Merger mania: the return of the private client?

Friday 20th April 2001

By Nick Stride

At first glance the sharebroking industry's burst of activity over the last year looks like good news for private clients.

The last few months have seen the emergence of "super-brokers" with hordes of client advisers and national reach.

Forsyth Barr, for instance, now has 32 advisers in Auckland alone after its mergers with Frater Williams and Cavill White Securities. ABN Amro's purchase of Craig & Co and the acquisition of around 18 advisers from Merrill Lynch gives it 75 around the country. More mergers, acquisitions and alliances are expected.

The private investor, long painted as an unwanted underdog by shareholder advocates, seems suddenly to be back in demand.

But whether all this activity will actually translate into better service or lower costs remains to be seen.

For one thing many of the major recent moves have been driven by a lack of enthusiasm for New Zealand broking, not the opposite.

ANZ Securities, for instance, closed its doors after its head office in Melbourne pulled the plug and Deutsche Securities is closing down its local research function. The private client base of the former Ord Minnett, along with its futures and leveraged equity functions, will soon be on the market following takeover by JP Morgan.

In the latter case, explains director John Rattray, the move simply reflects what JP Morgan does around the world. The local outfit will retain its investment banking, corporate finance, and corporate advisory roles and will continue wholesale broking to institutions.

Merrill Lynch, on the other hand, moved out because the New Zealand business case simply didn't stack up, according to Forsyth Barr's Neil Paviour-Smith.

"It's not a case of the business losing money. But their Cincinnati office was probably bigger than New Zealand," he says.

According to a former Merrill Lynch adviser the broker is trying to reduce worldwide the number of clients it services.

The key to profitability isn't the number of advisers you have, but the revenue per advisor, he said.

To qualify for private client service you now have to have investment funds of $US1 million or more - Merrill Lynch is encouraging all others into managed fund-type investments.

At the local level the urge to merge has been pushed along by a cocktail of spiralling technology costs and the changing needs of brokers' customers.

The decision facing smaller brokers such as Frater Williams and Cavill White was whether to merge or bear the cost of investing in the latest broking systems.

But the additional investment wouldn't have brought in any more revenue for operators such as Cavill White, with only nine advisers.

The company also offered only sharebroking services whereas, according to Forsyth Barr's Mr Paviour-Smith, private clients are becoming increasingly sophisticated in the way they run their portfolios.

The enlarged Forsyth Barr offers what it calls "private portfolio management," incorporating products such as managed funds, overseas funds, fixed interest stocks and cash management. But brokers need the scale economies of larger client bases to absorb the costs of the extra services, Mr Paviour-Smith said.

Revenue pressures are also coming from the likes of discount and internet brokers.

On the institutional broking front amalgamations among banks, insurance companies and fund managers also threaten revenues as they flex their muscles to push down brokerage rates.

JP Morgan's Mr Rattray said that hadn't yet affected the overall amount of brokerage institutions pay - since regulated commissions went 15 years ago higher turnover has mitigated any revenue effect. But the loss to the market of top 10 stocks such as Fletcher Paper and Fletcher Energy might yet squeeze brokers' wallets.

Mr Rattray also pointed to growing client sophistication as a driver for mergers.

For one thing our tax regime strongly favours direct equity investment over managed funds and more investors are becoming aware they can stay out of the tax loop if they're careful.

For another, both individuals and institutions are diversifying their portfolios by increasing the percentage of overseas assets held.

That could result in a loss of brokerage to overseas firms, Mr Rattray said, but it didn't have to.

What all the mergers have recognised is that brokers need to have some sort of international connection so clients can be offered research on overseas stocks and brokers can share commissions.

Another advantage mergers bring is geographic spread. ABN Amro's acquisitions, for instance, mean it can now offer equity issuers national distribution.

So will the recent burst of mergers stack up to better service for smaller investors? Mr Paviour-Smith thinks so.

Advisers providing the portfolio management model will be taking on a significantly higher duty of care.

"Clients want simplicity and a single relationship. And it's hard to keep an eye on all these things - rights issues, takeovers, etc - when you might be out of the country or out of contact," he said.

"This way you know someone will be looking at it day in, day out."

Roy Borgman, chief executive of Dunedin-based Greenslades, has his doubts.

"We strongly believe there is a downside to a preponderance of large overseas-owned broking firms for the average New Zealander," he said.

Larger corporate-driven cultures tend to give rise to a "clipping the ticket" mentality that will do nothing to improve "an already mistrustful mindset toward the broking industry in general."

For example some larger firms have clear and sometimes mercenary expectations of their private client advisors. Turnover expectations encourage volume trading ("churning") while portfolio management within larger firms tends to be of the "one size fits all" variety.

With a large number of smaller brokers still independent more industry mergers can be expected.

But as no brokers are listed on the Stock Exchange the really interesting information for private clients what price they change hands for isn't likely to emerge soon.

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