A swarm of pesky online discounters is eating the lunch of the silvertail sharebroker establishment. The old name firms are fighting back and changing the economics of Australia's retail sharebroking industry in the processDean Campbell looks down with cheerful contempt on the noveau investors trading through online discounters. "We exploit them," he chirps happily from his trading room desk on the 21st floor of a financial district high-rise.
A seasoned operator with a full-service brokerage that traces its lineage back to the last century, Campbell can play the flow of bids and offers on his automated trading screen like a concert pianist. Not so, the online mums and dads who are still at the hunt and peck stage. Result: Campbell and his colleagues can offload parcels of shares on the novices at higher prices than they would otherwise attract.
However, the silvertails may be a tad premature in popping open the Dom Perignon. Online discounters are offering bargain basement rates that are exerting magnetic appeal on the millions of new shareholders created in Australia by global trends to privatisation and demutualisation. Trades for which old-guard brokers routinely commanded commissions of $60 to $80 are being executed for as little as $10 by their upstart online rivals. Rippling through to the top end of the market, that downward pressure is being felt by the full-service brokers and affecting the rates they charge.
There's no doubt online brokerages are stealing business from the established brokers, says ASX spokesman Gervase Greene. Latest figures show online brokers are responsible for up to 20 per cent of all trades going through the ASX. The number is a bit misleading because the value of individual trades conducted by online brokers is lower than those done by the traditional houses. Measured by value, online brokers probably command less than 10 per cent of the action.
Even so, the rise of online trading and its deflating effect on the industry's traditional fee structures is a long overdue change that the investor community welcomes. "The whole industry needed a shake-up," says Phillip Wing, executive director of venture capital firm Technology Venture Partners. Particularly among retail traders, the margins were ridiculously high and the value-add was very low."
Online trading is not a fad destined to wither away, says Australian Shareholders Association executive director Tony McLean. "In my view, it is an inevitable development that provides a cheap and easy alternative [to expensive traditional advisory services]." Helping fuel it is the remarkable surge in Australians who directly own shares. In the 1980s, fewer than 10 per cent of the adult population held shares directly. Today that figure is more than 50 per cent, McLean says.
The popularity of online trading reflects a growing confidence among investors, says Helen Forde, director of brand management for online brokerage ShareTrade. "Pure online brokers typically have customers who know what they want to buy," Forde claims. "They are self-directed investors without any need for advice from a third party; they are generally well-informed and really keen to make their own decisions."
It is easy to wax lyrical about the appeal of online trading in a bull market when life for many investors is a bowl of platinum-plated cherries. The cheapness and ease of online trading may lose some of its lustre when newcomers see their portfolios clawed apart by their first bear market, McLean warns. "By and large, I think it is useful for people to have an alternative means of trading, and the success of online trading is an indication of the growing sophistication of investors. But I feel we will get a better handle on how people react to the risks of online trading if and when the market turns."
The "tech wreck" of dotcom stocks in April proved that downturns steer some online aficionados back to the relative safety of advisory service brokers. "The volumes trades done by online brokers fell away dramatically," says JB Were managing director for retail broking David Evans. "We saw good evidence of people coming back to us and saying: This is my portfolio, can you look at it now and assess it for me?'." In the US, old-fashioned retail brokerage Edward Jones estimates 2000 of its clients closed out their accounts and moved online before the downturn. A third have come back since the April adjustment.
Ord Minnett's head of private client investment services Charles Moore believes there will be natural leakage of customers from the online discounters to the full-service brokers even without a market wreck. "It is a pattern likely to develop as a consequence of people's desire for the benefit of advice and experience, which comes with the natural evolution and maturity of investment knowledge," he says. "I think the advent of the discount and online houses has been a good thing for the broking industry in general and new investors in particular. It has facilitated access to the market for many investors who otherwise wouldn't have come in."
In that view, online brokerages are the retail share industry's loss leaders, attracting fresh investors who then gravitate to the full-service shops.
Shape of Things to Come
Streamlined technology and no-frills service is what makes the online brokers tick. They typically don't offer the personalised hand-holding that private client advisers supply in traditional brokerages. Investors execute trades through phone operators or directly over the Internet with human intervention reduced to a minimum. That kind of automation strips out the high costs associated with knowledge workers and keeps fees low.
Kerry Roxburgh, founding CEO of pioneering online broker E*Trade Australia, believes the big full-service firms have significant cultural, structural and cost barriers to overcome if they want to reshape themselves as online brokers. "It is not worth their while to cater for the mum-and-pop investor with a few hundred NRMA shares," he says.
But the same dynamics that drive other areas of e-commerce are popping up in the broking arena. Bricks-and-mortar brokers are leavening their custom-tailored approach with fewer-frills order placement while the dotcom brokers are icing their offerings with up-market personalised extras. It means the bricks-and-mortar brigade are seeing online plays as just another business channel whose worth has been proved.
