Retail Brokerage Firms Surpass Investment Banks in Wall Street Profits

Strategic Insights -

For the past four years, profits at national full-line brokerage firms, such as Merrill Lynch & Co., have outstripped earnings at big investment banks serving institutions by 54%. This shift in the balance of Wall Street power can be attributed to the growing popularity of mutual funds, particularly stock funds, which provide a recurring revenue stream for retail brokerage firms. Despite a record merger activity this year, which should have boosted investment banks' profits, they have failed to capitalize on the bond market rally, due to reduced bond inventories.

Key Takeaways:

  • For the past four years, profits at national full-line brokerage firms have outstripped earnings at big investment banks serving institutions by 54%.
  • The shift towards retail brokerage firms can be attributed to the growing popularity of mutual funds, particularly stock funds.
  • In 1995, stock mutual funds accounted for 87% of net inflows into the two fund groups, up from 37% in 1991.
  • Retail brokerage firms have benefited from record stock market trading volume and soaring prices this year.
  • Investment banks have reduced their bond holdings by one-third since the fall of 1993, which has limited their ability to capitalize on the bond market rally.
  • The Securities Industry Association (SIA) reports that bond inventories at investment banks have increased by 28% for the six-month period ended September 30.

Statistics:

  • The value of bonds outstanding has increased by $1.65 trillion (U.S.) to $10.95 trillion this year, excluding new issues.
  • The value of stocks outstanding has increased by $2.1 trillion to $8.4 trillion this year, excluding new stock issues.
  • Stock mutual funds accounted for 87% of net inflows into the two fund groups in 1995, up from 37% in 1991.
  • The SIA reports that bond inventories at investment banks were reduced by one-third since the fall of 1993.
  • Bond inventories at investment banks have increased by 28% for the six-month period ended September 30.

Sources:

  • "The Securities Industry Association"
  • Jeffrey Schaefer, SIA's research chief
  • George Monahan, SIA's director of industry studies
  • The Wall Street Journal