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BIG in Europe

Online brokers battered by plummeting share prices are hoping to profit by working in partnership with the growing number of fee-based advisers, according to Self Trade managing director Peter Moores.

He claims discount broker Self Trade has weathered the storm of the dotcom crashes that sent other online businesses to the wall by targeting fee-based IFAs. He believes that if more IFAs start to use execution-only partners, then problems such as churning can be reduced.

Moores says: “By trading this way, commission is no longer an issue between client and adviser. The client pays a flat fee and then the IFA works through us to pick and choose their stocks. There is always a risk at some point but, if the incentive is removed, churning can be prevented.”

Self Trade merged with German heavyweight Direkt Anlage Bank in 2000 and launched in the UK, Italy and Spain, making it one of the biggest pan-European online brokers. Assets under management reached E10.93bn (around £6.7bn) in June.

Speaking at a European discussion forum in Munich on the future of financial services, Moores said Self Trade has followed DAB&#39s experience with financial advisers in Germany in preparation for the potential shift towards more fee-based IFAs working in the UK.

Although there are fewer of them, the majority of financial advisers in Germany are fee-based. The market is growing rapidly as more and more Germans invest in private pension plans following a radical restructuring of the state benefits system.

Moores thinks that, like their German counterparts, UK IFAs&#39 initial worries over doing totally internet-based transactions have lessened as ebusiness becomes more commonplace.

He says: “They were concerned that clients would go over their head, miss them out completely and deal with us direct. But IFAs began to realise that clients were self-directed and had sought them out deliberately to help them make stock decisions because they did not want to make those choices on their own.”

Moores claims that Self Trade&#39s partnership with a big German bank offers additional reassurance for investment clients interested in mutual products and says: “Because DAB already has a huge amount invested in well known unit trusts, it gives clients extra confidence, which means we can now offer 365 mutual funds from 12 managers.”

He believes the financial services industry worldwide will be forced to diversify and consolidate in this way to survive further economic downturn.

Speaking at the same discussion forum, Allianz Dresdner Asset Management senior analyst Dirk Bartsch predicted a widespread weakness in capital markets across Europe in the next 10 years. He said: “There will be a higher demand for guaranteed products and a shift from unit-linked products towards traditional life policies. More people will want independent advice and be relying on big, familiar brand names to make their purchases.”

DAB management board member Matthias Kroener admitted that he no longer wants to watch the share price changes along the bottom of his TV screen and can hardly bear to look at how far the DAX falls daily.

He said: “The only way for financial services companies to survive these troubled times will be to consolidate with other large European partners and expand across borders.” He strongly believes the future of financial services in Germany and the UK will be in big cross-European mergers and specialising through services such as online brokerage.

German private bank Sal Oppenheim head of financial institutions research Metehan Sen believes many financial services companies will be forced to move online in the next five years just to stay afloat. Sen said: “You have to have more consolidation in Europe to generate more cash but it will take longer than predicted because of cross-border problems. The middle market is going to disappear entirely and only the really big international banks or the niche businesses will survive.”

Sen said the euro has not brought immediate cross-border business and, as in the US, this will not be a natural progression. He said: “You only need to look at the tiny number of pan-American businesses to understand this.”

Senior researcher at the Centre for European Economic Research Friedrich Heinemann agreed that expansion in Europe will take more than a single currency. Heinemann said: “A more courageous policy approach towards integration would be highly beneficial for European consumers, the financial services industry and the world economy as a whole.”

Heinemann thinks that although it is still hard to assess the full consequences of the stockmarket fall since 2000, the bursting bubble has severely damaged consumers&#39 trust in to modern investment strategies.

He concludes that governments themselves are putting up the boundaries to more competitive trading by tying in consumers and IFAs to national rather than international trading. Heinemann said: “Despite the introduction of the euro, national borders still constitute a considerable barrier for retail financial markets.”

He said the results of his study into online brokers in Europe show that the national online brokerage markets are segmented in terms of prices and without further development could only be successful in a strong market

However, Financial Technology Research Centre director Ian McKenna believes the best way for UK businesses to cut into European markets will be through development of internet-based technology. UK IFAs who have cautiously learned to accept the fund supermarkets and just about learned to navigate the “frozen fund aisle” will now be faced with the financial services hypermarket and the wrap account.

Already used in Australia, it acts as a platform that holds multiple investments in addition to pension and life insurance wrappers, he told the forum.

McKenna said: “This facility will store all the client&#39s information in one place and cut down on paper work. If Self Trade is positioning itself to get in on this area of the market with the backing of a larger partner, it could corner a very lucrative and so far untapped area of trading.”

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