Serving the communities of Bures St Mary and Bures Hamlet



The Australian Financial Review Newspaper

Oct 24, 1994 - 10.00am

The small but thriving discount broking community in Australia is on the move. The Pont Securities discount group has swung solidly into profit in the past two years after losses for the previous five years. Gross commissions in 1993-94 leapt from $3 million to $7 million, and pre-tax profit this year is more than $3 million. The 41 owners of Pont's 15c shares will earn fully franked dividends of 18 from net profit in 1993-94 of $2.4 million. This compares with $478,000 net profit a year ago. Pont, an unlisted public company, is showing a dividend yield of about 27%, on the "grey market" share price of 65c. Brokers believe Pont now ranks as the top NSW broker in return on capital.

Pont's former managing director, Phil Croll, 50, who ran Pont Securities since its inception in 1984, quit last July after disagreements with Pont's main shareholder, Greg Moore. Croll is planning to launch his own discount broking house in Sydney in December, Australian Stock Exchange permitting.

Moore has just returned to Sydney after 10 years spent partly in Britain, and is likely to take a more active role with Pont Securities. "If Phil(Croll) sets up another broking house, it will be terrific," Moore says. "We have done everything solo for so long, it is good to have someone else in the industry."

Pont's only present rival, the US-owned Twenty-first Australia, plans to expand from Sydney to a serviced office and two staff in Melbourne's Collins Street next month.

The head of one Melbourne brokerage, asked how he would fight the trend, said he would prefer to create a discount brokerage operation in-house, except that it would cause a mutiny among his full-fee advisers.

Pont's Sydney office has 31 staff; the Melbourne office, run by Rea Van Deursen, has six; and the Gold Coast office at Bundall, which opened last April, has three. The Sydney office does about 450 trades a day and Melbourne about 125.

The privatisations of government banks and insurers have created large numbers of new sharemarket investors with very small holdings. Although the one-time client is not economic, they may well tell a friend, who will start trading regularly with Pont. "We put the losses on the 'oncers' down to advertising," Pont managing director Bill Lough, 51, says. Pont's marketing budget is about $300,000, focused largely on over-40s Sydney radio stations.

The two discount broking houses have found their niche among wealthy and astute private clients doing trades of $10,000-13,000. These investors are impatient with normal brokers' commission of up to 2%.

Twenty-first Australia has been a discount broker for only 18 months but managing director Chris Pedersen, 38, says commission income is running well above $1 million a year. The business clears its transactions through McIntosh Securities. Pedersen set his minimum flat-rate fee at $55. He says his discount broking business is not making significant profit yet because of start-up costs and fast growth.

His main business is offering arbitrage services to funds and corporates, such as exploiting the different values of franked dividends to investors with differing tax status. He says Twenty-first Australia can achieve profit margins of 0.1% on such deals, and clients can earn 15% per annum on funds compared with bond rates of 10%. Former Pont executive Croll predicts that Twenty-first will go for a full broking licence soon. The US parent, Twenty-first Securities, which Pedersen co-founded, has 40 employees, $US1-2 billion of funds under management and gross commission revenue of more than$US40 million.

On the Pont split, Croll says that two years ago he told Moore he was considering stepping down as managing director, and that could have been wrongly interpreted as a threat to leave the firm. Croll believes another reason for being "pushed out" was that he had argued for generous remuneration for staff, of whom 10 are shareholders. (His own salary appears to have been a modest $95,000-125,000 during the 1990s).

According to Pont Securities people, Moore offered Croll the choice of taking away Pont's institutional and options trading business, with a non-compete undertaking on discount broking; taking a six-figure handout; or termination. He chose the handout. Of his more than 300,000 of Pont Securities' eight million shares, he recently sold all but 2000.

"I know better how Pont works than anyone there now," Croll says. He may raid Pont staff in establishing his own discount broking house. "They weren't gentlemen when they got rid of me. I have a golden rule that if anyone hits me below the belt, the one that goes back is a beauty. I always hit from the front, so bad luck (to an opponent)."

He says that achieving the fine margins in discount broking is crucially dependent on staff calibre and productivity. "You can't expect to do any good with an ex-university student on $25,000," he says. "In a good market, discount brokerage goes like a kite in a 40-knot storm. Without a good team, you'll get yourself in a terrible mess."

None of the participants views increased competition in discount broking as a bad thing. Instead, the marketing and publicity is expected to develop the market at the expense of conventional brokers that offer research.

On transactions to $6000, Pont's fees are $60 per stock per account. On trades of $6000-120,000, the rate is a flat $120, and for trades above$120,000, the rate is 0.1%, about half the rate an institution could get from a broker on a multimillion-dollar deal. Discount clients must deposit cleared funds before a stock purchase and provide scrip before a sale. This kept Pont's bad debts to only $3000 last year on turnover of $7 million.

Twenty-first Australia's rates are lower than Pont's on trades up to $12,800. It then charges slightly more, but offers a wide variety of free data services.

"New clients always arrive thinking there's a catch. There isn't," Lough says. "Yes, the other brokers hate us." Some financial planners have blackballed Pont, because it rebates to clients 75-95% of commissions for unlisted trusts and funds, which charge up to 4% entry fee.

