The amount and types of services performed vary by firm. Some limit their activities to securities brokerage, the basic service of buying and selling stocks or bonds for customers. Others, called full-service brokerage firms, offer clients a myriad of financial services, including brokerage, trading, investment banking, financial research analysis, real estate management, and specialized investment planning.
The types of client served vary both by firm and within individual firms. The largest group served, by number of clients, is made up of individual investors. Firms develop what is referred to as a retail-trade business to handle these individual accounts. Another group of customers is institutional clients. Typical institutional clients are insurance companies, pension plan funds, corporations, and common trust funds. These clients are usually handled by large, full-service brokerage firms, as only they can provide the sophisticated, comprehensive services demanded. A third group of clients handled by full-service firms is composed of other firms in the financial service industry. For instance, brokerage firms often trade securities for commercial banks. They may also have other brokerage firms as clients-perhaps trading or purchasing securities the client firm controls-or as participants in large financial transactions.
Security brokerage firms earn money in a variety of ways. One source of income is the commission charged on securities bought or sold on a client's behalf; this fee is determined by the monetary value of the transaction. Fees from corporate clients for investment banking services constitute another source of revenue. Here, too, the fee varies according to the size of the transaction or deal. Firms also generate revenue when their traders buy securities at one price and sell them at a higher price, the firm keeping the difference (called the spread) as profit.
In full-service security brokerage firms, specialized departments often handle the various activities and services offered. Structure varies by firm, but typically there are the following departments: sales, trading, investment banking, services, and research. There are elements of both independence and interdependence in departmental relations. For example, both the sales department and investment banking department turn to the research department for information, but interaction between the first two is restricted by law, to avoid possible conflicts of interest.
Sales
In many firms the sales force represents the largest group of professionals. Salespeople work under various titles, such as stock-broker, broker, or account executive. Brokers, as we shall call them, are the firm's primary representatives to existing and potential clients. They serve as dis seminators of information on the financial services the company offers, services that encompass security transactions, portfolio management, and specialized services. Brokers are crucial to a firm's profitability, as the bulk of its revenue is linked to the brokers' ability to arrange and execute trades of securities.
The broker's job is predominately a sales position, and the ability to sell is important to anyone in this position. In order to sell effectively as a broker you would have to coordinate clients' needs with the personnel in your firm able to fulfill them. You would do this by first talking with clients and determining their objectives and then working with appropriate people within the firm to devise strategies to meet these objectives.
You would then arrange the transaction, be it buying or selling. Because interaction between brokers and personnel in other departments is so important, you must be well informed about each department in the firm. You must also develop and maintain good working relationships with specialists, especially in the research department, to facilitate good business relationships with clients.
Trading
People who work in the trading department execute the transactions arranged by brokers: They buy and sell securities. Only a small percentage of all the securities bought and sold are listed on the large stock exchanges (New York, American, Chicago, etc.). Others, traded over-the-counter, include traditional corporate stocks, bankers acceptances, certificates of deposit, convertible bonds, corporate bonds, Eurobonds, municipal bonds and notes, municipal-bond tax swaps, U.S. Treasury and agency securities, Yankee and Canadian bonds, commodity futures, and options. In other words, many securities transactions are not listed or published on a formal exchange; it is up to the traders to know what trading is taking place, when, between whom, and at what price. To be effective, traders generally specialize in particular products and markets, thus becoming familiar with large buyers and sellers, market behavior, and standard and aberrant pricing.
Traders working for a brokerage firm are in constant touch with the specialty markets in order to execute trades at the best price. Large firms also retain traders on the floors of the large exchanges to trade large blocks of stock on their behalf. The objective of these traders is to buy blocks of stock either at the price specified by the firm (for the firm's clients), or at a low price for resale to another trader at a higher price, making a profit for the firm and him- or herself. Obviously, the second objective is not always met.
Traders also assist in "private placement" of securities-when a corporation wants to issue a block of stock and not have it published on any exchange board or OTC list. This is done by corporations, generally with the advice of their investment bankers, either at the brokerage firm, at a commercial bank, or at another investment banking firm. In such a transaction, the trader is responsible for locating suitable trading partners and assisting the buyer and seller in negotiating the terms of the sale.
Investment Banking
Most large securities brokerage firms supplement traditional brokerage operations with investment banking activities for emerging and established companies, municipalities, and foreign governments. The investment banking department helps clients determine whether they need long-term capital for investment, expansion, or other purposes, and, if so, what is the best means of obtaining it. The investment banker may decide that capital should be obtained by the issuance of stocks or bonds, or perhaps that expansion should be achieved through merger with or acquisition of another company.
