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Death of the full-service broker?
Jill Fraser - June 12, 2007
It’s been the billion dollar question ever since the introduction of online trading and the 2001 Financial Services Reform Act: Will full-service brokers be replaced by a mouse and increasingly market savvy financial planners? Or will they hold their own, rising from what some perceive as the ashes of customer service?
Brett Spork, E*TRADE Australia’s Chief Executive Officer, maintains that there is no argument because “there’s space in the market for everyone”.
“Good full-service brokers will continue to thrive because clients appreciate the value they’re adding and are quite happy to pay the normal brokerage rate, which of course is higher than an execution-only, internet broker rate,” he says. “The bottom line is it’s a value-based issue. This is a consumer business and if people believe they’re getting value – either actual or perceived - they will pay."
But the cost, he says, automatically precludes small-portfolio clients who constitute the vast bulk of investors.
Alun Stevens, Managing Director, Trader Dealer agrees that the matter is complex. “In terms of market share the growth is tending to favour online brokers. But it would be wrong to assume that this means that full-service broker businesses are collapsing."
“In fact they’re actually doing well,” says Stevens, pointing out that there is a skew in the statistics. “If you’re an advisor you’re probably saying, my business is growing. But the reality is that while full-service brokers may be increasing their market share regarding the value of assets, they’re losing it percentage-wise.”
He says the report showed that in 2003 60 percent of assets were acquired under advice and 40 percent were not. In 2005 it was the reverse. This trend, he contends, is continuing, albeit not quite so fast, and will be revealed in the next AC Nielsen report, which is due to be released later this year.
Stevens predicts that within five to eight years the vast bulk of assets will not be with full-service brokers. He places the analysis behind this forecast squarely at the feet of ageing Baby Boomers, who he says are “increasingly shifting into semi-retirement, changing their job structures, getting into part-time work and opting to manage their own money”.
Laughing, he describes Boomers as “control freaks” and says that while they start off using a range of financial advisors ultimately they choose to do it themselves online. Another issue that is skewing the statistics, he says, are financial advisors who trade shares on behalf of their clients but don’t have broking licences.
Martin Lakos, Division Director, Macquarie Private Wealth dismisses the notion of the demise of full-service brokers and finds the suggestion that they are not advertising as much these days highly amusing, drawing attention to Macquarie’s current television campaign.
“What we’re seeing is a fracturing of clients needs,” he says. “Certainly there are those who want to do it themselves and with the internet and the plethora of financial information now available to the unsophisticated investor this has become a lot easier."
However Lakos points out that these people are not being served on an advice basis, that the internet service advisers are essentially providing execution-only, along with low level research.
“We’re noticing a significant increase of demands on our time by clients seeking advice, because the other side of the coin is that there is so much information about...there are also far greater complexities out there,” he says.
Lakos admits that changes in the industry over the past 15 years, has led to an “upskilling” of advisors. He sees a distinct polarisation happening in the industry with top end full-service brokers servicing the wealthy and online catering for traders and the smaller players.
“There is a middle group that seems to be slightly stranded because they’re not providing full investment advice and haven’t got the balance sheet to do so,” he says. “These are the ones who are being eroded by the internet providers.”
Steve Christie, Head of Private Wealth Management, Ord Minett, believes that the term full-service broker is “antiquated”. “When internet brokers came on the market there was a lot of teeth-gnashing about the fact that they weren’t full-service stock brokers,” he says.
However he believes that the role of the "full-service" broker has changed. He says that adifferent type of advice is needed because people are wealthier and there are more products available. He does admit that online brokers will always have a place, but adds a caveat: “I think wealthy people, and let’s face it, everyone is getting wealthier, will grow beyond that as their needs become more complex.”
Whatever your views, you can discuss this article - or any of Jill's articles - on our message board Your 2 Cents.
Jill Fraser has 25 years' experience in the media as a radio producer on 2UE and journalist for News Ltd, Australian Consolidated Press and Key Media.
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