By Tracey Franks
When I started out in financial services a little over 20 years ago, it was with a blue chip Collins Street broking house. It charged its retail clients a sizable commission (by today’s standards), dependent on the size of the transaction and the quality of the broker/client relationship. The fee was justified by a clear value proposition – the house provided a high level of service with many touch points, quality research was delivered by one of Australia’s largest and highly regarded teams, and clients had access to IPOs, many of which became ASX-50 companies. The commission structure made the house profitable and ensured that its retail brokers were well remunerated.
If I cast my mind back to the mid-90s and imagine myself looking forward to today, would I have envisaged the current state of play for brokers? Although some were tolling the bell for traditional brokers with the advent of the first of the disruptors, Commsec, most full service brokers were confident in the robustness of their business model. Did they foresee a future where margins are squeezed, online brokers dominate, and research is a commodity, no longer prized? While there has been significant upheaval for the retail broking industry in the past 20 years, there’s no doubt the industry will continue to evolve, disruptors will continue to emerge…and not all will survive.
Continued growth and innovation in online broking
The advent of online broking changed the industry. Investors suddenly had investment tools at their fingertips and could transact more cheaply than through the traditional broker relationship. While online brokers have proliferated and innovated, sharpening their offerings and reducing costs for investors, it’s been more evolution than revolution.
That may be about to change.
In May 2015, US-based Robinhood.com announced it had raised US$50 million and intended to expand to Australia. The value proposition is clear – free transactions. Robinhood’s revenue model is based on taking a clip of the interest paid on clients’ cash accounts.
In the US, more than US$1 billion has been transacted through the Robinhood platform saving investors, they claim, over $22 million in commissions (based on an average transaction fee of US$10). The Robinhood app for iPhone has topped the Apple Finance charts for some months and the company will soon launch an android app.
While Robinhood may offer free transactions in Australia, investors would still incur the other costs of trading – including clearing, for which Australians pay among the highest rates in the world. See Rick Klink's post on Why ASX's monopoly on Clearing is hurting our financial services industry.
One-stop-shop e-wallet apps, such as China’s WeChat, have the potential to shake up the market. WeChat is all-encompassing, with built-in messaging that links the user’s identity, address book, financial information…and much more. It’s quick and easy to share information and makes online and offline payments seamless. In China, nearly 600 million transactions are conducted each day.
Such technology has the potential to disrupt many business, including broking. Like Robinhood, it would cut out the middleman (the broker), deliver the tools investors require for decision making and provide seamless, low (or no) cost transactions.
What will the broker of the future look like?
The next wave of investors will be the technology savvy Gen Y and Millennial's; they’ve grown up with technology and will expect to transact simply, swiftly and cheaply.
For many, the broker of the future will look like this:
- a race-towards-zero brokerage
- access to multiple markets and products
- real-time digital banking technology (eWallet)
- centralized user identity system
- fully integrated with every other leading technology in the market
But all this leads to where broking is really heading: the monetisation of digital content i.e. deep analysation of investor patterns and behaviours, predicting where markets are heading, social peer-to-peer comparison and tracking, and supplying that information back to investors and companies.
Financial advisers who provide equity advice should embrace the technological revolution and make it part of your value prop. With so much fintech accessible to advisers – and investors – incorporating it will bolster your offering and help you retain clients. Remember how video killed the radio star? Don’t fall victim to change – embrace, and make it work for you.
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