Working For An Independent Broker-Dealer Vs. A Big Bank

By Ryan C. Fuhrmann on December 04, 2012

Individuals seeking employment in the financial services industry have a wide array of job choices and employers to choose from. Many firms in the industry qualify as either a broker-dealer or big bank. Below is an overview of what each one has to offer to employees and the different opportunities available with each.

Broker-Dealer Employment
To work for a broker-dealer basically means working for any firm in the business of buying and selling securities. The broker-dealer distinction refers to the fact that the firm will generally operate as either a broker or a dealer, depending on the transaction. The technical Investopedia definition explains that a broker is only an agent who executes orders on behalf of clients, whereas a dealer acts as a principal and trades for his or her own account. Because most brokerages, also known as wire houses, act as both brokers and principals, the term broker-dealer is commonly used to describe the combined responsibilities.

Firms that have significant broker-dealer operations include the giant bulge-bracket firms, such as Goldman Sachs and Morgan Stanley, and second-tier firms, such as Raymond James Financial. The benefits of working for these firms shows through during market upswings. In other words, their profits roll in when stock market trading activity is high and frequent. Prior to the financial crisis, many of the leading broker-dealers easily reporteddouble-digit return on equity (ROE) ratios or return on book value; many ROEs exceeded 20% prior to the crisis hitting. This is a primary profitability metric when determining if financial firms are doing well.

Of course, the flips side is these firms don’t do nearly as well during a bear market. The current market environment illustrates the difficulty these firms are having. Stock trading activity is depressed and there are less companies going public through initial public offerings, which use broker-dealers to distribute the stock issued during an IPO. When profit margins suffer, there is less to go around to employees in the form of new jobs and bonuses to existing workers.




Working for a Big Bank
Working at a big bank has traditionally been thought of as securing a very stable, predictable living. Returning again to ROE as a financial measure, the industry average ROE is currently around 12%, and the best-run banks, such as U.S. Bancorp, currently boast five-year average ROE levels closer to 15%. From an employee perspective, steady profits mean job stability and predictable paychecks. The upside isn’t as great during boom times as can occur at broker-dealers, but many employees are willing to make the tradeoff for a job they can count on.

Again, the financial crisis eliminated the security of a big banking job at many firms. Washington Mutual and Wachovia were snapped up by JPMorgan Chase and Wells Fargo, with both moves resulting in workforce reductions and the loss of many years of retirement funds that were invested in company stock. But again, there are still a handful of well-run banks, such as U.S. Bancorp, JPMorgan and Wells Fargo, that are able to offer steady, if unexciting job prospects. It is important to note that large banks also offer some generous benefit and vacation packages, such as up to four weeks for employees that remain gainfully employed at the same bank for three or more consecutive years.

A More Direct Comparison
Working for a broker-dealer definitely carries more upside in terms of the potential for a higher salary; however, this risk has grown only more apparent in recent years. A recent article in an Investment News periodical stated that “all the wire houses have been pushing their advisers to pursue more profitable high-net-worth clients” and cited one in particular that was making it very clear that brokers who don’t meet their numbers could be sent packing for another firm. In other words, brokers who perform or are simply lucky enough to have connections to bring in new business or make steady investment trades, do quite well in this environment. Others who aren’t as adept at selling or bringing in new clients can easily lose their jobs.

Working for a big bank definitely offers sales as a possibility, but a bank has many more functions than simply helping facilitate trades or bring in clients who are able to help facilitate trading activity. They have tellers, loan officers, back office support staff, asset managers, trust officers, portfolio managers and just about any financial services function imaginable. Combined with the more visible career stability offered by better-run banks, a big bank is going to offer much more in terms of job flexibility beyond what a broker-dealer is willing to offer.

The Bottom Line
As with any job, individual preferences and skill sets will primarily determine if an individual is better suited working for a broker-dealer or a bank. Those seeking to strike it rich may be best off trying their luck at a broker, and the ideal timing would be during a bull market. Those with a more general interest in financial services should be able to find an opportunity at a big bank, and steady employment, if they play their cards right.

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