FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet, a Nomura company.
Howard Schwartz was no stranger to readers of Traders Magazine around the turn of the century. As CEO of Lynch, Jones & Ryan, he appeared in a number of articles, discussing his brokerage firm’s commission recapture program and appetite for acquisitions, among other topics.
Traders caught up with Schwartz for a stroll down memory lane, and to hear what’s new in 20+ years.
What was the “story” of Lynch, Jones & Ryan? What were its primary accomplishments and what was your role.
I joined Lynch, Jones & Ryan in 1972 to participate in the development and introduction of the Institutional Brokers Estimate System (I/B/E/S), which eventually became a premier Wall Street research product. During that time, I was responsible for international sales, including managing a sales staff in New York and London.
My second major accomplishment was in 1986, following LJR’s acquisition by Citicorp. At that time the DOL issued a statement clarifying that brokerage commissions are an “asset” of an ERISA pension plan. Up until that time commissions were used, without discretion or direction by the Plan Sponsor, by investment managers to pay for brokerage research – which theoretically benefitted the pension plan. This written clarification by the DOL created an opportunity to recapture those commissions for the immediate benefit of the pension plan. This was a common-sense option to what had historically been the questionable route of paying for research with commissions, while at the same time paying an investment management fee which purportedly covered the manager’s expenses.
Simply stated, the method that I pioneered created the ability to provide institutional discount brokerage (disrupting the entire research industry method of commissions for research) through a mechanism that I called “commission recapture programs” (“CRP”). The investment manager traded with us; we rebated a percentage of those commissions (50-70%) back to the pension fund. This methodology ultimately resulted in an estimated industry-wide savings of $2 billion for participating plans, and substantively changed how the institutional agency business operated for the better.
To accomplish this, within LJR I formed and managed a division known as the Plan Sponsor Services group with a dedicated sales force of 20 focusing on this nascent market. This division quickly became the dominant source of LJR’s revenues, and I eventually became the Global Head of Sales for all LJR products with an emphasis on CRP.
How did LJR evolve in the 1990s?
In 1991 Citicorp decided to exit the brokerage business and I led the subsequent management buyout of LJR from Citicorp. Following that successful MBO, I became President and CEO. In 1994 I also became Chairman of LJR. My focus was to expand our market share as quickly as possible by expanding our sales force and establishing offices across the country and in London.
A key component of my strategy was to integrate our sales traders into this effort to ensure that the marketing effort and fulfillment process was seamless. To ensure the integration of outside sales and inside trading, we developed one of the first CRM systems (required by all Sales and Trading) used on Wall Street which ensured all members of our team were fully cognizant of every customer interaction. That system, along with an extensive, in-house sales training program that I developed, was a major contributing factor in our success. I am extremely proud of both accomplishments. And of course, the results.
Following the buyout in 1991, through 2002, LJR’s revenue grew from $15 million to over $150 million. We went from five years of no profit under Citi, to continuous annual profitability. With over 1,600 pension fund clients and 800 participating investment managers, LJR was a market leader. I still feel that in addition to building and managing an extremely profitable, well managed business, my greatest accomplishment during this time was creating a professional, highly focused and tight-knit sales/trading team that facilitated this rapid growth (along with top-notch integrated customer service and operational support).
LJR was acquired by Instinet in 2000 and, after the acquisition, in addition to continuing in my role at LJR, I added the role of Executive Vice President of Instinet and became a member of the Executive Committee where I was responsible for global sales and training programs. Combined annual global revenues of the combined market sectors exceeded $500 million.
What did you do after leaving LJR in 2002?
Following LJR I served as an Independent Director for the following fintech companies: Vie Financial Group, Advanced Financial Applications, Electronic Global Holdings, Stonehenge Inc., Starmine Inc., Efrontiers, and InfoExchange.
Since 2016 I have been an active member of the Fifth Avenue Association, which is a business improvement district. I am a Member of the Board and Executive Committee. Also, serve as Corporate Secretary, Chairman of Audit Committee, Chairman of the Search Committee, and member of the Board Nominating and Finance Committees.
The Association represents the interests of the real estate owners, retail merchants and residents of Fifth Avenue. It has a mandate for the security, sanitation and improvement of all Fifth Avenue commercial and residential interests working in coordination with various government agencies in New York City.
Most significantly, we have recently begun a major project (“Fifth Avenue Vision Plan”) for the complete restructuring of the streetscape to improve our competitive position and bring Fifth Avenue into the 21st century and beyond. The plan is addressing and incorporating the physical structure of the Avenue, aesthetics and environmental factors as well as the latest technology to ensure a visitor experience that reflects what is expected of the top High Street in the world.
What are your thoughts on how the brokerage industry has evolved?
Having the opportunity to be a board member for several FinTech companies, I had a birds-eye view as to where the industry was/is heading. Thus, the conversion to a tech-based industry was not surprising as I could clearly see the new technology taking hold and becoming the dominant part of the brokerage infrastructure. In fact, when I sold to Instinet back in 2000, it was obvious that tremendous capital investments would be required in the future to ensure competitiveness and I felt that a strategic partner was necessary. That informed my choice of a partner (rightly or wrongly). I used to say in many of my speeches to industry groups that the future of the NYSE Floor was to be a wedding/bar mitzvah venue. I still feel that way. It hasn’t completely played out, but just wait.
That said, there is no doubt that the industry has changed dramatically since I retired in 2002 in ways that I did not anticipate. It is interesting to see those changes first-hand every day on CNBC and in the various publications I read.
I follow the careers of several of my former associates and occasionally have lunch with them to catch up in person. What I miss most is the personal touch and camaraderie that was such an essential part of the industry during my almost four-decade experience.
What do you do for fun / leisure?
Since I retired in 2002 at the end of my contract with Instinet, my wife Gloria and I enjoy every moment we can in New York City. We have spent the last 19 years travelling as well as spending weekends and summers in our weekend home in Greenwich. Obviously Covid put a big dent in our travelling, but we are looking forward to getting back “on the road”. We have also enjoyed our family, especially spending as much time as possible with our grandsons, now 19 and 17.
