ASB faces battle with bargain brokers

By Geoff Senescall

Between the lines


ASB Bank is brave to buy a retail sharebroker given that history - at home and abroad - is littered with other banks' failures to achieve synergy between the two businesses.

In the 1980s, Westpac bought brokers Ord O'Connor Grieve, only to onsell it; United Bank owned Morrow & Benjamin for a while; Macquarie Bank once owned Francis Allison Symes; and only last year, ANZ decided to close ANZ Securities and exit broking.

Banks can convince themselves they need a broking arm. In theory, it turns them into one-stop shops offering the full range of financial and investment services from current and deposit accounts, through insurance and managed funds to more speculative investments.

And banking and broking seem similar businesses, since they both sell financial products to customers. But there are some crucial differences. Culture is the biggest. Brokers, paid on commission, have to earn their daily bread, whereas a banker's life is more structured.

Furthermore, bankers are more cautious than brokers. Their instinct is to preserve capital, whereas brokers constantly calculate the trade-off between risk and return, advising their clients accordingly. If sharing clients is the main synergy, then a cross-marketing agreement between bank and broker is preferable to the expense, risk and hassle of ownership.

ASB counter-argues it has four things going for it in taking over Warburg Dillon Read's retail business. First, it has bought only the part it wants and not the full institutional broking and investment banking business.

Second, it can benefit from the experience of its parent, Commonwealth Bank of Australia, of running a successful low-cost broking business across the Tasman.

Third, it has financial products to sell through its newly acquired brokers, thanks to having preferential access to Warburg's investment activities and to its ownership of Sovereign, the financial services group.

Fourth, its aim to set up Internet sharebroking will be helped by its successful start up of BankDirect.

It is the fourth point which makes ASB's venture into broking different and riskier than other banks' forays. In more developed markets, notably the US, Internet brokerage rapidly became a business of huge volumes and razor-thin margins.

To combat a big loss of business to Internet brokers such as Charles Schwab and E*trade, Merrill Lynch, the world's largest broker, this month dramatically slashed fees for all its US clients down to Internet rates. It intends to rebuild profits by massively chopping costs and by introducing high-margin products.

So far ASB's parent is doing well in Australian broking, but US-style pressures will build there too. In due course, they will also hit New Zealand, which is much smaller and already over-brokered.

ASB will have to be truly innovative on culture, costs and products to survive in broking. If it pulls that off, it will have broken new ground.