The New Criterion: listed brokers change their spots

Tim Boreham

Independent Investment Research

Aside from the hoary old one about bellhops imparting share tips, the sure-fire sign of an impending bear market is when stockbrokers seek a public listing to share the dubious love.

Well it used to be, anyway. Wizened readers will remember that three brokers listed in quick succession in 2007, only to come a cropper after the market tumbled in November of that year.

So we note with trepidation the recent listing of Evans Dixon, the amalgam of Melbourne blue blood broker Evans & Partners and the self-managed super fund specialists Dixon Advisory.

It’s a case of so far so good, with the shares roughly on par with their $2.50 a share debut price having poked as high as $2.70.

And much has changed since the noughties, when brokers relied on trading commissions and fees from equity capital market activities.

Old school brokers versed in wheeling and dealing might choke on their third post-luncheon port, but now brokers call themselves wealth managers and operate high falutin’ investment platforms (generating annuity fees that don’t depend on the vagaries of the all-ordinaries index).

Evans Dixon also has considerable sums invested in the US Masters Residential Property Fund and solar farm owner New Energy Solar.


Meanwhile the class of 2007 – Bell Financial Group (BFG, 82c), Wilson HTM and Austock – have morphed beyond recognition.

The latter solid its broking arm to Intersuisse in 2012 and is now an investment bonds specialist Generation Development (GDG, $1.22)

The Brizzie-based Wilson HTM was subject to a management buyout of its securities arm in 2015. But its funds management arm Pinnacle (an amalgam of boutique) lives on as Pinnacle Investment Management (PNI, $5.44).

Previously Bell Potter, Bell Financial Group is enjoying its best conditions in a decade. The firm has funds under advice of $47 billion, 10 per cent of which enjoys recurring revenues. “These numbers clearly demonstrate we are not simply a traditional broker relying on day-to-day revenue from secondary market execution,” managing director Alastair Provan.

The Perth-based Euroz (EZL, $1.20), which listed earlier, rides the ups and downs of the WA resources sector (which currently is more up and down).

Once again, the firm has earnings diversity through $1.43bn of funds under management and two listed investment companies (Westoz Investment Company and OzGrowth).

As with so many other professional service plays including real estate (McGrath) and accounting (Harts and Stockfords), broking was not amenable to the listed model.

One reason is that the brokers were more like independent deal-chasers working under the one shingle. Many were also unable to be herded into a corporate structure because they were eccentrics and/or permanently out to lunch.

Self Wealth (SWF) 13.5c

Who needs the help of brokers when you’ve got the collective investment wisdom of the masses, a la Wikipedia?

That’s the unusual premise of Self Wealth, which is best known as a discount online broker but is also developing a line in peer-to-peer stock selection.

Self Wealth has analysed the performance of 35,000 investor portfolios to create the SW200 index, which incorporates the stock selections from the best 20 portfolios.

It’s a case of so far so good, with the SW200 outperforming the ASX200 by 76 percent in the six months to January.

Founder and CEO Andrew Ward honed the concept after a 20 year stint in the financial services industry, including the fledgling First State (now the Commonwealth Bank owned Colonial First State).

Even back then, Ward didn’t like what was going on from a “moral and values” perspective and sought to create an online broker with a traditional service model.

That one didn’t quite come off, but it formed the basis for the current self-directed platform. “It dawned on me I could use the best investors to create a portfolio,” he says.

Self Wealth’s business model entails either traders availing of its $9.50 per trade flat fee, or punters signing up for a $20 a month “premium service”. The latter allows subscribers to track top-performing or like-minded members and receive alerts whenever they trade.

 But what if all the investors are wrong?  “There is no greater herd mentality than in financial markets so you do have to remove that noise,” Ward says.

To do this, Self Wealth overlays two tools over the model portfolios. One is a safety rating based on the level of diversification, the other is a test of returns over the longer term

In the third quarter, Self Wealth recorded revenue of $318,000, up 90 percent on the quarter with active users gaining 50 percent to 3382.

However only 10 percent of these are paying subscribers to the premium service and management’s priority is to boost this take-up.

Self Wealth also recorded a loss of $1.2m and at the end of the quarter held $5.1m of cash, having raised $7.33m on listing in November last year.

To date, most of Self Wealth’s revenue derives from interest on $30m of client deposits, but Ward says that contrary to perception the $9.50 trades are profitable.

Seeing you asked, exchange traded funds account for seven of the top ten investments held by the best ten investors.

The others are CSL, BHP Billiton and Rio Tinto.

Macquarie Group also features, while not surprisingly the Big Four banks have slipped in popularity.

Sadly, Self Wealth investors are yet to benefit from the wisdom of the masses, with the shares well below their November 2017 listing price of 20c apiece. As usual, profit taking, pre-IPO investors who got in at a much lower price appear to be to blame.

“As we’re a microcap, investors are waiting to see our track record. About 20 to 30 funds say they like the story, but they won’t get in yet.”

Self Wealth’s next step is its own ETF for self-manages super funds, based on the portfolios of the 200 top performing SMSFs distilled from 30,000 portfolios.

In the company’s favour it’s backed by BGL, Australia’s biggest SMSF administrator and this provides a channel to attract business.

The catalyst for a re-rating is decent set of full-year numbers, due to be released in August. Until this happens, Self Wealth is consigned to the ‘concept stock’ category.

Tim Boreham edits The New Criterion


Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.







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Tim Boreham
Tim Boreham
Editor of New Criterion
Independent Investment Research

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

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