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Prime brokerage heating up as new entrants compete

|Includes:FBRC, GS, JPMorgan Chase & Co. (JPM), LUK

The competition for assets in brokerage and investment advisory hasn’t been lost on prime brokers. In New Kids on the Prime-Brokerage Block on the WSJ, reporter Jenny Strasburg does a good job describing how new players in prime brokerage are challenging the old guard.

Strasburg specifically cites 4 newish entrants into the prime-brokerage pool:

  1. Cantor Fitzgerald
  2. FBR
  3. Jefferies and Co.
  4. Merlin Securities

These new entrants are all looking to take advantage of the carnage that occured during 2008 and early in 2009.

With the meltdown that took place last year, we saw an opportunity,” said Christopher Nealon, managing director in the institutional brokerage at FBR.

This news follows on the heels of an announcement by JPMorgan Chase last week of a combined service offering from Bear Stearns.  After purchasing Bear Stearns last year, JPM has been working to combine their own prime brokerage service with that of Bear’s.  Together, the new service offers a power-packed combinating of brokerage and custody.

In an interview with Financial Planning, the new head of this combined unit, Devon George-Eghdam, said of the offering:

“One of the major catalysts of the acquisition was Bear’s equity prime brokerage offering.”  JPMorgan Chase did not know that it would create this platform when it bought Bear Stearns, George-Eghdami said. “It was an evolution,” she said.

“When we bought Bear Stearns in the spring, it took us some time to digest this purchase. By the fall, there was a real focus developing on segregating custody accounts. That was when it became important to hedge funds to have specific, segregated custody accounts associated with a strong custody bank.”

To compete against the big-boys like Goldman Sachs and JPMorgan Chase, these smaller players are targeting the assets of smaller asset managers.  Many of these are hedge funds with under $300 million in assets.

While competitive on fees, these smaller clients are still feeling the pinch as they do pay more for these services than their larger competitors.

What this means is that combined with increased regulation and scrutiny, these higher fees make it harder for smaller asset managers to run profitable businesses.  Look for more consolidation — at prime brokers and hedge funds — in the near future.

Check out the whole WSJ article here.

Stocks: JPM, GS, FBRC, LUK