CommSec Has The Numbers

It has never been quicker, easier or more satisfying to conduct share trading online, and market leader CommSec has shown a clean pair of heels to its competitors over the past five years. But is CommSec’s dominance an advantage or a poison chalice? And what does all this mean for investors looking to spend and track their hard-earned cash?
CommSec, wholly owned by the Commonwealth Bank, enjoys a vast lead over its nearest competitors with estimates of client numbers ranging up to one million. E*Trade is in second place with a reported 160,000 clients, and Westpac Broking is a very close third. As far as basic investor services go, very little separates the three but sometimes it’s the small differences that make big impacts on individual investors.

E*Trade has, for example, focused on delivering value-added services through a range of partnerships that include Yahoo!, Qantas and eight independent research and information sources for clients. Partly owned by ANZ bank, E*Trade sees itself more as a BMW to CommSec’s Holden Commodore. This attracts more of the high-frequency share traders and gives E*Trade a potential value advantage over its larger rival.

There is no doubt that CommSec has more clients than any other online broker in Australia but its client list also has by far the highest proportion of infrequent and reluctant traders. CommSec’s competitors often claim that it is full of inactive clients and that its total numbers are therefore misleading. Recently available data supports this argument. But more of that later.

So what is the profile of a share trader; which online broker offers the right mix; and what does it mean for us all?

Retail share trading '” that’s you and me '” accounts for more than half the volume in Australia but less than a quarter of the value of shares traded. The volume is dominated by institutional investors. We are today focused however on the retail market, on you and me.

According to Roy Morgan Research, a retail shareholder looks something like this: I was born in Australia in the mid-1950s and live either in Sydney or Melbourne in a detached house with no children currently residing with me and my partner. I have tertiary qualifications, still work full-time in a white-collar job and my partner and I have a household income of more than $80,000 a year. I vastly prefer shares over property as an investment.

To provide a little more detail on that profile, almost a third of Australian shareholders are in the 25–49 age group and another third in the 50–64 profile (mean age: 50).

Almost half (40%) of Australia’s shareholders have tertiary qualifications and men are only slightly more likely than women to own shares.

Income is an important influencer on whether a person will or won’t own shares. The mean household income for shareholders is $78,000 compared to $64,000 for all Australians. And given the discretionary nature of share purchasing, it is unsurprising that the dominant household income bracket for Australian shareholders is $130,000 or more with 13% of shareholders in this well-off group.

The real challenge for the online brokers is to attract more active share traders with bigger discretionary pots of money. One way to do this is by offering clients independent research sources and other tools to make their lives simpler. E*Trade and Westpac Broking are leading this race, neck and neck, as they come into the straight.

The most active traders in Australia are a group known as the “new economic order” (NEO) and the least frequent traders are known as Traditionals. NEOs are 24% of the population but accounted for 72% of all online share trades in the past 12 months. Traditionals, on the other hand, are 50% of the Australian population but accounted for only 11% of online trades.

CommSec has more traditional traders than its closest competitors. Almost one in four CommSec clients are infrequently trading Traditionals, while over at E*Trade, Traditionals account for only 8% of its client base. This is significant for both CommSec and E*Trade because Traditionals account for a minuscule proportion of the people who traded online in the past three months (see graph below).

The really bad news for CommSec is that in its very large client base, just over half are the high-value NEOs. At E*Trade, on the other hand, 75% of its client base are NEOs and 74% of Westpac’s clients are NEOs.

We have seen that these four million NEOs account for the majority of share trade volume and they trade online more frequently than anyone else, but what about value? NEOs are twice as likely as the population '” and three times more likely than Traditionals '” to have share portfolios worth in excess of $1million.

E*Trade and Westpac Broking (also known as BT Direct) are therefore not only doing things right, they’re also doing the right things to attract the right clients '” and certainly doing it better than CommSec.

Both E*Trade and Westpac Broking claim they target clients who are more active and at the premium end of the market. We know they are succeeding with the more active, but what about premium end?

NEOs are younger (mean age: 43), they are 40% more likely than other share traders to have tertiary qualifications, are 73% more likely to be in professional or executive positions, and 84% more likely than their fellow share traders to earn a household income in excess of $130,000 a year. Looks good there, too!

CommSec views the world as a commodity market that delivers margin as the tide of trades rises. This is entirely appropriate for the broking business of Australia’s largest bank that has more traditional customers than any of its big three competitors. But with 98 per cent of NEOs online, a totally revamped 'platinum platform’ may be the best strategy to attract NEOs – who purchase vastly more shares online than anyone else:

E*Trade and Westpac Broking have both taken a smart route to profitability by attracting and motivating the highest value clients, rather than by attempting to run a purely volume strategy. It must be acknowledged that CommSec, by sheer weight of numbers, still has more NEOs than E*Trade and Westpac Broking combined.

The question for CommSec and for you and me (and let’s face it, chances are you’re a NEO if you’re reading this online and you do your share trading online) is: do they know what to do with us? Conversely, the opportunity for E*Trade and Westpac Broking is to turbo-boost their information, advisory and other NEO-sexy services to seduce CommSec’s NEOs into switching. Certainly, E*Trade’s partnership with NEO-rich Yahoo! (66% NEO) and Qantas (74% NEO) will throw down the gauntlet to CommSec.

CommSec will not relinquish its crown and will remain dominant in the volume race. The value race will be the interesting one to watch, however, so stay tuned (online of course).

Ross Honeywill (ross@customerstrategy.com.au) is an internationally published author and a foundation director of consumer think-tank the Centre for Customer Strategy. Data used in this article is drawn from Roy Morgan Single Source and is subject to copyright.

Note: Eureka Report has an alliance with E*Trade, which involves some of our content appearing on the E*Trade website. We also pay E*Trade a fee for encouraging its clients to become subscribers.