Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.ibd From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: Executive Update Date: Wed, 4 Nov 92 12:45:02 EST Message-ID: <7.1992Nov4.124502@AmeriCast.com> 11/4/92 TITLE Executive Update Complementary Goals Drove Bank-Broker Match Dean Witter Seeks New Clients; NationsBank Hopes To Keep Existing Ones Caren Chesler In New York The alliance announced last week by NationsBank Corp. and Dean Witter Financial Services Group will put yet another crack in the Glass-Steagall Act, which separates banks and brokerages. But it also presents a long-awaited opportunity for the brokerage indus- try. Under the alliance, a new company, Nations Securities, will market securi- Strategy ties through NationsBank's branches. It will begin operating in the first quarter with some 400 brokers, half to come from Dean Witter and the rest from the Charlotte, N.C.-based bank holding company. Brokers initially will work out of about 100 of NationsBank's 1,800 branches. They are expected to be placed in additional branches in the future. Brokerages took some hard knocks in the 1980s, making it diffi- cult to cultivate relationships. The stock market plunged twice. Difficulties in the limited-partnership market hurt brokers' re- lations with customers who had bought into the partnerships. And there were numerous accounts of brokers misappropriating client funds. Rising fees at full-service brokerages have driven custo- mers to discount brokerages. With their reputation bruised, brokers have had a hard time generating new business by picking up the telephone book and making cold calls. "Hit rates on cold calls are awful," said Jean-Louis Lelogeais, partner at Booz, Al- len & Hamilton Inc., a management consulting firm. "Despite the cyclical good news for the industry, brokerages are facing long- term problems about where they're going to find their clients." By having access to a bank's customer list, with all the related financial data, Dean Witter brokers hope to tap into a veritable gold mine. It's not surprising that Dean Witter, the Sears, Roe- buck & Co. subsidiary, initiated the talks. NationsBank hopes the venture will help it maintain existing relationships. With rates on certificates of deposit at a 20-year low and savings ac- count rates at 2% to 3%, all banks are in danger of losing custo- mers. Under the new arrangement, NationsBank can offer its custo- mers alternative investments before they find them elsewhere. "Those funds are quite vulnerable. It's just a matter of time be- fore everyone is going to reinvest," said George Salem, analyst at Prudential Securities Inc. While the deal is considered a landmark, given the size of the partners involved, the idea of banks offering limited brokerage services isn't competely novel. Banks have been marketing other companies' mutual funds and annuities to their customers for years. In fact, they make 10% to 20% of all mutual fund sales. Knowing that banks wanted to sell these products, about two dozen insurance companies and money managers have created services that banks could offer their customers. Kemper Financial Cos. owns a company called Invest Financial Corp., which provides investment services to banks that subscribe to it. Started in 1982 with seed money from a handful of thrifts, over 200 banks have signed on. These services generally work on a referral basis, however. "Banks have tried to retrain their branch personnel to sell these products, but they don't have the skills required. It's just too big a gap," Lelogeais said. With Dean Witter, NationsBank will have the real McCoy. Aside from selling funds and annuities, the venture will market stocks and taxable and municipal bonds. The subsidiary will be capital- ized equally with equity from each partner. Although the size of the contributions was not revealed, the effort is not expected to be very costly, since most of the resources - the brokers, the space, the funds - are being borrowed from existing operations. The joint venture is expected to break even in 1993, but offi- cials at the companies estimate it will generate annual profits of just over $100 million by 1997, which the two partners would split. That's a lot more than the $15 million that NationsBank expects to generate this year from its existing securities com- pany. "It will have a material positive effect on our earnings going forward," predicted Hugh McColl, president and chief execu- tive of NationsBank, at a press conference last week#m#cq#m#. The companies hope to offer the services to other banks with assets of $200 million to $5 billion, which could increase profit poten- tial exponentially. "Our concept is to serve the customers' needs. It is not to get into underwriting businesses right now," McColl said. That's not to say it won't; but presently, it can't. Banks can only underwrite securities through a tightly re- gulated subsidiary called a Section 20 sub, and even then, they can only underwrite municipal bonds and mortgage-backed securi- ties. Only a handful have been granted regulatory approval to un- derwrite debt and equity. The new venture is separate from NationsBank's already established Section 20 sub. The only risk is both sides will cannibalize their own customer bases. Dean Witter is creating a sales force that will compete with its other brokers. But according to officials involved, nine out of 10 peo- ple who buy mutual funds from securities firms don't think of buying them anywhere else. On the banking side, 75% of those that buy from banks won't buy anywhere else, officials say. Na- tionsBank could be in for an unexpected surprise, though, if its customers resent having their names passed on to brokers. Some people simply don't like brokers. "They could be putting their franchise on the line," said J. William Bowen, managing vice president at First Manhattan Consulting Group. "People trust bankers more than they trust brokers." The idea of banks aligning with brokers isn't expected to catch on like wildfire, at least right now. But if it works, other arrangements could spring up. This article is copyright 1992 Investors Business Daily. Redis- tribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. 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