Survival of the stockbroker: is ex-only the sector's white knight?

The UK’s traditional private client stockbroking sector faces an uncertain future as firms now focus on increasing recurring fee income by moving into discretionary management.

Even leaving fees aside, in the post retail distribution review (RDR) world, it is facing a number of growing regulatory pressures, not least concerning suitability requirements.

Looking back over the sector’s evolution, Stuart Duncan, an analyst at Peel Hunt, said: ‘Larger firms have evolved to private client wealth management from private client broking. It fits with a push towards fee income that started in 2002-2003, when it was highlighted that fee income represented far better quality earnings than commission income.

‘Certain businesses have suffered falling revenues over this period from the whole push towards generating fee income and there have been corporate issues. The businesses that have been more successful at doing this have been bigger and more robust. Those that have not made the transition particularly well have suffered. The businesses that rely on execution-only and commission income over the past 12 months have been very subdued.’

The push towards more of an asset management-style business makes sense for firms due to rising growing compliance costs that make it harder to service lower value clients and can help valuations for listed businesses as well, he adds.

‘If you look at Rathbones as an example, 10 years ago almost all of its focus was on discretionary investment management, which means the business has been successful over an extended period and it is in a good position today,’ he said.

‘Charles Stanley and Brewin Dolphin are two examples of moving more and more away from commissions to fee income. They are good examples of businesses that are much bigger but have far more stable and recurring fee income than they used to have. It is not something you do overnight.’

Seymour Pierce and Pritchards, which both went into administration over the past 12 months, highlight some of the difficulties facing stockbroking businesses. However, the outlook may not be completely bleak for the sector.

In fact, their demise has created opportunities for competitors such as WH Ireland to build assets by acquiring the client books, while others argue the potential growth in both advisory and execution-only should not be underestimated. ‘Looking at the full service traditional brokers (ie, with a significant advice offering), I think the model is very tough to sustain but people have been writing the obituary for traditional brokers for the past 20 years. Many have been transforming into wealth managers,’ Mike Levy, a director at Compeer, said.

In his view, full service stockbrokers are not the only segment within the industry that may be undergoing a review of their models at the moment. ‘I think everybody’s business model is under examination, largely as a result of regulation,’ he added.