FINANCE Increasingly, brokers put focus on their wealthiest investors

Some firms are starting call centers to handle smaller-level clients.
WASHINGTON POST
Three years ago, Wall Street brokers had one message for small investors: Buy, buy, buy. Two years ago, everybody found out that the message should have been: Sell, sell, sell. Now the message appears to be simply: Goodbye.
That's what brokers at U.S. Bancorp Piper Jaffray in Minneapolis are saying to their smallest clients. Since February, the firm has encouraged its brokers to shift clients with accounts under $10,000 to a call center where their transactions can be handled and their questions answered much more cheaply. Soon, Piper Jaffray will stop paying brokers commissions on trades in accounts below $10,000.
"We don't make money on accounts that small," said Paul Grangaard, who heads the company's retail division.
Comparatively low
Piper's cold calculus isn't unusual. In fact, its account minimum is much lower than the investment cutoff for full-service brokers at many other firms.
As part of an aggressive strategy to raise profitability, Merrill Lynch & amp; Co., the nation's largest brokerage, in 2000 began requiring clients to invest at least $100,000 to qualify for a full-service broker.
Morgan Stanley wouldn't say how much money clients need to put up before a broker will take them on. "But $20,000 is probably as low as you're going to want to go," said spokesman Brett Gallaway, adding that brokers usually accept only clients who commit much more than that.
UBS PaineWebber spokeswoman Susan Wentworth said the firm has no minimum but also has no special services for small investors. "Our target market is high-net-worth clients," she said.
The cost of service
Wall Street brokerages have long regarded serving the small retail investor as a money-losing business. Many of the costs of maintaining and servicing an account remain fixed, even as the amount of money in an account drops.
Louis Harvey, president of the brokerage industry research firm Dalbar Inc., estimates the cost of servicing an account at $500 a year. Commissions from smaller accounts don't usually even cover that sum, which means brokerage firms are bleeding money on these accounts before brokers have even picked up the phone to call the client.
The model has "always been one where higher-net-worth clients have generated a disproportionate amount of profitability to brokers," said Brad Hintz, an analyst at the research firm Sanford C. Bernstein.
Better days
When the market was roaring in the late '90s, that model became temporarily irrelevant. Even small investors feverishly traded stocks, generating commissions. Every investor was making money and every account was increasing in size, so firms that charged fees based on a percentage of a client's assets also made money.
When the market plunged three years ago, commissions and account sizes plunged with it. Small investors fled the market and have yet to come back. Trading by ordinary investors has fallen 70 percent since the market's peak. And serving the littlest investors is a money-losing business again.
Some firms have decided that the solution is to court the kind of people who have enough money to weather a bear market. Morgan Stanley is retraining 1,500 brokers, out of a force of roughly 12,000, to focus exclusively on clients who have between $1 million and $10 million to invest. UBS PaineWebber recently began offering advice on art collecting to attract and retain its wealthiest clients.
Trimming expenses
But other firms, such as Merrill Lynch and Wachovia Securities, are determined to find a way to transform their small retail clients into moneymaking machines. To start, they're urging their smallest clients to direct their investment questions and trade orders to call centers instead of a personal broker.
Brokers in call centers can answer questions from any caller and take any client's trade order. Because each call-center broker handles many more clients than the typical full-service broker and doesn't require fancy office space in a local branch, call-center accounts cost the firm much less to manage. In turn, call-center clients pay lower fees and commissions.
To achieve these lower fees and higher profits, however, firms have to assign a huge number of small investors to a relatively tiny number of brokers. At Merrill Lynch's two call centers, 300 brokers serve 1 million retail investors. The rest of the firm's brokers, 14,000 in all, serve the 8 million clients who have more than $100,000, and often much more, with the firm.
Nonetheless, "the call center bridges the gap between the impersonal online advisory services and having somebody at your beck and call," Harvey said.