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Jared Dillian
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The Great Rebalancing

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August 9, 2006

Analyst Predicts Bumps Ahead

By Peter Chapman

Top managers of institutional equities operations, faced with a profit squeeze, are in a race to change. That's the conclusion of Brad Hintz, Sanford C. Bernstein & Co.'s top-rated brokerage industry analyst. Hintz, in his annual report on the state of the institutional equities business, says the underlying business is sick.

"Firms everywhere are analyzing their internal performance numbers and adjusting their plans in anticipation of [four] secular changes," Hintz notes. "These efforts to embrace change represent a race against time."

Profits are solid today, but that situation won't last, Hintz maintains. The industry's fundamental problems are masked by a buoyant equity underwriting environment and strong retail trading. When these good times end, however, the underlying problems of declining commissions and increasing costs will force drastic changes, Hintz believes.

Then managers will have to take a hard look at "DMA-based pricing," proprietary trading, their research offerings, compensation levels, technology investments and equity underwriting.

Hintz sees four secular trends affecting the industry: (a) declining commissions, (b) growth in proprietary trading, (c) changing research models and (d) declining returns from prime brokerage.

"Most of us will ultimately survive the inevitable changes that are coming," Hintz writes, "but that doesn't mean the years ahead will be easy."