Planning on Wall Street

CFA Institute

Planning on Wall StreetAuthor(s): Walter P. SternSource: Financial Analysts Journal, Vol. 26, No. 3 (May - Jun., 1970), pp. 27-29Published by: CFA InstituteStable URL: http://www.jstor.org/stable/4470675 .

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PLANNING ON

WALL STREET

by WALTER P. STERN, C.F.A.*

THIS subject should be retitled, "Planning on Wall Street-What Planning?" Planning has, in the past, been generally non-exis.tent, and where it has been

tried, it has often been quite poor. In 1965, the New York Stock Exchange did a study of the long-range future of Wall Street and concluded that in ten years volume might reach 10 million shares a day. In 1968- three years later -volume reached almost 12 million shares a day. Wall Street has prospered quite well under this increased volume, but this increase in business has brought with it very substantial problems.

This is particularly interesting since Wall Street has been quick to criticize planning and decision-making in almost every branch of American industry. It is probably fair to say that Wall Street, at the moment, is probably one of the most overpaid, undermanaged, and underplanned industries in the country, an industry which has operated-and done very well-under a protective um.brella for some years but is threatened right now with that protective umbrella being raised or lifted; it is not at all clear how the industry will react. Right now it is reacting with dismay-perhaps to some extent a reflection on the lack of cohesive industry leadership; this reflects the divergent interests of many different segments of the industry.

The Industry

What is this industry called "Wall Street"? It is a. very diverse industry with a myriad of firms with many, many different goals an.d objectives. There are over five thou- sand firms in Wall Street, employing over 200,000 people, ranging from large firms - wire houses with offices in virtually every major city of the world--down to small firms with two or three people. Most of them. are headquartered in New York, but there are many regional firms all over the country. The industry's product mix is equally diverse. It ranges from full-service

WALTER P. STERN, C.F.A., is Partner and Director of Re- search of Burnham and Company.

*This article was prepared in conjunction with Hal Dynan, Director of Planning, Burnham and Company, and is based on an address by Mr. Stern before the Nattional Society for Corporate Planning, December 18, 1969.

houses offering a wide range of almost every financial service down to the specialty house in one narrow segment of this very diverse industry, such as trading, arbitrage, market-making, investment banking, mutual fund sales, or simply retail brokerage-which probably accounts for the largest single segment of our industry.

The Street has, "politely," adhered to a long, proud tradition; this tradition has also offered the opportunity for protecting and perpetuating long standing market arrangements and other types of what the Justice De- partment has termed "restrictive" agreements of one sort or another. There is a bit of a paradox in this: despite these very convenient arrangements, Wall Street is still a fiercely competitive industry with enormous opportuni- ties for the creative, the imaginative, and the innovative. In particular, the growth of the institutional business and the performance phenomena, which have swept in in the last couple of years, have gone a long way towards breaking down traditional patterns.

These paradoxical characteristics of restrictions, competition, and often contradictory interests have served to limit the interest and the willingness to recognize and develop industry solutions for many of its problems which have been building up over the last several years and which have really burst forth in the last twelve to eighteen months.

Problems

Possibly, the most significant problem has been a real failure to develop professional managers and, as a result, a nearly universal failure to utilize techniques and technology which have been almost commonplace elsewhere in U. S. industry. Many successful firms are run by pro- ducers or salesmen; these individuals often are largely responsible for administration. Over the years, emphasis has been placed on production, and, as a result, there has been at best a half-hearted interest in managing, directing, or planning the business.

There has been a fundamental difference in perspec- tive between the back office and the front office. This has often stemmed from the limited interest on the part of most of the producing partners or officers in getting involved in day-to-day routine activities. This lack of interest, probably to a large degree, accounted for the antiquated operating methods, particularly in the handling of securities and paper work, which has confronted the industry in the last two years.

