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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.
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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.
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