By David Griffiths The overall outlook for online brokers remains positive, despite recent share ...
By David Griffiths
The overall outlook for online brokers remains positive, despite recent share price volatility, with market share of retail fund flows expected to increase, according to a report by Schroder Salomon Smith Barney.
Mamoun Tazi, an analyst with the equity research group, said European online brokers are poised to become the retail financial institutions of the future. This is due to their continuing business model transformation and their efforts to build a strong Pan-European name.
This placed them in a strong position to take advantage of the broadening investment and equity culture in Europe, he said.
Tazi said: "We remain confident about the long-term prospects of the online brokerage industry and believe that online brokers will be the next generation of retail financial institutions in Europe."
The transformation is taking online brokers from a single-product online model to an open architecture, multi-channel and multi-product organisation. Retail customers will have access to all their personal finance needs under one roof and on their own terms, he said.
"We believe that online brokers are already recognised as viable asset gatherers thanks to their successful mutual fund and insurance distribution platforms. They should attract the second wave of internet users who are self-directed investors but require advice and professional management of their wealth.
We estimate that of the E1,234bn of new retail fund flows, E129bn should be transferred online by 2003 across Europe. We also expect online brokers to claim a 1.8% market share of retail funds flows."
However, their success may be held back by competition from incumbents with dominant brands such as traditional banks, asset managers and insurance companies, as well as leading US online brokers.
Tazi said comparative advantages include: an offline brand that can easily be exploited online; a large offline customer base which can be converted; a wide array of products and services which can be sold across a complete range of distribution channels; and a strong capital base to support any initiatives.
He added: "However, these incumbents also have impeding legacy systems, are less customer orientated and have costly offline distribution channels. As a result, we believe that online brokers will flourish alongside their competitors."
In the short term, he remains cautious about the sector as negative sentiment and market volatility has caused share prices to fall. He said it will take further industry consolidation before share prices start to rise.
There is also a problem with margin pressures and industry overcapacity that threaten the future of the sector, Tazi said. Increased competition could lead to needless price wars while the upfront and renewal fees currently paid to IFAs on products could also affect future profitability.
Tazi added that the current market is very fragmented and would appear to offer excellent opportunities for consolidation and the expansion of market share by groups.
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