The general trend for some time has been for Wall Street to flee retail. That trend arguably got kicked off as long ago as 1975 with the deregulation of fixed brokerage commissions and seemed to receive its coup d' grace in 2001 with Eliot Spitzer's analyst jihad, which almost exclusively focused on the plight of retail tech investors. The dominant lessons of that time is that retail brings regulators, and that's never good. Better to deal with sophisticated customers, which might sue you but which won't bring down the wrath of Congress upon your head (except of course for the subprime mortgage meltdown, which Wall Street always viewed as an institutional structured finance business, just one of many miscalculations). The exception over many years was Merrill Lynch & Co., which built its enormous -- now 15,000 strong -- brokerage army, well, financial advisers, in the face of all kinds of trends squeezing brokerage fees.
That brokerage group brought advantages, often lost in the general anti-retail drift. Retail assets, whether in brokerage or money management, tend to be "sticky," that is they're a lot less prone to flee in a crisis than institutional, not to say, hedge fund assets; and there's always the fees you can skim off them, though they've steadily diminished over time. When a crisis hits a commercial bank, its greatest advantage is that thick cushion of FDIC-insured retail deposits, which helps make up for the fact that banks still have not learned to make fat profits, usually through cross-selling, off those customers. And the same applies to Wall Street brokerage, without the insurance. While Wall Street has mainly drifted from retail brokerage -- Merrill and Citigroup Inc.'s Smith Barney being exceptions -- the firms did work for a number of years building strategies that focused on money management "asset gathering" and high-net-worth wealth management.
While this was a long way from man-on-the-street retail brokerage, it did involve individuals over institutions. And the fees were certainly fatter. In fact, money management, including acquisitions, from Merrill's purchase of the U.K.'s Mercury Asset Management in 1997 to Lehman Brothers Inc.'s purchase of Neuberger and Berman in 2003, became the new proxy for classic brokerage units. In fact, high-end brokerage and money management essentially merged into wealth management units -- look at how Morgan Stanley tried to evolve its Dean Witter retail brokerage -- which Wall Street continued to build through the boom years. Indeed, much was made a few weeks ago of Merrill's John Thain praising Merrill's wealth-management operation. Even Goldman, Sachs & Co., long the least retail of the major firms, played wealth management in a big way.
The question is: What happens now? Wall Street firms need protection and some steady revenue sources. With leverage falling, profit margins are down, reviving retail as a possibility. Again, the likelihood of firms trying to build (or buy) Merrill-type brokerage units is remote; the competition from electronic and discount brokerage is too great. If structured finance and other high-margin business fail to restart any time soon, Wall Street will edge up to Main Street in a couple of ways. First, they'll become part of a commercial bank, with a big retail banking network. Bear Stearns Cos. is already there, and Lehman Brothers may end up in a similar situation. Second, they'll look to again begin acquiring high-end money management operations, like Neuberger. And if profits remain prostrate for any length of time, you might well see Wall Street firms looking to do a deal with a mass market mutual fund complex or big discount brokerage, if they can afford it.
In fact, despite all the critics of the strategy (often activists, who have been recently successively called for the breakup of Citi, Merrill and now American
International Group Inc.), a bear market on Wall Street will tend to force firms to move even further toward the one-stop shop, that is some combination of retail and wholesale.
Nothing is forever, of course. It would require a protracted profit crisis for Wall Street to really embrace Main Street, and then the firms might as well become commercial banks. Indeed, the Wall Street firm is pyschologically caught between the desire to be a go-go hedge fund or a PE shop and the sheer size and power of the universal bank. Likelier is that surviving firms will continue to build high-net-worth wealth management and search for a reason to hike leverage and make "reasonable" bets, either in proprietary trading, principal investing or a revived form of structured finance. And then, when another boom develops, these firms will once again talk of the great advantages of just dealing with sophisticated institutions or individuals. - Robert Teitelman
Last Friday Ken Klee over at Corporate Dealmaker 
