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CDP-linked brokerages still offer value despite higher fees

Lim Hui Jie
Lim Hui Jie1/23/2023 07:00 AM GMT+08  • 9 min read
CDP-linked brokerages still offer value despite higher fees
OCBC Securities executive director and head of equities business Alvin Tham (left) and head of futures, FX and CFD Franky Ng (right). Photo: Albert Chua/The Edge Singapore
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Last year, investing was the buzzword among Singaporeans. However, fewer than half are on track to meet their investment goals and over a third suffered losses in their portfo­lio. This was according to OCBC’s Financial Wellness Index 2022, released on Nov 22, 2022.

In its survey of over 2,000 working adults, the report found that “investing in stocks” was ranked as the best financial decision that Sin­gaporeans made in 2022. In fact, 85% of Singa­poreans have made some form of investment, up from 82% the year before.

Despite the common refrain that the Singa­pore market is “boring”, the report found that 41% of investors in Singapore were putting money into local stocks. This was followed by unit trusts, then bonds and international shares.

Commenting on the findings, OCBC Securi­ties executive director and head of its equities business Alvin Tham says that equities have been very popular over the last two years, part­ly due to the Covid-19 pandemic. “They cannot go anywhere. So, they stay at home and what can you do? That’s where they get online and then they trade now.”

The brokerage is also seeing an increase in its active user base, with Tham saying they trade not only local shares but shares listed in foreign markets, like in Hong Kong and the US. Most notably, investors have also plunged mon­ey into tech stocks as the sector went on a bull run in 2020 and 2021.

However, Tham says that “things have shift­ed” in recent months, with the stock market re­treating due to inflation pressures and interest rate hikes. “We have seen some ‘defection’ in terms of the shifting of the money to other as­set classes like the fixed income space.” Popu­lar fixed-income instruments include Singapore Government bonds such as Singapore Savings Bonds and Treasury bills, commonly known as T-bills, he notes.

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While many have gotten into the markets in 2022, the investing journey is long and wind­ing. As they enter the new year, the OCBC re­port found that many Singaporeans are look­ing to invest more in equities, especially local stocks. But how can investors navigate today’s uncertain landscape?

Brokerages and commissions

When it comes to trading, investors are just one-half of the equation. The other half are broker­ages, which help investors clear their bids and sales and provide a platform for them to trade.

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Over the course of the pandemic, the trad­ing ecosystem in Singapore has seen an influx of new brokerages challenging the established players in this space.

These new brokerages offer investors zero minimum commissions, attractive FX rates to trade in global markets, and sign-up gifts like free shares of big-name companies like Apple, Starbucks and Tesla. Most notably, they offer commissions that are at rock-bottom levels com­pared to traditional brokerages. Some offer com­missions of as little as 0.08% per trade, with a minimum commission of just $1.

Traditional, CDP-linked brokerages typically charge a commission of 0.28% per trade, with a minimum of $25. As commissions eat into returns, what this means for investors who are only able to trade in small amounts is that a $25 commission could wipe out a good portion of their returns.

For example, a trade for 1,000 shares of the SPDR STI ETF at $3 a share would cost $3,000 before fees, but as the 0.28% commission for $3,000 comes up to only $8.40, the $25 will be charged. Effectively, the $25 commission comes up to a 0.83% commission, four times more than the 0.28% advertised.

With such a stark difference, is there an ad­vantage to choosing a traditional brokerage over a new brokerage? The only advantage that tradi­tional brokerages seem to have is that they can credit the shares to a shareholder’s Central De­pository (CDP) account.

In contrast, most of these new brokerages are custodians, which hold shares on behalf of the shareholder. This means that in the event of important decisions, the shareholder does not have direct voting rights as the stocks pur­chased are not under their name.

As such, investors who buy shares through a custodian will not be able to vote directly dur­ing an EGM or AGM should a corporate action comes up, and may be charged custody fees for some custodians to hold their shares.

For more stories about where money flows, click here for Capital Section

Having professional advice

So, here’s the million-dollar question: Is there still a point in using traditional brokerages?

Yes, says Tham. The OCBC report found that Singaporeans are looking to invest more in eq­uities, especially local stocks, in the year ahead.