In addition, management ranks have remained very thin. There is a real generation gap on Wall Street. The industry fell into disrepute during the Thirties, and, up until perhaps the Sixties, it was not a popular industry. I graduated from Harvard Business School in 1952 and was one of perhaps six or seven people in my class to come down to Wall Street out of a graduating class of something over six hundred. In recent years, about 20

FINANCIAL ANALYSTS JOURNAL / MAY-JUNE 1970 27



per cent of each class seems to be looking for jobs on Wall Street, which indicates something - probably the fact that it is an overpaid profession.

1968-1969 Period

1968 was really a crucial year for the industry. Vol- ume was extraordinarily high; profits for most firms were also very satisfactory. 1968 also saw the industry pay a terrific price for the neglect that it has built up over the years: there was a real inability to process the business, to deliver securities, to receive securities, and to keep proper records. These and various other malpractices finally brought about the intervention of the regulatory authorities. Wall Street is the only business I know in the world that has shut down because of too much business. The New York Stock Exchange stepped in and put its members on a shorter working week and then shorter hours-which we are still on.

At the same time, operating costs went up very sharp- ly as firms reacted in two ways. Many firms turned to the computer or automation, which probably solved about 10 per cent of the problems; for many firms the introduction of computers substantially increased operating foul-ups. Most firms also hired any warm body that was around. Wall Street was inundated with a lot of high- cost equipment and hordes of inexperienced, untrained personnel. Anybody who could be hired was thrown in to try to unlock the paper jam. This resulted in a real disaster. It also resulted in a terrfic increase in costs.

The industry has had an unerring ability to adjust its breakeven to last year's volume; this has happened every year for the last five years. Volume in 1968 averaged about 13 million shares a day. In 1969 it slipped down to about 11 million shares, and the result is that many firms. at least in the brokerage end of the business, are operating in the red, despite the fact that this is an in- credible volume of business by any historical standards. It is a sad plight.

1970 and 1971

The next year or two, 1970 and 1971, may well be the most crucial for the securities industry since the structural changes which followed the crash and depres- sion in the early Thirties. There are major issues facing the industry which must be resolved over the coming months. We are faced with a further volume discount on large orders and a whole restructuring of the commission framework; we are quite likely faced with doing away with the fixed commission, which probably pro- vides the underpinning for 60 per cent or 70 per cent of the firms in the industry. We may well have public ownership; we may have institutional access to the Ex- change. Institutions in 1969 accounted for about 50 per cent of the business, and this may grow to as much as

70 per cent over the next ten years; if institutions are granted access, it will eliminate an enormous amount of the commission dollar from the present member firms.

The industry is finally getting around to re-examining the commission structure of salesmen, who are probably the most highly paid salesmen in any industry anywhere. This is partly because volume has increased very substantially. It is partly because Wall Street, in an effort to hire salesmen to get an increasing share of the business, has paid out an extraordinary amount of the commission dollar to the salesman. In the last few months, this particular aspect - the commission pay-out - is being reassessed. Wall Street analysts have been critical of volume for volume's sake in almost every other industry, yet has, itself, been very guilty of pursuing this policy; instead of gearing salesmen's compensation to the profitability of the business generated, almost without excep- tion, up until recently, salesmen have been compensated pretty much as a straight percentage of gross volume.

Along with this, Wall Street is seeing substantially increased competition. Almost every firm is trying to get into every other firm's business, and institutions are trying to get into the brokerage business; it is very hard to plan for what may happen. As a result, a resolution of any one of these problems could have a major impact on opportunity areas for the securities industry.

Responses to Problems

The industry has been reacting in various ways. First of all, it blames Washington and the "regulators." Sec- ond, hardly a day goes by without an announcement of one firm merging with another or other diversification efforts. Third, there is some attention being paid to professionalization in the industry. Younger partners and officers continue to take an increasingly significant role in a growing number of firms. There has been a substantial increase in responsibility given to those individuals who have had formal training in management services or other types of back office management. The industry has finally reached the stage where it has been forced to adopt some of the management practices and devices - including planning - which have been used elsewhere in American industry for many years.

There have also been some few specific things done to try to increase planning on Wall Street recently:

1. In February of 1969, the Anmerican Stock Exchange commissioned a study by North Ameri- can Rockwell Company to review the entire opera- tions-the handling of securities-in the industry and to try to come up with a whole new systems analysis.