A firm's investment banking department is kept separate from its brokerage sales area to avoid conflicts of interest within the firm and between clients. The reason for separate and confidential operation by the investment banking department is that if brokers know that a merger between two companies is being considered, they are tempted to inform their clients, hoping to make commissions on the flurry of trading that ensues. The resulting rise in stock prices could adversely affect the proposed merger. Use of such "insider information" is illegal, punishable by imprisonment and fines. This is an ethical problem for securities firms as well; the leakage of indirect information regarding mergers and acquisitions is hard to eliminate, because both the sales and investment banking departments use services provided by the research department. Information can inadvertently slip out.
Support Services
The service department encompasses all support systems of brokerage firms, such as operations and data processing, human-resource management, accounting, marketing and advertising, and systems analysis. Opportunities in each of these areas are extensive in large firms.
One area which deserves discussion here is operations and data processing. Timely and efficient flow of information is especially crucial in this fast-paced industry where "time is money." The back office of brokerage firms-where records of customer accounts are maintained and the securities certificates representing transactions are physically transferred-is important to the firm's profitability. The failure of back-office operations and data processing to keep up with the hectic pace of the "go-go" years of the late sixties highlighted the importance of this previously neglected area, and identified the need for more extensive managerial skills and sophisticated equipment. Automation has replaced much of the clerical labor that traditionally staffed the back office, although even today operations may still falter during periods of extremely high volume on the exchange. Operations and data processing experts-equipped with computer, work-flow management, and data processing skills-are in high demand to ensure efficiency and efficacy in this vulnerable area.
Research
The research department is the informational core of brokerage firm and, as information is so crucial to the community, an important center of activity.
Director of Research: The director of research manages and administers the department and represents it to the rest of the firm. It is a powerful position within the corporate structure; the director may sit on the company's investment policy or steering committee to help develop and implement coordinated policy to guide the activities of research, sales, trading, capital management, and investment banking.
As manager of the research department, the director develops and oversees investment policy and research effort. As administrator he or she hires, fires, and grants salary increases or promotions. In large research departments there may be a support staff, including an office manager and assistant director, to help run administrative details, leaving the director free to manage research activities.
Economist: The economist occupies a key position in the research department and in the firm as a whole. Generally, economists hold advanced degrees (either M.A. or Ph.D.) and have been involved in academic research, thus bringing a rigorous analytical background and knowledge of the field to the position. Their opinions are generally taken as prescriptions within the firm, and sometimes receive national media attention.
The economist is responsible for determining the firm's view of future economic events; projections are made quarterly and annually on key dimensions of economic activity, such as gross national product (GNP), consumer spending, housing starts, and disposable personal income. Frequently the economist works with sophisticated economic models developed by independent economic research firms having state-of-the-art computer capability. The research department and other firm personnel use the economist's projections to develop investment strategies and make estimates of industry and company activity.
Portfolio Strategist: The portfolio strategist translates ideas about the economy as a whole and the stock market in particular into an overall investment plan, using the advice of analysts who monitor specific industries and subsectors of the economy. The key questions addressed are how much to invest, in what, and when. The strategist imagines a cash sum of money which a hypothetical investor with certain financial requirements can allocate among finances. He or she then determines what portions of that should leave as cash, invest in equity and fixed income put in other types of investments. Furthermore, the mines which industries are most attractive for investors even identify a subset of firms within an industry for fixation.
International and Political Analysts: The international analyst addresses the effect international economic activity has on the firm's and its clients' investments. The political analyst focuses on the current political climate and its possible effect on economic activity. These two positions augment the advisory functions of the director of research, economist, and portfolio strategist.
The Securities Analyst
Securities analysts make up the bulk of a research department's professional staff, conducting most of the actual research. As this position is a key position in brokerage firms, and is a common professional starting point in the industry, we shall look at the activities and responsibilities of securities analysts in some depth, followed by an analysis of the skills required for the position.
Securities analysts usually are assigned to cover one industry, such as chemicals, consumer durables, foods, insurance, transportation, telecommunications, or banking, to name a few. Their primary function is to monitor companies in that industry in order to discover companies that are attractive investment opportunities. Specialization allows analysts to become expert in a particular industry and alert to movement and possible investment opportunities.
Uncovering new investment opportunities, is an analyst's most challenging and rewarding activity. It centers on the identification of a corporate stock's "real worth." As an analyst, your aim would be to discover stocks with a current market price below this real-worth figure. These stocks represent buying opportunities. In determining a stock's real worth you would apply investigative, analytical, and intuitive skills. This activity also comprises your three primary functions as researcher, writer, and marketer.
Researcher: Analysts new to an industry must collect and read all the secondary material they can find on the industry-its products, services, and markets in order to obtain an overview. This includes books, trade publications, newspaper and magazine articles, and reference services such as Standard and Poor's Outlook. Analysts may also contact trade associations and attend their conferences to keep abreast of industry developments.
