Security Firm Operation Imagine you are a consultant who is assessing the operat
ID: 2731554 • Letter: S
Question
Security Firm Operation
Imagine you are a consultant who is assessing the operations of a securities firm. Address the following issues:
The securities firm relies heavily on full-service brokerage commissions. In your opinion, is the firm's heavy reliance on these commissions risky? Explain your answer.
If this firm attempts to enter the underwriting business, discuss whether this would be an easy or difficult transition.
In recent years, the stock market volume has increased substantially, and this securities firm has performed very well. In the future, however, many institutional and individual investors may invest in indexes rather than in individual stocks. Discuss how this would affect the securities firm.
Explanation / Answer
Yes. The heavy reliance on full-service brokerage only is risky for a business. A business should always try to diversify into related areas improve research and identify opportunities to foray into different, but related businesses. Heavy reliance on brokerage may lead to lean periods (when there is a recession) where brokerage could be low and high brokerages (when there is a recovery) when brokerage could be high. Hence this would be a cyclical business and the firm should try to achieve good revenues in lean periods as well
Underwriting business involves the process of valuing the business and arriving at the right value. This is completely difference they simple collection of brokerage on the securities and the firm should have the expertise to do it right. Hence, I feel it is a difficult transition.
With the information that in future many institutional and individual investors may invest in indexes rather than in individual stocks, this would affect the firm adversely and revenues of the business would plummet forever. With this information, the firm should look at gathering expertise in the underwriting business and make a foray into that even if it is difficult since the growth of the firm is at stake in the brokerage business.