One of the last of the offline holdouts, JB Were, has just launched its own online trading facility, Were Oncall, in conjunction with a call centre. It gives clients a do-it-yourself investment management service and access to Were research. Generic advice is available at lower rates than those charged by Were's personalised broking channels. Similarly, Ord Minnett is moving online with what it calls an "intermediated model" in which clients can trade via the Internet and advisers will intercede only if they spot gross misjudgements.
Meanwhile, the online discounters, having commoditised their market, are moving to differentiate themselves by moving back up the value chain with a range of extra services. Overall, the process is leading to a three-tiered segmentation of the brokerage industry. On the bottom tier are the pure online deep discounters. Next rung up are the discounters whose first priority is non-advisory execution of trades but who are moving to offer a limited range of human-dispensed advice. On the top rung are the full-service brokers offering the complete range of investment bells and whistles including red carpet rides into promising IPOs.
Leading the online broking charge are Commonwealth Securities (ComSec), an arm of the Commonwealth Bank of Australia (CBA); and E*Trade Australia Securities. Between them they claim ownership of something like 75 per cent of the market. All the leading banks have their thumbs in the online broking pie. Westpac and CBA are players in their own right with Westpac Securities and ComSec. ANZ is there via an alliance with E*Trade, and NAB through an association with Sandford Securities.
Other serious players are Your Prosperity, the online entrant from financial services company MLC; and ShareTrade, a joint venture between Kerry Packer's publicly-listed ecorp and Charles Schwab, the largest US online broker. Coming up on the outside is TD Waterhouse Investor Services.
Paradoxically, the deepest discounters are not the specialist online brokers but the large financial institutions whose core businesses are not tied to securities. So ComSec, Westpac and Your Prosperity all charge rock-bottom fees - but only if clients also use their core services in other sectors.
Many of the grand old names of Australian stockbroking have disappeared in recent years. Their disappearance cannot be traced to rivalry from online brokers, however. It has more to do with the exit of banking-oriented British firms from the Australian scene and the arrival of well-heeled US and European houses focused on the global securities market. The shift has seen UBS Warburg acquire Potters, Salomon Smith Barney acquire County Nat West, and Deutsche Bank acquire Bains. The wash-up leaves only a couple of home-grown Australian firms in the top 10 full-service brokerages, notably JB Were and Macquarie.
As a percentage of total staff, the online brokerages use far fewer licensed brokers than their full-service competitors. So are brokers a dying breed, watching their numbers shrink in tandem with their pay-packets? If the online revolution were the only force at work, the answer would probably be yes. But anecdotal evidence suggests the impact of online discounting is overshadowed by a confluence of forces generating wealth for the industry as whole.
One is a massive expansion in the shareholder base. The huge influx of new investors fed into the market by the NRMA's recent float is only the latest in a long series that includes the privatisation of the Commonwealth Bank, Qantas, and Telstra and the demutualisation of insurance giants like National Mutual and AMP. Added to that is the immense weight of superannuation funds flowing into equity markets, the long-running bull market and the buoyant world economy. So it is not surprising that full-service brokers claim to be more than holding their own.
"Some clients who are price-sensitive have started relationships with online brokers," concedes JB Were's Evans. "They are certainly not eating our lunch. We have seen our business grow dramatically over the past couple of years." According to Ord Minnett's Moore, the average rate charged by full-service brokers has dropped markedly in the past two years in response to the discount and online onslaught. But the average dollars generated per contract have gone up, not down, thanks to the rising market.
One industry participant puts the value of commissions generated by an average private client adviser working with one of the big brokerages at $500,000 annually. Allowing for about 200 licensed brokers each, that works out to roughly $300 million in commissions generated by the top three full-service brokerages alone.
So they may be looking nervously over their shoulders at the online newcomers. But they aren't trading in their S-class Mercedes for second-hand Ladas just yet.
Clean Bill of Health
Retail investors have embraced online trading as a cheap, easy and efficient way of buying and selling securities. That's the word from the Australia Securities and Investment Commission following a survey of online trading sites. ASIC, the body which licenses sharebrokers, gave the Internet sharetrading industry a clean bill of health after examining 29 online brokerages.
The survey found no significant industry-wide problems that required immediate action by ASIC to rectify. But it did identify a number of areas where online brokers could lift their game.
Complaint-handling procedures were the main bugaboo. The ASIC survey, released in August, found only 35 per cent of sites disclosed information about internal or external complaints resolution schemes. In contrast, 93 per cent displayed disclaimers limiting service provider's liability.
Most of actual customer complaints in the six months to February 2000 related to administrative flaws, the survey says. These included debiting the wrong cash management account for settlement, issuing incorrect holding statements and delays in responding to client queries. Delays in order placement and inadequate disclosure of the order cancellation process also ranked high on the list of complaints.
ASIC urges online brokers to conform with a Good Disclosure document now posted on its Web site (www.asic.gov.au). The document prompts brokers to provide more upfront consumer information about fees and commissions plus limitations and restrictions on their services. The document also prods brokers to supply a history of system outages and delays and asks for simple, clear explanations of security features like encryption. - P Young
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