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Changing of the guard in Perth stockbroking circles

The local stockbring industry has undergone a dramatic change in the past 18 month with the withdrawal of most of the big US firms from Perth. And that’s created enormous opportunities for those brokers who have stayed a traditional course.

p Mark Beyer

PATERSON Ord Minnett executive chairman Michael Manford expressed confidence in his firm’s role in the WA finance sector when he said: “I believe we are the premier stockbroking firm in Perth. I’ve never said that before but I’m quite confident in saying it now”.

After 18 months of tumultuous change, Mr Manford’s assessment signifies a major realignment of the local broking industry.

Paterson, along with Porter Western and CIBC, was traditionally ranked just behind market leader Hartley Poynton.

But while other firms have been taken over (Porter Western), disappeared completely (CIBC) or pursued new growth opportunities (Hartley Poynton), Paterson has kept to a steady course.

“There is so much opportunity out there for a traditional broker like us who has stuck with a sound medium-term strategy, through the Internet boom,” Mr Manford said.

Surprisingly, he cites a lack of competition as one reason for Paterson’s bright outlook.

“Most of the big US firms have withdrawn from Perth. CIBC was a real competitor but they’ve gone and we’ve got their best people,” Mr Manford said.

“The big national brokers like Were’s and Macquarie don’t look at the smaller deals.”

That leaves Paterson competing with a handful of Perth-based firms for equity capital raisings, he said.

Its competitors include Euroz Securities, which has enjoyed great success since recruiting a team of dealers and researchers from Paterson Ord Minnett in November 2000.

Euroz is pursuing what it calls a niche business philosophy.

“Euroz is differentiated from its peers by concentrating on its core broking operations,” managing director Andrew McKenzie said.

“Euroz does not intend to offer services like Internet trading, asset management, financial planning and futures trading.”

The firm has completed more than $100 million of capital raisings since November 2000 and been consistently profitable.

Mr Manford insists the loss of senior staff to Euroz has proved to be “totally irrelevant”.

He said Paterson raised $115 million in 25 deals last year, to substantiate his belief that it is number one in all four segments of the industry – retail broking, institutional dealing, research and equity capital raisings.

Commenting publicly on the staff defections for the first time, Mr Manford does not question their right to leave, or even the circum-stances of their departure, but he is clearly unhappy about subsequent comments.

“They claimed they had ‘gutted’ our firm, and that hurt. It was like a whack in the face,” he said.

“They made it sound extremely significant, but their departure has become totally irrelevant.”

Paterson had quickly filled the vacancies, Mr Manford said.

“There are good people out there to replace those who left. And we’ve given other people a chance and they’ve come through with flying colours. In fact, the firm is now substantially larger,” he said.

Hartley Poynton remains a powerful force in the private client advisory business. Its status as one of the market leaders in this sector has been overshadowed by the hefty losses reported by its parent company, HP JDV.

Hartley Poynton recently announced a substantial restructure of its Investment Bank, the latest of many steps to lower its costs.

In what is effectively a return to its roots, Hartley Poynton will now focus its research and corporate finance activities on small to medium sized companies capitalised at less than $250 million.

The strategic focus of most brokers in Perth can be divided into two camps, depending on their ownership.

The likes of Macquarie Equities, JBWere, Salomon Smith Barney and Bell Potter are part of major national or international firms. This gives them significant competitive advantages.

As Bell Potter’s state manager Trevor Benson puts it: “We are Australian and independent, yet we are backed by UBS Warburg, a global powerhouse.

“We have 220 advisers (nationally) representing a vast pool of collective experience. We have access to capital raisings and floats that are off limits to smaller players, the ability to offer a full range of investor services, and the invaluable research from their 60-strong team of analysts,” Mr Benson said.

Perth-based brokers face the challenge of carving out a successful niche focusing on WA stocks and, in some cases, targeting specific investors such as Perth’s Asian community.

A desire to build critical mass and gain greater financial muscle has prompted a couple of recent mergers, with the latest between industry newcomer Terrain Securities and Mortimer & Chua.

Craig Smith-Gander, a CIBC veteran who will run Terrain’s Perth office, echoes many brokers when he says the recent departure of big US brokers signals the bottom of the market and a time of opportunity.

“We’re doing this at exactly the right time,” he said.

Another newcomer to Perth is Grange Securities, which started seven years ago in Sydney and Melbourne as a specialist fixed interest broker for the retail and wholesale market.

It has progressively expanded its capabilities to encompass equities dealing, research and structured finance, with a focus on “hybrid” securities.

WA Manager Frank Sciarrone said Grange was aiming to provide a broad range of services, including financial planning, to its clients.

For the industry as a whole, a key challenge is building a consistently profitable business model.

Paterson Ord Minnett seems to have found the right formula. Mr Manford said the firm had “always been profitable”, averaging a 35 per cent fully-franked return on equity over the past 10 years.

Remaining profitable has been particularly difficult for firms reliant on retail brokerage, as they have been squeezed by lower trading volumes and the emergence of Internet brokers.

The overall market share of Internet brokers has stabilised at a low level, yet their real impact has been to push brokerage rates lower.

The minimum brokerage charged by most full-service firms is $75 or $80, though State One is markedly lower at just $50.

The Internet brokers have hit some Perth firms especially hard, since they have attracted many active traders who focus on small-cap speculative stocks.

With pressure on brokerage rates, many brokers are building up services such as financial planning, portfolio management and superannuation.

Bell Potter’s Trevor Benson believes this is pivotal to the firm’s growth prospects.

“Investment, superannuation and retirement planning have become far more complex over the years and people are looking for high quality advice. This above all is our opportunity,” Mr Benson said.

These additional services allow brokers to build up more stable fee-based revenue, rather than the traditional transaction-based revenue.

For instance, Hartley Poynton says the increase in funds under management in its portfolio and master trust services means that lower transaction volumes are not affecting revenue as significantly as in the past.

The move towards financial planning and wealth management comes at a price. Advisory staff in this field require a much higher level of training and it adds an extra regulatory and compliance burden.

Grange’s Frank Sciarrone is also sceptical about the ability of “old style” brokers to change their spots.

“The brokers love the profits when the market is running hot. It’s hard to get them away from that,” he said.

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