(44 Total References)
Roorkee Global Community
· 3: Vivek Agrawal, Fellow, McKinsey Global Institute (3494 reads)
· 19: Vivek Agrawal, Director Operations, Inductis (2218 reads)
By Vivek Agrawal, Guillaume de ...
By Vivek Agrawal, Guillaume de Gantès, and Peter Walker
Vivek Agrawal is a director in McKinsey's Tokyo office, Guillaume de Gantès is a principal in the Jakarta office, and Pete Walker is a director in the New York office.
Roorkee Global Community
· 3: Vivek Agrawal, Fellow, McKinsey Global Institute (3247 reads)
· 19: Vivek Agrawal, Director Operations, Inductis (2073 reads)
VIVEK AGRAWAL AND DIANA FARRELL
Notes:Vivek Agrawal is a consultant in McKinsey's Minneapolis office; Diana Farrell, who is based in the
Vivek Agrawal, partner at ...
Vivek Agrawal, partner at consulting firm McKinsey & Co., believes that even a "moderately" strict set of new rules could significantly cut profit-per-broker at the largest firms.
This pressure would likely push the firms into new ways of doing business, he added.
team at McKinsey
have calculated that the large brokerage firms make about $72,000 operating profit per broker, a margin of roughly 15%.
But the increased regulatory oversight means much of that profit is in danger.
"We're at an inflection point for companies to use this regulatory push as a catalyst to change their business model," said Agrawal
"Less affluent clients will probably see the most changes" in their relationships with brokers, he
Congress is currently discussing ways to bring together the different House and Senate versions of financial legislation, but Agrawal
said it's likely that provisions to increase the funding and powers of the SEC
will make it into a final bill, as will greater protection for whistleblowers and an end to mandatory arbitration for clients--measures that will likely ramp up legal and compliance costs.
Agrawal said the toughest scenario for brokers would be if the final financial bill holds brokers to a fiduciary standard--a change that could also come from a regulatory authority such as the SEC or the Financial Industry Regulatory Authority.
Today, brokers are effectively salespeople, marketing investment products to their clients.
Fiduciary responsibility would hold them liable for their suggestions, creating not only legal and compliance costs, but limiting which funds they could recommend.
Fiduciary responsibility is at the extreme end of what might be introduced, said Agrawal
Still, in this "worst case" scenario, profit-per-broker could disappear entirely, he
Even in what he
called the most benign scenario, the new rules might cut the 15% profit margin by 3 to 5 percentage points, he
Brokerage firms need to deal with this new world by changing their business model, said Agrawal
"This is here to stay," he
said of the push toward more rules and scrutiny.
"The retirement system in the U.S. will continue to go in the direction of consumers funding themselves," said Agrawal
said the rule may push brokerage firms to give investors the type of services they're actually looking for.
For instance, investors stand to win from objective advice--a broker suggesting funds irrespective of what products the broker's firm offers--clarity about how much brokers charge and how they make their money, and fees that aren't based on pushing particular products.
"They should have been doing these things five or 10 years ago, and consumer surveys--and asset flows towards independent brokers--show that it's what investors want," said Agrawal
But the changes will mean a smaller margin, which will affect how brokers work with the majority of their clients.
said that, for instance, affluent investors will still have brokers, but their brokers will have many more clients.
This will probably mean that more of their brokers' advice will be "off the shelf"--prepackaged or using computer models.
And the mass affluent will be more likely to get their advice from a broker provided by their employers, in 401(k) plans, or even within individual products--for example seeing their asset allocation decisions handled by target-date funds.
"For most investors, the one-on-one model will simply be economically unviable, but it could mean a more efficient system," said Agrawal
Stephen Winks - Mr Agrawal's
Conclusion would render the brokerage
is misinformed on both cost and the economic viability of advice.