Major Wall Street Firms Losing Customers


Investors are leaving big, full service firms like Morgan Stanley Smith Barney and Bank of American Merrill Lynch, and investing their money through online discount firms like Schwab and TD Ameritrade, according to a recent article called “Investors Dump Brokers to Go It Alone.” This has been happening for some time now, but the trend has accelerated since investors were badly burned by the toxic securities sold by major financial institutions and the related collapse and near-collapse of many of those financial institutions.

The financial crisis has sharpened the focus on two major problems in the securities business: (1) the inherent conflict of interest between investors and brokers, whose incomes are based on sales commissions, assets under management, or both, but not really on the provision of sound investment advice, and (2) the reality that most retail brokers lack the kind of education and expertise that truly sets them apart from the people they purport to advise.

The major Wall Street firms have become their own worst enemies and are “killing the goose that laid the golden egg.” Their “sell anything at any cost” approach to investors has resulted in a significant loss of investor confidence and that loss of confidence is futher damaged by an arbitration system that many see as unduly biased in favor of the securities industry.

While figures for 2009 are not available, the flow of money during the last 10 months has been to online brokerages, according to research firms like Gartner and Celent. Since the collapse of Lehman Brothers last September, investors have withdrawn over $100 billion from traditional, full-service brokerage firms, and deposited $32.2 billion into the two largest online brokerage firms ? TD Ameritrade and Charles Schwab.

As one might expect, the trend away from full-service is being led by a younger generation that knows how to use the information technology that is out there. Investors can get “more information on their iPhones than brokers could get 10 years ago,” said Scotttrade’s chief marketing officer, Chris Maloney.