End of Glass-Steagall to fuel competition, mergers

The signing of Financial Services Modernization Act into law last November marked the end of the Glass-Steagall Act, the Depression Era measure that separated the banking and securities industries. The change follows decades of industry debate as to the necessity of the Glass-Steagall Act in modern financial times.

Financial industry professionals have been talking about the issue for some time, according to John Piatchek, of the financial planning firm of John Piatchek and Associates Inc. "This controversy has gone on for years," he said.

David Kunze, president and chief executive officer of Signature Bank, agreed. "You could anticipate over the past 10 years that they would eventually do away with it," he said.

The repeal of the Glass-Steagall Act means banks can now provide securities trading for their customers, and Piatchek and Kunze said that gives customers more options.

"It just simply means that they'll have more sources to go to," Piatchek said.

"I think it's going to give banks the ability to service their customers in one stop," Kunze said.

Greg DeLong, investment representative at Edward Jones, has been involved with the issues contained in the Financial Services Modernization Act for years as part of Edward Jones' Grassroots Task Force, a group of Edward Jones employees who lobby for issues involving both the financial services industry and individual investors.

"One of the important elements of the act is functional regulation," DeLong said. "They will now apply uniformity of regulation to everyone, whether they operate from a brokerage house or a bank, and this will eliminate inconsistency of regulations. That's a real benefit to the consumer."

Regarding consumer safety, "I think the key safety issue is that it's important for consumers to know the difference between FDIC-insured deposits and securities. This functional regulation will be the safety net for consumers," DeLong added.

While the Financial Services Modernization Act has already been signed into law, DeLong said the rule-making stage will continue for the next year. In the meantime, the Securities and Exchange Commission will oversee all securities trading.

Kunze also said there are other consumer protection measures within the act. "There are fire walls built into the law," he said.

"Additional financial services would have to be done in a subsidiary holding company. Also, the regulators are passing directives on how these services will be handled," Kunze added.

But don't expect every bank to hang out a shingle announcing securities services, DeLong and Kunze said.

"I don't see smaller community banks offering these services like the big money center banks will," DeLong said.

Kunze said smaller banks will have to consider whether they have the customer base to justify offering such services.

"Two things must be met customer demand and profitability," Kunze said. "The bank must determine those things to be both meaningful and sustainable." Kunze said Signature Bank would be considering securities and insurance services when the bank evaluates what services it will be adding.

While banks are now able to offer securities services, Piatchek said these transactions will not render financial planners obsolete.

"The banks are still not going to be able to replace what we do; rolling up our sleeves and talking one-on-one about financial goals and objectives," he said. "In terms of all-out financial planning ... it's taken us 25 years to figure out how to do this. It's not a science, it's an art."

Local financial professionals agreed that competition could become fierce.

"There'll be more people doing transactions," Piatchek said. "But there will be few people doing all-out financial planning."

Kunze said while there will be increased competition, he expects the best to survive.

"People will vote by their wallet whoever offers the best service at the best price, that's where they'll go," he said.

DeLong anticipates that competition could drive the evolution of a two-tiered banking system.

"You'll have large money center banks and the small community banks," he said. "I think it will continue to accelerate consolidation among three groups banks, brokerages and insurance companies."

Local professionals also agree that the repeal of the Glass-Steagall Act will prove safe and advantageous for the consumer.