It’s no great surprise that the financial services industry is going through another major change. Some old timers remember the technology revolution when chalkboard quotations were replaced with hi-tech Quotrons and Bunker Ramos. Others remember the explosive growth of mutual funds, money markets, options, and limited partnerships. Those older, gray-in-the-temple folks asked themselves, “Am I with the right brokerage firm?”

Today, a more appropriate question is, “Am I in the right channel?” For the purpose of staying within the bounds of this brief article, let us say that there are three financial services channels. (We know there are more, but we’ll save them for another day.) They are: 1) bank brokerage, 2) traditional brokerage and 3) independent brokerage. Here, we’ll discuss bank brokerage and follow in subsequent issues with information about traditional brokerage and independent brokerage.

Bank brokerage has undergone tremendous growth in the past decade. Once considered to be low down on the financial services food chain, bank brokerage has reshaped itself by necessity into full-service, multi-level brokerage handling all kinds of investments. Brokers, with either Series 6 or Series 7 registrations, who reside in bank branches often have more business than they can handle. Branch brokers, depending on location and management support, often open 20 to 30 new accounts a month, ranging in asset size from $10,000 to $500,000. Although payouts are lower and generally range between 20 and 35 percent, a broker who has no natural sources of new business or spheres of influence, may find a branch bank can be a terrific place to work.

Skills necessary to be an effective bank broker include the ability to handle paperwork efficiently (there probably won’t be a sales assistant on site); the ability to work as a team member (the branch bankers select the investors for you, so you’d better be nice); and a high level of patience (neither the bankers nor the investors will generally understand your comprehensive explanations). One bank broker described his primary method of prospecting as identifying himself in his branch as Mr. Donut because each week he walked around the branch offering Krispy Kremes to all the bank staff. Not a bad client acquisition strategy considering most bank brokers gross $300,000 to $500,000 per year.

All banks that handle brokerage have “phone banks,” to which customers can call to place trades when their bank broker is unavailable. This often removes the need to have registered sales assistants in the field. The quality of these phone banks varies widely from efficient and useful to impersonal, low service entities. Most of phone banks do not get good marks from either clients or brokers.

Several banks have organized their brokerage to accommodate services in all economic markets up to multi-million-dollar wealth management programs. Institutions such as Bank of America, Wachovia and Wells Fargo have capabilities in the more sophisticated segments with trust officers and private bankers on client teams. These teams often provide the full service far beyond what a client can get at a traditional firm. With access to experts in charitable giving, alternative investing, elder care services, etc., clients tend to like the one-stop service the banks provide.

Be careful before you draw conclusions about bank brokerage. Some are still in the “chalk board era,” but others are cutting edge, with everything on a broker’s desktop that he or she could have in the most modern wirehouse branch office. Products and platforms differ significantly from bank to bank or even branch to branch. Some of these bank brokers have access to very few products, often limited to a few mutual funds and annuities to other brokers, who have access to sophisticated wealth management programs, including separately managed accounts and asset allocation programs.

Of the larger banks, Bank of America, BancOne and Wells Fargo were the early promoters of full service across the entire financial service spectrum. Some of the banks tried to buy their way into the brokerage business such as U.S. Bank (Piper Jaffrey), Royal Bank of Canada (Dain Rauscher) and Key Bank (McDonald Financial), all with mediocre success. Others, such as Wells and BancOne, built brokerage from the ground up. Still others tried a little of both, such as Bank of America, which purchased Montgomery Securities, while at the same time recruiting retail brokers from the large wirehouses.

Depending on the bank’s structure, the broker may report directly to a bank branch manager or to a distant brokerage manager. Either structure causes a rub. Bank managers generally see brokerage as highly regulated, high risk, labor intensive and low profit. Why, they ask, do we spend so much time and capital to do lower profit business? One bank CEO, when announcing the spin-off of its brokerage division last year, said, “Brokerage generates 8 percent of our revenue, 4 percent of our profit, and I spend 40 percent of my time on it.”

Regional or district brokerage sales managers often handle brokers geographically distributed in 30 different locations, making any kind of personal attention or leadership nearly impossible. Although brokers might be convinced to follow a client service-oriented philosophy, the brokerage manager never gets the opportunity to adequately reinforce the concept.

Bank brokers are taking a larger share of investors’ wallets. The number of bank brokers may shrink in 2005, however, due to many banks “de-registering” trust officers and private bankers because of excessive compliance risks as well as ever-growing administrative expenses. Banks do the best job of a very important concept in financial services called “account aggregation,” a great term that simply means “one-stop shopping”

Let me give you an example. A wealthy client wanted to have several investment accounts for his family, all with different objectives. In addition, he needed to finance a small fleet of trucks for his business, establish a 401k for his employees, and refinance several mortgages on his home and his cottage. Finally, he needed someone to watch over the finances of his elderly mother, pay her bills and answer her questions. All of these services were handled by one relationship manager, who coordinated these services with five or six different departments inside the bank. The client monitored it all via Internet access from a single secure website. In layman’s terms, that is account aggregation.

Today, banks are tightening up compliance and expenses. They are defining how they want to handle brokerage, and each one will look a little different from the other. But you all know Willie Sutton, the well-known bank robber, who gave as his reason for robbing banks: “That’s where the money is.” Bank brokerage is just an extension of Willie’s philosophy.

Coming up next issue: Traditional Brokerage