Retail Brokerage in N. America: Down, But Not Out

December 31, 2001

Abstract

San Francisco, CA, USA December 31, 2001

 

Retail brokerage is suffering as a fierce bear market chases individual investors away. The pain, however, is not evenly distributed.

In a new report, “Retail Brokerage in N. America:Down, But Not Out,” Alenka Grealish, analyst at Celent Communications, compares the performance of four types of retail brokerage firms: national full-service, regional full-service, pure-play firms operating entirely online, and the so-called “clicks-n-bricks” firms, which combine an extensive branch network with a significant online presence. The report also analyzes the forces driving the dramatic rise in households’ equity holdings and discusses the recent behavior of individual investors.

The full-service broker model has shown its resilience in the current bear markets, registering the smallest changes in pre-tax profit margins since the downturn began and proving that revenue diversification matters. At the same time, the clicks-n-bricks players have proven that the combination of an extensive branch network and a dominant online presence can push pre-tax profit margins to nearly 25%. These margins, however, are relatively more vulnerable to declining trading volumes.

Although the pure-play online broker is an endangered species, Grealish predicts that the Internet will continue to spawn new niche competitors and promote further disintermediation. Providing investors with tools and advice also looks like a near-term win, as the sweet spot of profitability has shifted from trading to advice and asset management services.

"Between September and October, individual investors did not run for the exits," comments Grealish. "They made a one-time adjustment out of equity in September, and are currently sitting relatively tight. Whereas safe havens, in the form of insured deposits and money market funds, are gaining popularity, certificates of deposits are not, signaling that individual investors still hesitate to lock money away.”

Grealish adds that "Although it is hard to see through the fog that a bear market, a recession, and a war have generated, past experience shows that individuals’ enthusiasm for investing is likely to return. A bear market is the ideal time to build customer loyalty. Retail brokers who figure out how to serve the mass affluent cost-effectively today will reap generous rewards when the next bull market comes around."

A Table of Contents is available online.

of Celent Communication's Retail Securities & Investments research service can download the report electronically by clicking on the icon to the left.

        

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Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

 

San Francisco, CA, USA  December 31, 2001

Return to report Abstract

EXECUTIVE SUMMARY 3
FROM IRRATIONAL EXUBERANCE TO BEAR REALITY 5
  Differing Strategies, Divergent Performance 5
  Revenue Diversification Matters 8
  Canadian Players Faring Better 11
WITHERING HEIGHTS OF ONLINE BROKERAGE 15
  Bear Market Crushes Growth 15
  Revenue Model Showing Flaws 16
  Decimalization Eats Into Revenues 18
  Free Trades: Merely An Ankle Biter 18
AMERICANS BECOME INVESTORS 19
  Good-Bye Deposits, Hello Stocks 19
  Products and Channels That Lured Households to Invest 21
  Rise of the Instividual 23
  Higher Penetration But Shrinking Share 25
RESUSCITATING INDIVIDUAL INVESTORS 26
  Checking Investors' (Im)Pulse 26
  Short-Term Safe Havens 28
  Reassurance Vs. Reallocation 29
CONCLUSIONS 31

 

        

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