Thursday, September 27, 2012

Why your friendly neighborhood stockbroker is an endangered species

Boyd Erman has an interesting piece in the Globe about why retail brokerages are disappearing.

And while it's a reasonably informative article I'd like to tease out a couple of strands that he hints at but never follows up.

There was a time when every town of any significance had at least one stock brokerage. I remember my father taking me into a place in downtown Guelph, right on St. Georges Square. It was one of those Toronto-based independent shops that later on was to disappear into the maw of one of the big banks. There he opened an account in my name because I was not of legal age, and I was henceforth empowered to buy and sell publicly traded shares.

I was also welcome, were I so inclined, to sit in their lounge and watch the stock ticker on the wall. On any given day in that pre-computer pre-internet era you'd find a couple dozen gentlemen gathered there with their eyes glued to the ticker. Some guys would stay all day, from the moment Bay and Wall Streets opened till they closed.

Others stayed fifteen minutes.

Some of those guys were local businessmen, some were retired professionals, some were factory hands. You had not quite a cross-section of humanity, but something close to it.

When you did a buy or a sell there was a 5% commission that went to the brokerage.

Technology has been one of the forces that have pushed this business model into the dumpster. You no longer have to sit in somebody's real estate to see live stock quotes. They're available on your home computer or your smartphone.

That's made it possible for on-line brokerages to totally destroy that fee structure. Who would pay 5% to buy or sell shares when a dozen on-line brokers will do a million dollar trade for a $15 flat rate?

The other part of it is those clients are no longer there. Retail stock brokerage is dead because there aren't those regular folks involved in the game anymore. Most local businessmen don't have the kind of surpluses that small local business used to have, and the blue-collar guys went to mutual funds long ago if they can accumulate any savings to begin with, which gets less likely every year.

The brokerage business itself has changed too. They can't make the rent hoping that your small account might someday turn into a large one. Most of their profits now come from trading for their own accounts in one way or another.

That's why retail brokerage is down for the count.

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