Industry Overview: Mutual Funds and Brokerage

Posted by The Editors on December 3, 2012
When a large amount of money is needed for any enterprise, from building a factory to funding a corporation to drilling wells in a new oil field, that money is raised from investors-usually a large number of them. Commonly, the enterprise raises that money by either selling ownership shares in itself or simply borrowing it. When ownership is sold, the investor gets shares of stock. When money is borrowed, the investor gets bonds. Stocks and bonds are both securities. Investors buy and sell individual securities through brokers, also called securities dealers.

Additionally, mutual fund companies-and other so-called asset management firms-form funds, which consist of a variety of securities. The asset management company buys and sells the securities in a fund, seeking to maximize its value, and it sells shares in these funds to investors directly and through securities brokers.

More people invest in securities today than ever before, and they have more choices. Not only are there more investments to choose from, including stocks, bonds, real estate trusts, limited partnerships, and an ever-growing diversity of mutual funds; there are also more ways to invest: full-service brokerages, discount brokerages, and electronic trading for most of us; exclusive opportunities such as hedge funds and venture capital funds for high-net-worth individuals, such as multimillionaires, and institutional investors, such as pension funds, insurance companies, and university endowments.

There is an unimaginably large amount of money chasing investments these days, which is part of the reason that the stock market rose so steeply during the 1990s. Brokerages and mutual funds are the two primary means by which all these investments are made.

Commissions to Fees
The retail brokerage industry is weaning itself from its traditional reliance on trade-based commissions by offering more and more fee-based services, which provide a more regular revenue stream in a volatile market. The fee structure also helps insulate firms from appearances of conflicts of interest as the fee is usually a percentage of assets under management, which means that it's in everyone's interest to see those assets grow. To give you a measure of this trend, fees represented more than 25 percent of revenues in 2004, versus less than 10 percent at the beginning of the decade; fees are expected to account for more than 40 percent of revenues in 5 years.

Dude, Where's My Brokerage?
During the trading frenzy of the late '90s, virtual brokers such as E-Trade and Ameritrade were the vehicles of choice for the savvy day trader, but with many of those folks now eating Ramen noodles, these companies have experienced serious declines in activity. Investors increasingly appear to be seeking experienced advice and are willing to pay reasonable incremental costs for help in navigating the current turbulent markets. Though the market rebounded in 2004, retail brokerages have focused on keeping a neat bottom line and resisted aggressive hiring. This is due in no small part to the costs associated with training new brokers-analysts estimate that a full-service brokerage pays about $250,000 to train a new broker and that even seasoned brokers cost firms $150,000 a year. The strategy most firms have adopted to cope with this fact is by consolidating the industry; Wachovia and Prudential joined forces, creating the third-largest retail brokerage in terms of brokers and customer assets in 2003. Most recently, Bank of America purchased Fleet and its subsidiary brokerage, Quick & Reilly. Dozens of regional brokerages are merging as well, in hopes that lashing themselves together will keep them from breaking up in the current economic maelstrom.

Hedging is the Bet
Once thought arcane, volatile, and the province of Nobel Prize winners such as Myron Scholes, hedge funds have suddenly become arcane, volatile, and wildly popular. MBAs are flocking to, or at least pounding the doors of, hedge funds, which have grown tremendously in the past few years. The Hedge Fund Association estimates that hedge funds are growing at a 30 percent clip, to $934 billion of assets under management at the end of 2004. More than half of those assets are managed by the largest 100 firms. The total number of hedge funds has grown exponentially, from about 100 in the early '90s, to more than 8,000 today. While once considered a club for only the wealthiest of investors, some hedge funds accept investments as little as $25,000 from individual investors. Still, institutional investors-pension funds and foundations-account for the majority of hedge fund contributions.

Experts expect the trend of investing in hedge funds to continue. Opening a fund is relatively inexpensive, requiring a total investment of $30,000 to $50,000 for legal and accounting fees. Add to this the hedge fund track record in down markets-hedge funds consistently beat mutual funds in down markets-and it becomes easy to see why hedge funds have become so popular. And, of course, there's the money; hedge fund managers rake in a large portion of the funds' profits in addition to management fees.

Though we divide the industry up into brokerages and mutual funds, within the two segments there are significant differences among the players. You'll want to make sure you not only know which segment you're interested in, but also how the particular company with which you're interviewing is distinguished from the competition.

A broker acts as the intermediary between the buyer and seller in a securities transaction. The buyer and seller, not the brokerage firm, assume the risk. (If the firm acts as the principal or dealer, it deals from its own account and assumes some of the risk itself.) Brokers charge their clients a commission. A full-service firm such as Merrill Lynch charges commissions of up to several hundreds of dollars for transactions but offers extras such as tailored research, strategy and planning, and asset management accounts-checking, credit (including lending on margin), and brokerage, all in one convenient package.

