When Your Stock Broker Is Also Your Banker

Is your stock broker turning into a bank (or vice versa)?

Just when you thought that you had everything (and everyone) figured out, people start messing everything up. I’ve worked hard to make sure that I’ve found the perfect banking relationship and brokerage relationship, but now my broker wants to be my banker, too. Why?

The answer to that question seems like it should be pretty obvious, doesn’t it? Fewer and fewer people are investing and those who are, are doing it very conservatively. Small scale conservative investing doesn’t lend itself to making big profits for investment firms. But, there’s little that they can do about it in such a shaky economy. So, what’s a big brokerage house to do when the chips are down? Diversify, diversify, diversify.

Try out stock brokerages that stick with investment products. Check out TradeKing (they’re offering $50 for each sign up right now) or OptionsHouse. For more information on these brokers, you can read our OptionsHouse review here and our evaluation of TradeKing here.

What does that mean exactly? Well, what it means is that if the brokerage firms can’t get at your money through more traditional investing means, they’re going to take a shot at getting to it by offering you other services. Sound familiar? It should. Think Comcast and Charter cable. They were running toward the end of the profitability of non-competitiveness in the cable television industry, thanks to the likes of satellite TV, so they figured that it might be wise to offer telephone and Internet services. Voila! A new revenue stream.

When Your Stock Broker Is Also Your Banker

Companies like Morgan Stanley have seen the light, so to speak, and want to start offering other services to their wealth management clients. They want to loan them money and collect the interest. However, there’s one catch. They don’t want to do this for everyone, just for the clients they bill as wealth management clients…or the “Daddy Warbucks” clients. This way, they aren’t taking as big a risk because these are the folks with A+ credit AND have the funds to pay back the loans.

But, didn’t we see such entities not fare too well during the current economic crunch, you ask? Of course you did. Wasn’t anyone watching when Citi practically went down in flames? And what about Smith Barney? Didn’t they try to do the same thing? Yes they did, but it was with the wrong mindset. Citi and Smith Barney were trying to capitalize on the wave of subprime lending, which as we all know by now was the wrong security to bet on. Today’s brokers are looking toward more secure, less profitable loans.

But, if I were the CEO of such companies as Bank of America, Merrill Lynch and such, I might be worried on a different note. The wealthy are a notoriously fickle lot. They tend to base many of their financial decisions on emotional nuances rather than on sound financial principles. What happens to Daddy Warbucks as a client if he decides to take his business elsewhere, thanks to a bad taste left in his mouth from a confrontation with a lender or advisor? It’s not like these guys can’t get refinanced somewhere else. Not only will the brokerage lose a loan and the income involved with it, but will also potentially lose an investor or wealth management client and all the perks that go along with servicing such a relationship. Then there’s the whole word of mouth thing. If Daddy Warbucks ain’t happy, then neither is anyone else in his circle. One bad move and poof! There go ten relationships.

So, as brokerages search desperately for ways to keep the big bucks rolling in and begin offering banking products to help ease the strain, I smile a little and say no thanks. I’m a firm believer in keeping my money in my bank account and my investments in my investing account and never the two should meet.

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