One of the most iconic and coveted investment careers is that of the stock broker. The job has come to symbolize Wall Street itself and even those with little or no investing experience know what a stock broker does for a living.
Stock brokers are basically Wall Street middleman: buying and selling stocks on behalf of investors, collecting a commission for each transaction.
But stock brokers are slowly becoming a dying breed. Thanks to the Internet, passive investing and automation, investors are now capable of doing themselves what brokers have traditionally charged them to do.
The Rise of Discount Brokerage Firms
One of the biggest reasons for the decline of the stock broker profession has been the rise of discount brokerage firms. As far back as 2005, BusinessWeek reported that discount outfits had eroded the profit margins of stock brokerages, such that only wealthy clients got much face-to-face attention and stock brokers were “an almost extinct breed.”
Five years later, that trend shows no signs of stopping. Online-only firms like E*Trade theoretically eliminate the need to hire stock brokers at all by enabling knowledgeable investors to execute trades all on their own, using web technology. Discount brokerages, as the name implies, thrive by offering the same services as stock brokers for far less money, cutting their own commissions down to the bone to attract more business and make up the difference in volume.
Another contributor to the diminishing role of stock brokers is the growing popularity of passive investing. In the late 1980’s, investment author Burton G. Malkiel made waves in the financial community with his book A Random Walk Down Wall Street. The book was not so much an attack on stock brokers as it was an assault on the entire idea of actively managed investing. Using an impressive array of data and studies, Malkiel convincingly showed that most investors lack consistent skill at timing markets or picking winning stocks over the long-term.
His most controversial claim was that a monkey throwing wet paper towels at a stock chart on the wall could beat an expert armed with statistics and stock picking formulas. Intrigued (and no doubt annoyed) by this statement, the Wall Street Journal took it as a challenge and ran a simulated experiment where people threw darts at stock charts while experts picked stocks deliberately. While the dart throwers didn’t win out (the experts got it right 61 out of 100 tries), the experiment did show the investing public that completely random dart tosses beat the experts 39% of the time.
The Growing Role of “Financial Advisors”
In response to their shrinking margins, many stock brokers and brokerage firms have widened the scope of their services to include broad financial planning. The goal has been to “de-commoditize” and differentiate themselves from discount brokerages, and in large part, it has worked. While there were still l 661,000 “registered representatives” in 2005 (down 2% from 2001), the actual day-to-day job descriptions of those brokers has undergone a near-total overhaul.
Rather than cold-calling investors and pitching specific stocks or investment ideas, the typical job of those formerly known as “stock brokers” is now helping clients develop and put into motion long-term, comprehensive financial plans. As a practical matter, this amounts to advising clients on how everything from mortgages, estate planning, life insurance and even tax preparation fit into the broad picture of their financial lives. It involves more work, to be sure – but also fatter commission checks for the top performers.
Downsizing on Wall Street
Wall Street in general has been the victim of substantial downsizing as a recent of recent financial meltdowns. In February 2009, CNBC wrote of an “avalanche of Wall Street layoffs” that is “leaving many in the financial industry feeling more than a little desperate.” Consistent with the general trend of stock brokers fading away, CNBC also notes that “unlike previous downturns—many of the Wall Street jobs that are disappearing aren’t likely to come back.”
All told, New York City’s Independent Budget Office predicted that financial firms “might lose some 82,300 jobs between 2008 and 2011.” While many of these jobs belonged to hedge-fund managers and investment bankers, stock brokers were included in the total and a financial industry headhunter interviewed by CNBC called it the worst situation for financial employees since 1985.
In large part, the future of stock brokerage is already here. The days of an individual or entire firm being built solely around stock recommendations and trades is more or less over. What has replaced them are full-service financial advisors and advisory firms who assist people in building comprehensive, over-arching financial plans for all aspects of their lives.
In other words: the role of the swashbuckling, charismatic, cold-calling trader Charlie Sheen immortalized in Wall Street is likely a relic of a bygone era.