A discount broker, such as TD Waterhouse, generally just executes trade orders and issues a confirmation-few or no frills. Frills or no frills, to be authorized to trade on the various exchanges you need to be a registered representative and licensed by the National Association of Securities Dealers.

Mutual Funds
Whereas brokers act on investors' orders, mutual fund managers raise cash from shareholders and then invest it in stocks, bonds, money-market securities, currencies, options, gold, or whatever else seems likely to make money. Mutual funds often have a specific investment focus-be it income, long-term growth, small cap, large cap, or foreign companies. And managers are restricted in what kinds of investments they can make. Compared to individual portfolios, funds hope to persuade investors by offering several advantages: professional money management; liquidity; and more diversification than most individuals can create or afford in a personal portfolio, particularly now that switching between funds is allowed.

All investors share equally in the gains and losses of a fund, and probably the most important factor in choosing one-whether to work for or invest in-is your tolerance for risk. Bull markets tend to make many funds look good, but a downward turn or a jump in interest rates can have a significant negative impact that may take longer to correct for a fund than in the nimble independent investor's portfolio.

These days, everybody is trying to make money with money. This all boils down to a wide range of career options in a dynamic industry. Though firms say they will hire in 2005, hiring won't be uniformly aggressive. Companies catering to lower-end investors, the discount brokers, are still smarting from their past irrational exuberance. In all, the downward spiral seems to have stopped and some insiders feel that the industry can't continue to grow without doing some substantial hiring. Additionally, the top-tier firms always have slots open for new talent.

Even though the market quietly inched back up in 2003 and 2004, the upsurge in the market hasn't translated into commensurate levels of hiring. "We're hiring, but it's pretty conservative," says an insider. Mutual funds and brokerage firms are still hiring, albeit in a more modest capacity than in the past. There is still money to be made, but you will have to make it the old-fashioned way, by earning it. So if you do manage to find (and keep) a job in the industry, you can still expect to make a solid living and retain something of a life, particularly compared to the slave-labor existence of your investment banking peers.

The Challenge
The market has a thousand faces and shows you a new one each day. It can take a lifetime to feel you have any kind of handle on it. Many insiders report that the intellectual challenge-trying to be smarter than the market-keeps their jobs forever interesting. "It appeals to my competitive instincts," says an insider. "I get the same thrill as when I play tennis or golf." Analysts enjoy the challenge of unraveling a numeric puzzle. And for salespeople, it's all about closing the deal.

Variety of Opportunities
No matter where you start in the asset management business, there are many avenues you can pursue depending on how your interests develop. If marketing is your forte, you can develop and launch new products and services to keep investment dollars coming in. If managing money is your hot button, you can start by doing research and work into an investment management position. You can move from a bank trust department to a mutual fund. You can get into retail brokerage or start your own hedge fund. With a proven ability to make money, there will always be investors willing to pay you to manage theirs.

Salaries and bonuses in the current market climate aren't setting any records, but then again, not many fund managers are on food stamps. Those who still have jobs are generally well compensated, and when the market turns around, as inevitably it must, Porsche Boxter and "house in the Hamptons"-sized bonuses are sure to return to top portfolio and fund managers.

Unstable Ground
Merger activity among financial firms has been frantic in the past few years. Both in the United States and in other countries, all types of consolidations, purchases, and takeovers are changing the make-up of financial institutions, including mutual funds. Many mergers today are based on cost savings, and that means job cutting. So along with market volatility, these activities increase the pink-slip factor.

Slow to Change
Investment companies often have difficulty changing processes and procedures. Perhaps this is because companies must strive so hard to create a sense of stability in the midst of constantly changing markets. Insiders report some mutual fund companies have also had an ongoing problem integrating new technology-spending hundreds of millions of dollars on systems that have become part of an unmanageable patchwork of computers.

Performance Anxiety
Mutual fund and investment counseling insiders are saying more frequently that fund or portfolio performance is the key factor for a company's success, and the pressure to perform is high-maybe too high. Investors have so many choices and can make changes to different funds so quickly and cheaply that funds are coming under pressure both to keep costs way down and to beat the market consistently. This can put a lot of pressure on fund managers who are making intelligent bets that can lose no matter how smart they are. Retail brokers are entrusted with the life savings, the retirement plans, the college funds, in short, the dreams of their clients. If you don't feel that pressure in a bear market, you have ice in your veins.

Portfolio Manager (Mutual Funds)
Portfolio fund managers use their knowledge of investment theory, market experience, research from staff and outside companies, and occasionally plain dumb luck to pick investments for their fund portfolios. To reach the pinnacle in this profession, count on many years in the ranks of investment advisory and money management. Passing the SEC's Series 7 exam is necessary to be registered and the Chartered Financial Analyst (CFA) designation is a huge plus for people planning on entering portfolio management. Salary range: $150,000 to more than $1 million.

