Between the unbundling of research and execution, the new regulatory requirements of best execution and the increase in automated trading, dealers and brokers should be giving up the ghost and finding new careers. Instead, many are becoming more client-focused, more creative and more capable. Is the broker or dealer dead, or is this an urban myth?
The debate mirrors the debate two decades ago about independent financial advisers (IFAs). Then, I opined that IFAs were dead. Insurance firms were ramping up direct sales forces, banks were moving heavily into bancassurance, and technology had changed channels to allow insurance products to be sold over the telephone. The squeeze was on the traditional chaps who had local offices and offered independent advice. Was their advice really independent or appropriate? How could you tell? We all agreed: the IFA was dead.
Two decades later, IFAs have prospered while the direct sales force has disappeared and the banks’ attempts to sell insurance have fluttered in the wind as a fragile operation on the side but never at the core. IFAs have broadened service, taken on more complexity, added technology to improve their knowledge services and marketed themselves more effectively.
More popular than ever
The result is that their advice is sought even more and more than two-thirds of complex products, such as life and pensions, are still sold through this primary distribution channel. Some of the largest firms, such as Aviva, are totally dependent on this channel, making more than 90% of their pension sales through IFAs.
The lesson? It is easy to forecast that dealers and brokers are fragile, threatened and declining due to technology, regulation and margins, but the process needs to be rethought. Dealers sell direct. Brokers intermediate between investors and dealers. Both still have a critical role.
The broker needs to find the best way to serve the client’s needs and the dealer needs to find better ways to attract business. The broker must be more sophisticated in advice and selection of investment vehicle. The dealer must be more creative in building risk-and-reward strategies that meet the broker’s and end-client’s appetite for risk.
The end result is that there will be more challenges for both brokers and dealers; but the idea that either or both will disappear due to the growing march of direct market access, execution and order management systems, and algorithmics is pure balderdash.
The overriding message is that brokers and dealers will work harder to justify their existence. If they cannot do so, they will follow the path of the dodo. IFAs did not follow that path and I do not think that brokers and dealers will either.
So, the dealing desks of doom and gloom... go take a walk.
Chris Skinner is an independent financial commentator (www.balatroltd.com)
