SINGAPORE (Mar 15): During a recent trip to Kuala Lumpur, I ran into an old friend whom I knew from my days in the brokerage business back in the 1990s. To my surprise, he told me that he still worked in the industry and appeared to be making a good living at it. After two financial crises and a collapse in brokerage commissions, just about everyone I know from this business has moved on. Many found new careers in banking or fund management, some found themselves doing consulting or corporate work and a few drifted into a life of semi-retirement.
So, how did my old friend survive in what many people say is a tough business? According to a fund manager who has known him for decades, he simply stuck to doing what brokers have traditionally done: bringing promising companies to investors. In particular, my old friend had alerted the fund manager a few years ago to a company called Pentamaster Corp, which makes automated test equipment. He organised meetings for the fund manager with the company; and, when the fund manager was ready to invest, quickly found a block of shares for him. Pentamaster’s revenue and earnings have quadrupled over the last three years, and its shares are up more the 30 times since the beginning of 2015.
The same week that I was in KL, news broke in Singapore that DBS Group Holdings will transfer its retail equity trading business from DBS Vickers Securities to the bank. Predictably, it reignited old grouses about the lack of retail investor interest in the local market and raised concerns that the move might result in some of the brokerage firm’s remisiers losing their clients or even their jobs. Nobody seemed interested in asking whether the local brokerage firms and their remisiers have been serving their retail equities clients well, or if DBS Bank will ultimately do it better.
When The Edge Singapore began publishing in 2002, the local brokerage industry was bracing for the advent of low-cost online trading. There was excitement about what it would mean for the growth of the industry, but also concern that it would disrupt the old order of things. I remember officials at some brokerage firms being careful to reassure their remisiers that their role would not be diminished, and that the online trading platforms could ultimately improve their productivity. Remisiers were encouraged to branch out into selling other financial products such as funds and insurance to provide their clients with a more complete wealth management service.
Things didn’t exactly work out as they envisioned. Today, brokerage firms have delegated the day-to-day servicing of clients like me to their trading platforms. The human brokers at these firms don’t speak to me about more than just investing in stocks; they don’t speak to me at all. Don’t get me wrong — I’m not pining for the human touch. But brokers who don’t engage their clients will eventually lose their loyalty. The only thing that prevents me from taking my business elsewhere is the hassle of opening a new account and becoming familiar with another trading platform.
This is why the likes of DBS Bank could ultimately dominate the retail equities trading business. Personally, I cannot see any difference between the stock trading service of DBS Vickers Securities and that of the wealth management arm of DBS Bank. The stock trading platform in the bank appears to be identical to the one in the brokerage firm, and neither the bank nor the brokerage firm has made any attempt to engage me on my stock trading activities.
Through DBS Bank, however, I’m able to manage all of my investment activities and banking transactions from a single platform. Other retail banks could just as easily incorporate stock trading capabilities into their wealth management platforms. But it would be harder for brokerage firms to expand into retail banking.
That’s not to say that retail equities trading will thrive as part of the wealth management platforms of the big banks; if anything, it could well hasten its demise. Relationship managers at the banks are judged at least partly on the income they generate. Hence, they have an incentive to steer their clients towards financial products such as funds. Banks that distribute these funds earn upfront sales charges and take a portion of the annual management fee of these funds as a recurring “trail” fee. Against that backdrop, it seems only natural that clients would be dissuaded from investing in stocks and encouraged to let professional fund managers handle their money.
Where does that leave the local retail equities trading business? Do brokers and remisiers in this field have a future? Is Singapore doomed as a capital-raising centre?
Better trading platforms needed
My own view is that the heyday of retail stock investors, and the brokers who serve them, is long over. Singaporeans are ageing and becoming more financially sophisticated. Fewer and fewer of them are likely to have the appetite for fast-moving penny stocks in the future. Many are likely to prefer investment instruments that preserve their wealth and offer the prospect of regular income. This is perhaps one reason that real estate investment trusts — which are designed to deliver the bulk of their return through regular cash distributions — have been such a great success in this market.
There will, of course, always be some die-hard risk-takers out there. To efficiently serve this group, brokerage firms need to double down on their investment in technology to ensure that their trading platforms engage their clients more effectively. For instance, a human broker might think to enquire if a client would like to modify an incomplete limit order when the market price moves well out of reach. Trading platforms ought to do this too, and allow investors to respond in one or two steps on their mobile phones. Human brokers have also traditionally alerted clients to news and information that matter to them. Trading platforms ought to bring to the attention of investors financial results, corporate announcements and dividend ex-dates for stocks they own or have been watching.
Indeed, two decades after these online platforms were rolled out, I’m surprised more hasn’t already been done to improve their functionality by drawing on all the information they have on their clients. Amazon.com is never short of recommendations of books and gadgets that I might want to buy. Netflix keeps serving up suggestions of movies and TV shows that I cannot wait to watch. Google sends me all manner of timely information and news via my Android phone, including significant moves in stocks and currencies that I’ve been watching.
The online platforms I use don’t even automatically alert me to big moves in stocks that I own, or prompt me to trade a stock that has been specifically placed on one of my watch lists when the price moves in my favour. Looking back now, I cannot help but wonder if pushing retail stock investors onto such rudimentary online platforms has at least partly contributed to their waning interest in the market.
Restoring vibrancy of the market
Whatever the case, reviving the vibrancy of the local market is going to take more than just providing better service to retail investors. It will require leadership from the authorities as well as the brokerage sector.
Last month, the Monetary Authority of Singapore launched the $75 million Grant for Equity Market Singapore, a three-year initiative to help promising companies raise money in the local stock market. Among other things, the grant will be used to defray listing expenses of companies seeking to go public, and subsidise the salaries of research analysts to ensure better coverage of small, locally listed companies. In my view, the authorities need to go further than that. Singapore should also nurture a crop of homegrown boutique fund houses that are focused on the small- and mid-cap sectors of the market, perhaps by tapping the support of GIC and Temasek Holdings.
Having a group of prominent local funds taking the lead in sizing up IPOs and secondary offerings could mobilise more capital for the small- and mid-cap space. These opinion-leading funds could also help influence the kinds of companies that seek listings in the local market and inspire more shareholder-friendly behaviour. Companies that need the support of these investors to grow would have a strong incentive to behave well. And, low-quality IPOs that risk being snubbed by these investors might never get off the ground.
A thriving base of homegrown fund houses could also spell a new opportunity for some brokers and remisiers to rediscover their fundamental purpose of putting investors in touch with promising companies. While Singapore’s evolving stock market may well require fewer brokers and remisiers in the future, the ones who manage to consistently bring hot stocks such as Pentamaster to their clients early are likely to continue making a good living.
This story appears in The Edge Singapore (Issue 873, week of Mar 18) which is on sale now. Subscribe here