Broker revenues dropping even before Spitzer probe: study

A new study reveals “organic” revenues were dropping for the world’s largest brokers even before the impact of the U.S. compensation probe was felt.
The study, by Pennsylvania-based WFG Capital Advisors LP, finds that the eight largest brokerages saw organic revenue drop by 2.7% in the second quarter ending September 30, 2004 almost six weeks before New York Attorney General Eliot Spitzer announced the filing of civil charges against broker Marsh as a result of his probe into insurance industry practices and compensation. “Organic” revenue refers to revenue without the influence of foreign currency exchange and acquisitions.
“Product rate stabilization continues to hinder the industry leaders. The overall direction of the market would strongly suggest that these firms have only begun to experience difficulties,” says Steven Wevodau, managing principal of WFG. “When you combine a product rate stable environment with lost consumer confidence as a result of the Spitzer suit, it only makes the uphill climb steeper for this group.” The world’s largest brokerages have already announced they will stop receiving contingent commissions as a result of the Spitzer probe.
In response to revenue declines, many brokerages are pursuing acquisition opportunities, specifically directed to certain niche service areas, adds Rob Lieblein, managing principal at WFG. “Many firms are up against enormous shareholder demands and while heavily leveraging acquired growth does not necessarily reflect an ideal scenario, it does demonstrate continued commitment to core competencies while deploying market capitalization toward growth.”
He notes that the “pipelines are full” of acquisition opportunities, indicating that smaller firms are experiencing the same revenue crunch as their larger peers. “The resulting effect is that industry consolidation should continue at its record pace,” Lieblein says.