2. The New York group of the Investment Bankers Association, early in 1969, conducted a three-part, nine -day seminar in Long Island to

28 FINANCIAL ANALYSTS JOURNAL / MAY-JUNE 1970



attract the younger key officers or partners of par- ticipating firms to talk about planning.

3. The Association of Stock Exchange Firms recently held a conference which carried the title "Building Profitability in a Changing Environ- ment"; long-range planning was emphasized throughout the conference.

4. The American Stock Exchange is now in the process of completing the results of a joint effort with Ernst & Ernst on management planning and control for distribution early in 1970. This runs some 150 pages and goes into all types of management and planning techniques.

5. The New York Stock Exchatnge is sponsor- ing a two-day planning seminar for partners and officers with responsibility for their firms' planning efforts to talk about what is going on.

6. Lastly, the major firms in the industry, or a handful of them, have formed a planning group called the Wall Street Planning Group, which in- cludes partners and officers from about three dozen name houses who meet monthly to discuss common planning problems and gain exposure from planning specialists in other industries.

Basically, the industry has not done much planning, in part because the official industry associations have never agreed on what is right for the industry. There has been a large element of self-interest and protecting one's own position; there has been no agreement on common goals or working together.

A survey by the New York Stock Exchange taken early in 1969 showed the following: Out of the twenty- five large firms replying to the survey out of forty-one questioned, all except two had planning programs. Even in these large firms, however, in almost every case, it was a very recent innovation. For twenty-three out of the twenty-five large firms, two-thirds have had less than three years of planning experience. Among the medium- sized firms (which category Burnham and Company falls in) a slight majority had long-range planning programs; at the other end of the spectrum, among the smaller firms, about one out of three indicated that they had some kind of planning effort. This estimate does not allow for the absence of planning among the other two hundred odd firms in the industry which were not circu- larized or did not respond to this questionnaire. Gen- erally, planning has been non-existent in smaller firms; it has been sparse in the industry associations; and there has been a lack of cooperation and coordination among the various power structures in the industry, with each seeking to protect his own position. The industry has suffered.

Areas of Planning

There are some areas of planning which have received emphasis. Basically, this has been "reactive" planning rather than "anticipatory" planning. In particular, with the great increase in industry personnel, there has been a lot of attention paid to planning for future space requirements; space planning has probably been the most single pursued area of activity. Space needs are neces- sarily affected by personnel requirements, and there has recently been much attention paid to planning personnel needs.

In general, the medium-sized and smaller firms are looking only at operating problems; a few larger firms are considering broader problems. Very few firms ap- pear really to be looking at the whole environment around us and examining the future of the firm, its product mix, and the direction that it should be taking in view of the changing environment. One firm which is staffed almost entirely by men under forty, which has shaken up the industry and is about to go public, has done a pretty good job in this; it is virtually the only firm using scientific planning in the business.

The great part of the effort has been directed at the handling and processing and trying to unsnarl the paper mess which most firms have gotten into. Most recently, there has been attention given to organization structure, compliance and surveillance of sales personnel (appar- ently a direct reaction to the SEC cracking the whip over the industry). Activities are mainly directed at avoid- ing or solving current problems. Planning has had very little to do with looking at the changes in the business and trying to figure out how to adapt to them.

There is a growing interest in planning on Wall Street. In part, this is a result of the mess that the securities industry has gotten into and the realization of the neces- sity of thinking ahead beyond next week - which is something that has not been done very much in the past; it is much overdue.

Concluding Note

Wall Street has been very quick to criticize the management of most of the rest of American industry. We are probably, ourselves, operating in one of the less well- managed major industries in the country. This seems to be changing rapidly, not because we are so alert, but because the industry has gotten itself into a mess which has forced these changes upon us. When these imme- diate problems are resolved, the industry should be substantially better off, having sat down and sought solutions to its problems. At least the problems have brought about the introduction of planning concepts to an industry which badly needed it. *

FINANCIAL ANALYSTS JOURNAL / MAY-JUNE 1970 29



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