Lough says: "We don't see much business from the large institutions. They still deal only with their panels of brokers who give them research and services. Among our private clients, $1-million dealings are not rare. There are some pretty wealthy people around. A full-service broker would probably charge 0.5% on $1 million, or $5000 compared with our charge of $1000."

Discount brokers still have a tiny market share in Australia, compared with the US and Canada, where discount brokers are believed to handle about a quarter of retail-client business, which represents about one-third of US stockmarket turnover. The Pont Australia operation was modelled on a leading US discount broking house, the listed Charles Schwab & Co. Schwab, with a 44%share of the US discount broking market, has gross revenue of about $US1 billion a year, a current market capitalisation of about $US2 billion and net 1993 earnings of $US125 million. Founder Charles Schwab's personal holding is worth about $US475 million. The company has 2.8 million active clients with equities worth an aggregate $US110 billion at July 31, and does about 23,000 trades a day.

Pont Securities is still a minnow. "We had many lean years but, because we kept small and kept costs down, those years didn't really hurt," Lough says.

Pont half-owner Greg Moore started his career as a clerk with broker ABS White & Co, and eventually became a principal in the firm Jackson Graham Moore& Partners. He was a leading figure in committees of the Sydney Stock Exchange, and helped get options trading established in Australia. After he quit Jacksons to pursue other interests, Jacksons became the first Australian broker to list, raising $14 million in the heady month of July 1987 and folding in 1989 under the weight of $10 million of bad and doubtful debts.

Moore's first love in business was data services. According to US sources, he bought the international operations of the St Louis-based Bridge Data group as the basis for Pont Data. In the lead-up to deregulation of Australian broking in 1984, Moore saw the chance to get a discount brokerage house launched with "soft dollar" brokerage from institutions taking the data service in exchange for putting trades through Pont. These institutions included Potter Partners clients brought across by Croll.

One of Moore's schoolmates at North Sydney High School, Peter Dind, 53, a former broking operator, liked the Moore plan, invested $200,000 in Pont Securities and helped mobilise the original investors, who included Panfida Foods' Sam Gazal, former

Jackson Graham Moore stockbroker John Grattan, and the wife of an eminent legal identity, who still has 600,000 shares. Dind resigned as a director of Pont Securities four years ago, but retained his 1.1 million shares.

Moore got $1 million worth of Pont scrip in exchange for Pont getting various exclusive rights to Pont Data services. Pont Securities began badly undercapitalised and after over-expensive advertising, had only $380,000 capital left after 12 months. The soft-dollar activities were never very lucrative. The firm was saved by the share boom, after which Croll sacked half the staff of 40 to survive the post-1987 slump.

Moore planned an early listing. The Stock Exchange, no friend of Moore or Pont Securities, objected. "It did us a favor by preventing us listing in 1984. If we had, we would now be wanting to re-privatise," Lough says.

Meanwhile, Pont Data grew to extraordinary size overseas before collapsing early in 1992. Dind says it had hundreds of employees spread over a score of countries, including about 60 top programmers splicing together electronic stock and business data streams. Dind believes the main reason for Pont Data's collapse was that when the Gulf War started, one of Pont Data's major shareholders, the Kuwait Investment Office, removed a line of credit worth more than $A30 million, on which Moore had been depending for corporate expansion. Others strongly dispute this explanation. At the time, Pont Data's global turnover was running at about $A50 million. "There were a lot of very hurt employees around the world," one insider says.

The relatively small Australian arm of Pont Data had endured special problems. The Australian Stock Exchange was trying to market its own data service, JECNET, and damaged its rival Pont Data by gross overcharging for the basic data feed. Pont Data sued under the Trade Practices Act. It won both the case and an appeal by the Stock Exchange.

Moore continues to have significant involvement in entrepreneurial computer companies, including a software business in India. He is still a member of the Stock Exchange, but will spend most of his time on non-broking businesses.

Pont Securities was something of a cash cow for the group. Until 1992 it ran a travel agency that was heavily used by Pont Data. Pont Securities paid large sums (on commercial terms) to Pont Data for information services: for example $423,000 in commissions in 1989-90 and $251,000 in 1990-91.

Pont Securities was able to continue normal trading when Pont Data Australia failed in 1992 with an estimated deficiency of more than $26 million. Pont Data's "report as to affairs" in April 1992 shows $8 million owed to the company by other Pont group members worldwide, with no net assets, and $25 million owed by the company to a different group of Pont affiliates. (The company also owed $527 to BRW). The Pont Data operation in Britain was placed in receivership two weeks later. Pont Data US had earlier filed for Chapter 11 protection.

Liquidator Chris Horn of KPMG says there was a substantial shortfall to creditors and a host of claims and charges. "We are still really just trying to get enough money to pay the employees," he says. "We are continuing investigations. I think the people involved in the day-to-day activities were completely above board and trying to do the right thing by creditors and employees, but some other issues at least raise questions that bear looking at."

Moore declines to discuss Pont Data. He says that Pont Securities and Pont Data were totally separate entities. "I like to be a pretty private person. It's water under the bridge," he says. "The Gulf War did have a major impact on Pont Data. The business had become a mini-Reuters, but times changed."

Investors have had a long wait for their returns from Pont Securities, partly because of amortisation of the $1 million for "exclusive rights"originally provided by Moore.
The remaining $250,000 portion was written off in 1991-92.

Published 29/09/2023