Individual investors have squirreled away at least US$500 billion in cash accounts as markets slump, making this the prime time for retail brokerage firms to reposition themselves for the upturn. Or so says a report published today by consultants Celent Communications.
The report, Retail Brokerage Tactics and Strategies: The Road to Redemption, says the fierce market slump marks the end of traditional retail brokerage. “Retail brokerage firms are under tremendous pressure to improve performance,” says Celent.” The time is right for brokerage firms to reposition themselves for an eventual market rebound. Retail brokerage will not change beyond recognition, but will undergo some heretical transformations during the course of this decade. Those retail brokerage firms that provide do credible cost-to-value proposition and objective financial advice are sure to succeed.”
The report examines the factors that are driving change in the retail brokerage industry. The report begins with an overview of the state of the industry, its plunging profit margins, the performance disparity across leading players, and the broad initiatives being undertaken to dampen performance volatility.
Section II switches to the customer-side of the equation and reviews trends in individual investor behavior. Section III focuses on the expanding scope of brokerage: its convergence with banking and its market extension via multi-channel delivery. The final section includes strategies being pursued by industry leaders: Citigroup (Salomon Smith Barney), Charles Schwab, and Ameritrade.
Celent says retail brokers must come up with a new value proposition founded on transparency and objectivity. It also could involve some currently heretical ideas: all-in cost transparency and individual portfolio performance tracking It could also involve some less controversial ones, such as expansion into banking, migration of low/unprofitable customers to remote channels, and loosening of broker-client ties to the firm’s advantage.
“Even though the road to redemption will be long and pitted with challenges, the race is already making the previously unthinkable happen. For example, Charles Schwab has begun to offer advice directly, Merrill Lynch has pushed itself into the top ten U.S. banks in terms of deposits, and several firms are considering tying the compensation of research analysts to the accuracy of their forecasts,” says Alenka Grealish, manager of the banking group at Celent and author of the report.
The report includes profiles of strategies being pursued by Citigroup (Salomon Smith Barney), Charles Schwab, and Ameritrade.