Financial planners could be selling equities without having to go through a broker within the next 12 months.
That prediction by Australian Clearing Services (ACS) managing director Alasdair Thomson is based on proposed changes by the ASX to introduce ‘third party clearing’.
“Historically a financial planning group had to set up a relationship with an intermediary firm to handle orders for shares from their clients,” he says.
“Under third party clearing, financial planners can obtain a licence, obtain a minimal amount of capital, outsource the back-office services and sell shares.”
Third party clearing will allow brokers and other financial services companies to transfer their settlement risks and operations to well-capitalised, specialist back office clearing firms like ACS.
Thomson sees the proposed move as opening up the sharemarket to many people and not just the “privileged few” brokers.
“We believe third party clearing will introduce a large number of new brokers to the market,” he says.
In the United States there are between 7000 and 8000 brokers.
Thomson sees no reason why a proportional expansion could not happen here with third part clearing.
“We are keen to see financial planners become closer to the market and we believe ACS can help them achieve this after the approval of third party clearing,” he says.
There will also be potential work for ACS from dedicated small broking firms that will start up after the introduction of third party clearing.
The change will allow new entrants into the stockbroking market without them having to provide the extensive back-office services expected from brokers.
ACS will also provide research and product development as well as clearing facilities.
“We can get a new broking operation up and running much quicker than in the past,” Thomson says.
“The cost of installing your own software and systems can make the cost per transaction prohibitive,” he says citing figures of $100 a transaction if a company has to start from scratch. By outsourcing, the cost is bought down to the levels of the major stockbroking firms.
Opening up the broking market will enable niche players to enter. With the back-office operations being outsourced, costs have been brought down to competitive levels.
“Third party clearing will allow niche players to retain a strong identity as they can concentrate on the selling part of their business, rather than worry about settlement and other administration problems,” Thomson says.
“These reforms will reduce a broker’s risk and costs and that in turn will encourage the growth of specialist firms, increased discounting and further democratisation of the market.”
He warns, however, that more competition could see the disappearance of some well-established broking firms.
“Some will survive by changing the way they do business, either pushing the discount end or by adding services such as financial planning,” Thomson says.
ACS is no stranger to the broking world. It was originally an offshoot of Melbourne brokers Burdett, Buckeridge and Young.
The idea of offering an outsourced back-office operation came to Thomson while he was with Burdett, Buckeridge and Young.
Initially the firm offered the service to a small broker in Perth – which allowed the systems to be tried and tested.
“We had a problem running the operation under the Burdett, Buckeridge and Young banner and that was independence,” Thomson says.
“If we were going to offer the service to other brokers, we had to be seen to be independent and no amount of ‘Chinese walls’ was going to give that impression.”
The need for independence meant ACS was created as a separate company with its own dedicated offices and dealer’s licence.
“We wanted to demonstrate that we were regulated by the ASIC,” Thomson adds.
Since then ACS has gained 16 clients, 14 of them brokers. “We still have the capacity to expand at present, but we don’t want expand for expansion sake,” he says.
At present ACS offers a bureau service which supplies the IT and hardware, but the clients still provide staff. The second is a bureau service that includes the staff as part of the outsourcing move.
This second service is providing the groundwork for the third party clearing, an initiative that ACS sees as the key to expansion.
Thomson leaves no doubt as to what his company plans to do after the third party clearing approval date. “We will go live on third party clearing within 24 hours of the approval,” he says.
He maintains that the key to launching the additional service so quickly is its systems and Thomson expects to have everything ready for the potential May launch date.
