Execution-only brokers reap rewards of stock falls - 02.07.2010
Financial Times
Anyone who bought shares in BP when the market opened on Tuesday – in spite of the gloom surrounding the crisis-hit oil company – would be sitting on a profit this weekend of almost 8 per cent.
Of course, anyone who made such a bet on nearly any other day since the
But buying supposedly undervalued stocks after a heavy sell-off – or trying to “catch a falling knife” – often tempts retail investors. When they do so, execution-only brokers reap the rewards.
“Whenever there’s a dramatic fall [in a well-known stock] we see brand-new customers open accounts,” says Guy Knight, director at the Share Centre. “A lot of it is to do with wanting to join the party – that’s a real private investor phenomenon.”
Figures from ComPeer, the wealth management analysts, show that execution-only stockbrokers had £60.1bn ($91.2bn) of client assets under administration as of the end of March, up 61 per cent from a year earlier.
Over the same period, assets held with full service brokers or wealth managers grew at less than half that rate, up 30 per cent at £374bn.
“We survive on volatility,” says Jason Robinson, director of operations at TD Waterhouse, which is the ’s biggest execution-only broker by trading volume and provides white-label services under the NatWest Stockbrokers brand among several others.
Some claim retail investors grew disillusioned with discretionary and advisory brokers during the financial crisis, which led them to believe that they could manage their portfolios as well as professionals – and save on fees in doing so.
However, others play down the significance of this supposed phenomenon. More important drivers, they say, have been poor returns on cash – tempting investors to the equity market – and an improved online offering from execution-only providers.
According to ComPeer, the proportion of online trades jumped from 20 per cent of the execution-only total 10 years ago to 80 per cent in 2009.
That has helped margins to rise sharply. According to the ComPeer data, the industry wide pre-tax profit margin leapt from 8.4 per cent in 2005 to 35 per cent in the first quarter of 2010.
Yet the fickleness of customers presents a key challenge for companies in the sector. Given that client relationships are of much less importance than in other areas of stockbroking, execution-only brokers tend to compete more on price.
That can provide an opportunity for start-ups.
“I was always mindful that there could be a gap in the market,” says Stephen Pinner, chairman of SimplyStockbroking, which launched last September and charges £8 a trade.
Still, the industry is eager to stress that price is not everything. “Even though you haven’t got as deep a relationship [with customers], you still have to provide the [right] tools,” says Mr Robinson.
Mr Knight adds: “It’s always possible to get something cheaper. What investors look for is value for money. What do you get for the price? Does the website constantly go down?”
As a result of such concerns, technology infrastructure is of key import for execution-only brokers and accounts for a substantial chunk of their costs. TD Waterhouse, for example, employs only 850 staff.
In spite of the upbeat stance of the sector, some analysts are sceptical that a significant and permanent shift is under way.
Sarah Spikes, analyst at Arden Partners, says: “Retail investors tend to use execution-only services more when there are public reasons to have an opinion on the economy or individual stocks. The credit crunch was an example – retail investors dealt heavily in UK bank stocks then. Right now there is probably a surge of retail interest in BP. So there is an underlying trend, but it is probably exaggerated by events.”