But while many are investing, only 25% of those surveyed said that they had sought pro­fessional advice when investing, such as from financial advisors or bank analysts. The most popular source of advice for Singaporeans when investing came from online articles or family and friends.

Franky Ng, OCBC Securities’ head of futures, FX and CFD, says that in the past, investors would usually get their investing advice from newspapers and family members, recalling the times when research reports from brokerages would be published in newspapers.

However, investors today, especially young­er ones, tend to consume their financial advice from non-traditional platforms like social media, including TikTok and Facebook, he says. “Ba­sically, they have little time to do a lot of read­ing. So, what they do is that most of the time, they will just Google and find out information.”

However, the fact is that investors who had sought professional advice achieved higher finan­cial wellness scores than those who did not, and this is where a traditional brokerage, like OCBC Securities, can prove its worth to its customers.

Traditional brokerages like OCBC Securities are usually part of a bigger ecosystem, like a bank. As such, they can leverage other arms of their ecosystem to deliver more value to investors.

Tham says that OCBC Securities is a whol­ly owned subsidiary of the larger OCBC Bank and “we integrate that in our deliveries to our clients. OCBC Securities has been dealing with equity, derivatives and FX trading for more than 30 years, [and] we currently are ranked among the top three retail brokers in Singapore for the last five years.”

More importantly, the ability to deliver pro­fessional advice to investors is the major differ­entiator for these traditional brokerages, Tham points out.

He reveals that investors with OCBC Secu­rities can access research reports from its re­search arm, OCBC Investment Research, and they are linked with a trading representative or so-called “TR”, whom investors can seek pro­fessional advice from.

Tham says: “The TRs themselves, they do their own research, and that’s where they will know where money can be made. Any time you have a certain cycle [in the market], by engag­ing with a TR and getting information, [you can make better trading decisions] than if you just depend on yourself.”

The TRs, he adds, study the market and com­panies every day, and therefore, have experience and can identify opportunities.

Tham explains that TRs can also understand the customer’s needs and suggest an investment solution to fit those needs, and as such, the ser­vices that OCBC Securities provide are more be­spoke, in comparison to new brokerages, which are more of a self-service model.

Ng says that for younger investors, going to a TR might seem like a hurdle in the investing process and something that the older generation did, but he is of the view that “they should lev­erage on the TRs because these are the people that have vast experience. They’ve been in this market very long. [And] through engagement with the customers they’re able to understand the customer’s risk profile, what you’d like, what you don’t like and then after that, able to rec­ommend certain stocks or certain markets that are good for the customers.”

Having a TR can also help in mitigating risk to the investor. For example, Tham points out that TRs can utilise their experience to advise if an investor may be sinking money into a “pump and dump scheme”, referring to schemes where bad actors attempt to boost the price of a stock or security through fake recommendations, before cashing in by selling a huge amount of shares and causing the price to crash.

Unwitting investors who rode the wave and expected the share price to rise even further would be left holding shares at overpriced levels.

He says, “out there, if some things are real­ly so good. Is it true? What stage do you get in? Talk to somebody in this line, it will be good. It will help the person to either stay clear or get the right information before they plunge in.”

The best thing about having a TR? OCBC Se­curities provides this service completely free for its investors, and this is one of the ways that OCBC Securities differentiates itself. A TR can understand a client’s needs, and clients value the brokerage for this unique experience, Tham reiterates.

Ultimately, does OCBC Securities see the new entrants as a threat? Absolutely not, say Ng and Tham. Instead, they think that by hav­ing these new entrants into the market, they have generated more interest in the markets, and this grows the whole pie for all the play­ers involved.

Tham thinks that they actually bring with them “fresh perspectives” and that creates “healthy competition.” Most importantly, Tham says that he welcomes them, “as long as they operate within SGX and MAS regulations so that you can have a level playing field.”

The way he sees it, the increased interest will also benefit not only the equities market but also other adjacent areas like foreign exchange (FX) and futures trading.

At the end of the day, the new brokerages may offer freebies for new investors and lower commission rates, but the “old school” tradition­al CDP-linked brokerages come with their own benefits. While the rates may be higher with the traditional players, the professional advice that comes with them is something that is much more valuable than having to come up with a few extra dollars.

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