The bull is stirring in global equity markets once more and optimism is returning to private investors with the recent strong rallies on local and international markets.
Investor interest in equity markets has improved, but whether another 1990s-style run is in the offing is still up for debate.
After years of caution, the private client stockbroking industry has been transformed. Broking firms reinvented themselves during the lean years and are ready to offer private investors top service. Until 1995, private client stockbroking in SA was dominated by a few powerful local partnerships, including Max Pollak & Freemantle, Davis Borkum Hare, Fergusson Brothers Hall Stewart & Co, Simpson McKie and Frankel Kruger. These firms also dealt with the large financial institutions but derived their bread and butter from private clients.
Like all stockbroking firms, these were joint and severally liable partnerships, whose capital base was limited by the partners' assets. That changed with the deregulation of the stockbroking industry in 1995, which let banks and corporates own local stockbroking firms.
Sadly, all those names are gone, consumed by local and international investment banks.
Investment banks see financial institutions such as insurance companies and asset management firms as their main source of business and avoid private clients. The main reason for this is that institutional business is more lucrative because the deals are larger, which means the cost of doing business is proportionately lower. Institutional business accounts for more than 95% of the trade on the JSE Securities Exchange. David Shapiro of BJM Securities says private clients account for no more than 2%-3% of total JSE trade.
Foreign investment banks especially need to keep their costs down in SA because of the soft local currency. This is one of the reasons Merrill Lynch sold its private client business to Investec and Sanlam in 2002, and Société Générale sold its private client business to Sasfin.
Institutional business is also easier to transact than private client business. Private clients have their own money at stake and can demand much of advisers' time. Institutional dealings are conducted on a much more matter-of-fact commercial basis.
Private client portfolio management is probably the most transparent form of asset management in the country because it is easy for a client to see what the broker is charging. Unlike institutional fund management, there are no hidden costs associated with intermediaries in the system.
Institutional fund managers have destroyed wealth at an alarming rate in recent years and haven't been shy in charging for this destruction. Many wealthy clients balk at this treatment and prefer the idea of private client portfolio management, where there is accountability. There's no recourse against poor institutional fund managers. Private clients want to take back control and be part of the decision-making process.
Today, the landscape is different. A handful of large firms still dominate private client stockbroking, but they're mainly banks and insurance companies rather than incorporated partnerships.
But there are smaller independent stockbrokers that have a loyal following.
And the clients are different too. Gone are the speculative traders who used the old "seven-day rule" to their advantage. Under that system, traders could buy shares and did not have to pay for them until a week later, hoping the price would rise in the interim period. More often than not, they would sell their shares and take the profit, never having paid for them in the first place. They also did not have to have cash in their accounts to buy the shares. This led to bad debts when share prices fell steeply.
The implementation of the Strate electronic share dealing system brought an end to that. Now clients are required to have cash in their accounts before they deal and must settle almost immediately. Bad debts are a thing of the past and the quality of client dealings has improved.
Times have been tough for private client stockbrokers and their clients during the past three or four years. Increased costs from the JSE/Strate combined with markedly lower volumes have resulted in a number of amalgamations and restructurings. Most firms have reduced their head counts and cut costs wherever possible.
But the result is a leaner industry that is able to offer better service to its large client base.
