The 20th century saw the dawn of the modern marketplace, where the common man was able to purchase homes, securities, insurance policies and other products with the help of a sales broker. For about the first three-quarters of the century, these professionals only had each other for competition. But the '70s and '80s introduced a variety of discount products and services that sometimes drastically undersold the traditional sales brokers. The role of the sales broker, as a purely transaction-based salesperson, is changing. (With online broker options, it is important to ask Is Your Broker Ripping You Off?)
TUTORIAL: Brokers and Online Trading
Changes in the Financial Industry
Full-service stockbrokers, banks and insurance agents have been among the hardest hit in the consumer marketplace with competition from discount and Internet services. Charles Schwab first appeared in the '70s to challenge the traditional wirehouses such as Merrill Lynch by charging substantially lower commissions. Many other discount firms, including Quick & Reilly, Scottrade and Olde quickly followed suit, setting new standards for how low commissions could go. Most discount firms initially functioned strictly as order-placement operations that provided very limited services, many of them evolved to provide most of the services available from full-commission firms, such as top-notch research, analyst commentary, real-time quotes and even limited advice in some cases.
This trend continued with the Internet explosion of the '90s, which brought a slew of online brokerage firms that charged as little as $5 or $10 per trade and even offered free trades under certain conditions, all while providing a full range of investment research, professional money management services and other amenities, such as annuities, life insurance, mortgages and even investment advisory services. No-load mutual funds, such as Vanguard and T. Rowe Price also appeared in the '70s and quickly grew to provide investors with a much cheaper alternative for professionally managed diversification than their load-bearing cousins.
Insurance, Commercial Banks and Real Estate
The insurance industry has followed a similar path, as captive agents must now contend with no or low-load annuities and insurance policies offered by fledgling carriers, as well as a plethora of online insurance and annuity vendors that can provide instant quotes and other services. A search on any major Internet search engine for insurance will yield several pages of insurance vendors and sites that list and offer all types of annuity and insurance products according to various criteria, such as type of product or underwriting requirements.
Commercial banks have faced increasing competition from online firms. Because Internet banks don't have brick-and-mortar locations to maintain, they have much lower overhead and can therefore offer superior rates on CDs, mortgages and loans. But they can still provide most of the traditional benefits and services of banks such as FDIC insurance and around-the-clock customer service. (For more check out Online Banks: Lower Costs And Little Sacrifice.)
Real estate brokers have been hit equally hard. Online listing sites now allow prospects to peruse dozens of possibilities online in an afternoon instead of driving around to different locations to view houses or meet people. Downloadable pictures and video clips often make it unnecessary to tour a house in person, and instant messaging and email make it easier than ever for buyers and sellers to contact each other directly. A study done by the Department of Finance at the University of Texas, in San Antonio, that covered over 48,000 residential home sales indicated that homes listed online take slightly longer to sell than those listed by agents, but also fetch slightly higher prices on average.
These changes have effectively forced those who make their living by charging commissions for transactions in these sectors to reposition themselves as advisors and advocates who can provide personalized advice with a human touch. The Internet has made prospecting for clients harder in the sense that advisors must now convince prospective clients why they still need the advice and service of a human being. The automated services that advisors can now provide can also allow clients to accomplish many routine tasks themselves, thus freeing brokers and advisors up to service their clients. Ultimately, the changes seem to be having a positive effect for advisors, as the U.S. Bureau of Labor Statistics shows that the labor force for financial salespersons is expected to grow anywhere from 6-16% by 2018.
Brokers in Other Trades
Headhunters and travel agents are likewise facing extinction from websites such as Monster and Expedia, which allow job hunters and travelers to find jobs and book travel reservations at the touch of a button. As with those in the financial industry, sales brokers in these sectors are forced to try and provide deals and services that cannot be duplicated online. However, the Bureau of Labor Statistics again indicates that the overall number of sales brokers from all sectors of the economy is expected to grow by approximately 14% by 2018.
The Bottom Line
Across the board, sales brokers are facing increasing pressure from not only the Internet and other discount services, but also from their own employers, who are often discovering that maintaining an active online presence can be considerably cheaper than maintaining a sales force. The cost of salaries, benefits, training and office space can be exponentially more than the costs associated with creating and hosting a website and advertising online. (To help you choose a broker, read Picking Your First Broker.)