Being a stockbroker these days can feel like a lonely business.
Just ask Ned Laughlin, who graduated from Ole Miss in 2000 with a degree in finance and has worked since then as a pure stockbroker. He’s currently with Duncan-Williams, Inc., having joined in June. He was with Wunderlich Securities before that.
“It’s been a tough time,” he says. “It’s tough to make a living when you know the market is due for a pullback.”
Larry Cox knows that story. He dallied in the stockbroker trade for a few years in the late 1970s before market conditions sent him into the more stable world of academia. Today, Cox chairs the insurance program at theUniversity of Mississippi, where he says there aren’t many young finance students with ambitions of being a stockbroker — or at least a successful one.
“Those who started in the last year have seen a definite fallout,” he says. “They’re just not able to produce the business firms had expected and they’ve fallen out of that market.”
That decline shows up most demonstratively in the declining number of registered representatives tracked by the Financial Industry Regulatory Authority, Inc. Through November there were 642,689 registered reps, down from 664,975 in 2008 and a high water mark of 672,688 in 2007.
While only a percentage of those are stockbrokers, the numbers tell the story of a shrinking industry.
Laughlin is keeping his focus in a down market by maintaining customer relationships. Meanwhile, he’s seen more of his counterparts move to a more full-service sales model, offering any number of products and services such a bonds, annuities, life insurance and estate planning.
He stuck with the retail side of trading stocks and in the process has developed strategies that he feels separate him from the pack, give him a niche and enhance his value proposition.
He considers himself more of a risk manager.
“I don’t want to let a profitable position not be a profitable position anymore,” he says.
Protection of profits is the goal in tough times like the market faced earlier this year when the Dow Jones industrial average and S&P 500 both dropped more than 10% in the first two months. Whether it’s a buying or selling market, though, there’s work to be done, Laughlin says.
“These defensive periods are tough but not non-negotiable,” he says.
Risk manager or not, the fact remains that the days of the pure stockbroker are possibly waning.
More firms that have lived off the trading business are becoming dinosaurs, says David Waddell, president and CEO at Waddell & Associates, Inc.
“Nobody believes the commission-based model has a bright future ahead of it,” he says, noting that several major brokerage firms including Citigroup are looking at ways to transform out of the old-line commission model.
Recently, several equity trading firms like The Charles Schwab Corp., TD AmeriTrade and Knight Capital Group, Inc., reported that trading volumes had eroded.
E-Trade said its daily average trade volume fell 13% from October to November to 170,300 total trades. That was a 22% drop from November 2008.
Schwab, the largest U.S. discount brokerage, warned that earnings would be impacted in part by a 27% drop in its daily average trading from a year ago.
“The business itself is not expressing signs of health,” Waddell says. “They have been damaged during this cycle and they’ll have to rebrand themselves.”
Mike Gibbs, managing director of equity strategy for Morgan Keegan & Co., Inc., says that’s exactly what the industry has been doing for years as it incorporated more full-service offerings, but it won’t completely go away.
“Although the reduction of pure stock business at the retail client level tapered off after the tech bubble, it is far from dead,” Gibbs says.
In tough times like investors faced earlier this year, the stockbroker’s skills were even more in demand as clients wanted to bail. A broker’s job is to try and prevent that natural tendency by taking emotions out of the decision-making process.
“Knowing this capitulation tendency we attempt to talk them off the ledge by educating them,” Gibbs says.
But the education that took place earlier this year hasn’t completely worked as the trading volume numbers show.
And, despite the 50%-plus run-up in the markets since March 9, Waddell says most of that has come from non-retail customers like hedge funds, pension plans and foundations.
The retail customers — the stockbroker’s bread and butter — have largely sat out licking their wounds and being a bit weary of stocks.
“The term stockbroker insinuates someone who just doesn’t have a lot to do,” he says. “Retail America is not interested in hearing stock ideas right now.”