Fool's Eye View

[ March 8, 2000 ]

Shed a tear for the Wise

By Rob Davies (TMF Essex)

Normally The Motley Fool does not have much sympathy for the Wise. This group of time-serving, overpaid, pretentious people have earned a good living for a long time by taking a little, or sometimes a lot, from each transaction they process. Every time they do that they scrape away a little of the value created by the stock market.

But the good news for investors is that the drive to increase returns for investors is putting more pressure on the Wise, and they are feeling the pain. TMFJimmyC has already written about the demise of Tony Dye, formerly head of investment at Philips & Drew fund management. His contrarian/value approach to fund management has been disastrous for most of the nineties and resulted in his funds underperforming and the firm losing business as a result.

Schroders (LSE: SDR) has given up trying to compete in the global investment banking game and is selling that division to Salomon Smith Barney. Not surprisingly that has caused a number of brokers there to review their career options, and some have decided that life with the Americans might not be so rosy, or even that there won't be a life at all. Some have jumped ship already; others will wait for the UB40.

Now there is news that two of Germany's largest banks, Deutsche and Dresdner, are considering merging. Part of the reason is to reduce their cost base in Germany and integrate their fund management businesses with Allianz, an insurance company with stakes in both. But a secondary target will be to combine the investment banking operations each owns in London. Deutsche owns the former Morgan Grenfell and Dresdner bought the old Kleinwort business. Between them they employ 13,000 people in London and about 20% of these are expected to be made redundant if the merger goes ahead.

At the moment investment banking is hugely profitable because of fee income from the mega-mergers and takeovers that have been such a big feature of the financial markets recently. But the bread and butter business of buying and selling shares has been getting progressively more and more competitive. The rise of tracker funds, as advocated by The Motley Fool, is bad news for brokers because the trades will be executed virtually automatically and I doubt that any commission will be paid at all.

But there is another trend developing that is probably even more of threat to the traditional broker. This feature is the private markets set up between funds to trade large blocks of shares. Reuters (LSE: RTR) is doing something similar with Instinet and Tradepoint (LSE: TFN) is also tackling this market. By eliminating the broker from the process the fund manager is able to secure substantial reductions in dealing costs, and pay even less commission to brokers.

However, this rather invites the question of where the stock exchange lies in this process. After all, the original idea was that the stock market was the place for price discovery and then execution. If a lot of trades are being done away from the market then how do we know that the stock market price is the "right price"? Add to that the inherent problems of a market increasingly dominated by tracker funds, and it is perhaps easier to see why we often seem to get sudden movements in share prices.

But the good news is that the private client and the execution-only broker are thriving. A trio of small brokers is testament to the success of the Foolish message of taking charge of your own finances. Just look at the performance of these three companies. Brewin Dolphin (LSE: BRW) stands at 1287p, three times the price of 18 months ago, Charles Stanley (LSE: CAY) was 215p last October, today it is 925p, and Teather & Greenwood (LSE: TEG) was 200p in the third quarter last year and now it is at 880p.

Maybe the Fools are winning after all.

To further empower yourself, why not read the Fool's Industry Focus 2000? This new report looks at 14 sectors and highlights stocks in each one that you should know more about.

Related Links
• Fool's Eye View discussion board
• Industry Focus 2000