Marriage between banks and brokers: How consumers are impacted
A key 21st-century financial trend has been the union of banks and brokerage firms via merger. So far, not all of these mergers have been completely successful, but banks and brokers keep trying. Beyond what it means for the firms involved, a key question is whether this trend is good for consumers.
It is likely that mergers between banks and brokers will continue, even as the growing prominence of online stock brokers and online banks changes the nature of these mergers. A well-informed consumer should understand some of the reasons behind these mergers, and how the potential benefits and drawbacks for customers.
Banks and brokers: marriages of convenience?
Chase and JP Morgan. Bank of America and Merrill Lynch. More recently, Ally Bank and Tradeking.
Some high-profile banks and brokers have walked down the aisle together since the start of this century. Why are these institutions pursuing these unions so ardently? There are several business reasons that make these mergers appear to be marriages of convenience, though in some cases they might be thought of as marriages of inconvenience as banks and brokers turn to each other to solve fundamental business problems.
Here are some of the reasons banks and brokers are getting together:
1. Low interest rates have made deposits less sexy
With average savings account rates mired at 0.06 percent, traditional deposit banks don't exactly have the most enticing come-on with which to lure new customers. Adding a range of brokerage products can add a little spice to their product line-ups.
2. Online stock brokers have turned many functions into a commodity
The availability of information and services online means that price often matters more than relationships. Being able to tap into a bank's customer base can give an affiliated brokerage firm a marketing channel that does not rely on a traditional broker-driven sales.
3. Cost pressures have both banks and brokers looking for a partner to share expenses
Regulatory and economic conditions have squeezed profit margins for both industries, so mergers can ease the pressure if they are cost-efficient.
4. The right partner can make an old bank feel young again
Many traditional banks in particular have been somewhat slow to embrace technology. A union with a more tech-savvy broker can be seen as a quick way to get up to date.
5. Data mining can bring out the best in both partners
Historically, a problem with mergers has been that entrenched habits and fiefdoms have made it hard to integrate product lines across each partner's customer base. Better use of data to identify and pursue likely matches between customers and products can automate a process that used to be slowed by internal politics and inertia.
The marriage of brokerages and banks goes online
The acquisition of brokerage firm TradeKing by Ally Bank represents a new wave of bank-broker marriages in that these are two online institutions. As such, they don't have some of the baggage that traditional banks and brokers have brought to their relationships.
It is possible that the online model might represent the most positive form of combination for banks and brokerage firms. It is not trying to solve the cost problems of a branch network or a team of stockbrokers, though it can enhance the cost efficiency that online financial institutions already bring to the competitive landscape.
In fact, a merger between an online broker and an online bank might help address the distribution disadvantage that these institutions have. They rely primarily on advertising to attract new customers, unlike traditional banks and brokers which have offices and representatives in multiple locations.
Being able to cross-sell more products once customers are signed up - i.e., offering brokerage services to banking customers and vice versa - gives these firms a way to add new revenues without paying for more advertising. It can also prevent them from losing business to firms that are able to provide a broader range of products.
Happily ever after for consumers?
When wedding bells chime for a bank and a brokerage firm, should consumers be raising a toast to the union? Should customers whose banks and brokerage firms remain single be applauding their independence or wishing they would find a partner with whom they could offer a more complete customer experience?
The answer depends both on what benefits the combined entity offers, and on how you use bank and brokerage services. Here are some issues you should think about:
1. Do bundled services provide best-in-class offerings for your needs?
There is no need to accept an affiliated product if it is inferior. Make sure both banking and brokerage offerings are competitive before you decide to put all your business in one place.
2. Are you benefiting from cost efficiency, or paying for a bad marriage?
Best case, a merger can make you eligible for discounts as the combined entity values its broader relationship with you. Worst case, one way the new management may try to make the economics of the merger work is by hiking fees across the board.
3. Can you keep the distinction between insured and uninsured products clear?
A crucial distinction between a bank and a broker is the FDIC insurance on bank deposit accounts. The brokerage side of the business may offer seemingly similar savings vehicles, but understand that just because they are affiliated with a bank does not mean FDIC insurance extends to them.
4. Are your savings deposits being led astray?
Given the low bank rate environment, savers are desperate for better income sources. If your bank starts introducing brokerage products, you may see some income vehicles with higher yields, but keep in mind that these are likely to be fundamentally more risky than deposit accounts. Besides lacking FDIC insurance, that income may come from more uncertain sources such as mortgages, corporate bonds, or derivatives, or foreign securities.
Have you ever gone through one of those phases of your life where it seemed like everyone was getting married? Mergers between banks and brokerage firms are often so high profile that it may seem like they are becoming the norm as well, but the fact is the sheer number of banks and brokerage firms means that consumers have plenty of choices, both independent and affiliated.
Where you take your banking and brokerage business depends on who offers you the best deals and service. Under some circumstances this may turn out to be a combined entity, but that won't always be the case. You do not have to bank and trade with the same firm, even if they offer a combination of services. Banks and brokers may be getting married, but your accounts remain free to play the field.
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