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The $432 billion life insurance industry is trying to fight back with a host of new financial services. Many firms have introduced a variety of new policies with greater investment flexibility and higher interest rates. Equitable Life Assurance, for example, is now offering a money-market fund for policy holders. Earlier this year, Prudential Insurance Co. jumped to set up its own broad-based financial firm by buying Wall Street's Bache Group, the sixth largest American brokerage house, for $385 million. The companies are already working on new financial products that can be sold jointly by insurance agents and stockbrokers. Says Prudential Chairman Robert A. Beck: "Acquiring Bache is a significant step in our plan to offer a broad range of financial services."
While banks, savings and loan associations and insurance companies have been retreating, brokerage houses like Merrill Lynch, Bache, and Shearson have assumed unprecedented importance in personal finance, and are now leading the drive toward new forms of saving. Unhindered by the restrictions on the amount of interest they can pay or where they can do business, brokerage houses operate many of the largest money-market funds.
The success of the brokerage houses in popularizing these new financial products has made them a tempting target for takeover. American Express acquired Shearson, the second largest American brokerage firm, in order to establish its one-stop financial shopping center. American Express Chairman James D. Robinson III and Shearson Chairman Sanford I. Weill are already drawing up plans to introduce accounts modeled after Merrill Lynch's popular interest-bearing checking accounts.
Although the brokerage houses are now some of the most attractive players in the money game, less than a decade ago they were in disarray. After the stock market collapse of the early '70s, more than 5 million investors left Wall Street, and brokerage-house profits tumbled from $915 million in 1971 to $43 million in 1973. The result was a vast merger of firms, as poorly managed houses were taken over by stronger ones. The number of brokerage firms belonging to the New York Stock Exchange decreased by 18% between 1971 and 1977. Fixed-rate stock commissions were eliminated in 1975. The resulting competition led brokers to offer other services, including real estate, money-market funds and tax shelters. It was their very weakness in the 1970s that has led to their strength today.
Mutual-fund companies like T. Rowe Price Associates in Baltimore and Fidelity Management & Research in Boston have also played an important role in the growth of financial services. These firms have long given moderate-income families the possibility of investing small amounts to buy shares of companies doing business in anything from natural resources to high technology. Now the mutual-fund companies have also become a major source of money-market funds, which they often offer with minimum deposits of $1,000.