Registered Rep or Account Executive
This is usually what brokers call themselves these days. And given the seismic shifts-technically, structurally, and psychologically-in the past two decades, a new job title is probably in order. If you work for a full-service brokerage firm, you need to be better, think smarter, and sound more knowledgeable than the discount option. A lot of handholding, a lot of the guilt and blame, and for the first 3 to 5 years, endless cold calls to disinterested strangers. (Investment advisory work is somewhat different in that you're generally working on customized reports for clients and focusing on the finer points of preinvestment quantitative analysis.) Salary range: As low as $21,000 for beginners before commissions to a more standard $140,000 once you're established. Bonuses can augment these figures significantly, particularly if you and your firm do well. The top 15 to 20 percent earn more than $250,000; an increasing number of these overachievers are in their 30s and 40s.

Brokers and many of their clients tend to like passive investments, and funds are ideal for these types of people. But they may also want a little more involvement in fund information and more details than Mr. and Mrs. J.Q. Public. Enter the wholesaler from mutual fund XYZ, ready to host a "client appreciation program." Wholesalers market their funds to huge clients such as Merrill and Morgan Stanley, but also must focus on smaller brokers and independent financial advisors. This is nice work if you can get it, and most wholesalers do well. Salary range: $75,000 to $300,000, with liberal expense accounts for meals and seminars.

Analyst or Researcher
Here you delve into the fundamentals, examining every single feature of a security to determine if it's really a buy. You specialize in a certain industry or an industry segment and come to know the companies that compete there inside out. Expect to give computer screens lots of quality time and to really get cozy with annual reports. If you don't like reading, accounting, crunching numbers, and more reading, you won't be happy here. But it's excellent training for more substantive and lucrative investment-advisory work or portfolio management. Top MBAs sometimes land plum industry assignments; everyone else has to cover trucking and footwear for a while before moving up to telecommunications, technology, and financial services. Salary range: $60,000 to $100,000, plus bonuses of like amounts or more.

Financial Planner
How is a one-income family going to pay for its kids' college education? How soon, if ever, can a graphic artist retire? Financial planners help people work out these and other difficult money problems. In some ways, this is a thankless job. Even wealthy people don't much enjoy tackling these issues head on, and everyone else actively dreads it. But if you sympathize with that anxiety and know a lot about tax law and different investment strategies, you can do quite well in this business. You can also do it alone with a fair amount of flexibility. Whether you decide to be independent or join a firm, many of these professionals now opt for a CFP (Certified Financial Planner) certification. Salary range: $60,000 to $120,000. The very best can earn more than $250,000, typically working on a fee or commission basis.

Sales and Marketing
These jobs are similar to product management positions at consumer products companies, but the products are financial products. People in sales no longer focus on fund or investment. They need to be able to sell any one of a growing spectrum of financial products, depending on a customer's short- and long-term needs-and whatever his brother-in-law told him to do last week. This is forecast as one of the strongest areas for jobs in the next 5 to 10 years. Marketers focus on both the long-term picture and specific current product offerings. Who needs what and how much will they pay for it? Salary range: $45,000 to $100,000, not including bonuses, which can range into six figures.

Customer Service
Murphy's Law reigns supreme in this industry. If something can go wrong with other people's money, of course it will, regularly. So someone needs to be on top of what are euphemistically known as challenges and issues and make them disappear or at least diminish by the close of trading. And investors, especially the new ones, have endless questions. Even if the information they want is right there in front of them on the prospectus or in Section C of the Wall Street Journal, it's your job in customer service to "research" the right answers for them quickly, capably, and cordially. Want to earn your spurs and make it to marketing or portfolio manager in the next few years? This is a great way to do so. No one knows more about the customer than you after a year of answering calls. Patience has its own rewards, particularly in this role. Salary range: $30,000 to $65,000.

Mutual fund companies and brokerage houses hire recent graduates and professionals with proven success in other fields. Some of the smaller players lack a formal recruiting process, so you'll have to network to get your foot in the door. Hiring in the industry has cooled considerably, so competition is fierce. Research your potential candidates well and follow these tips:

  • At mutual funds, teamwork is a core value. Don't give these people the idea that you need to be a star performer. Instead, convince them that you only want to help your team succeed. If you're a gregarious loner and group activity is not what you do best, brokerage firms are where you should focus your job hunt.
  • Brokerages need to be persuaded you're a hard worker and a smart worker who doesn't give up easily. Sell yourself the way you'd sell a great stock.
  • Different firms in different cities all have their own distinctive character and style. Research the culture and be able to articulate how you'll fit in.
  • Remember that behind all the charts and graphs there is an investor-the customer. Let your interviewer know that you understand how important that person is.