iEXPERT REPORT 52312

Securities Brokering in the US

October 2019

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Securities Brokering in the US October 2019

Snapshot Total Revenue Annual Growth Annual Growth

2019 2014-2019 2019-2024

$157.3bn 0.7% -0.1%

Profit Margin Wages as a share of Revenue Number of Businesses
2019 2019 2014-2019

12.8% 38.3% 1.5%

Industry Strucuture Level Trend Level Trend

Life Cycle Mature Regulation Level Heavy Steady

Revenue Volatility Medium Technology Change High

Capital Intensity Low Barriers to Entry Medium Steady

Industry Assistance None Steady Industry Globalization Low Steady

Concentration Level Low Competition Level High Increasing

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Key Industry Data

Products & Services

Segmentation

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Securities Brokering in the US October 2019

Major Players

Cost Structure

Industry Performance
Performance The Securities Brokering industry primarily serves as an intermediary between investors and investment
Summary securities such as stocks, bonds and derivatives.

Brokerage firms match a client's buy order with a third party's sell order or fulfill the client's order with their
own investment products. The industry generates revenue from trading commissions as well as
transaction and asset-based fees. With the rise of electronic trading and discount brokering, many industry
operators have started to offer more value-added services such as investment advice for clients. As a
result, the industry has become increasingly indistinguishable from the Financial Planning and Advice
industry (IBISWorld report 52393).

Over the five years to 2019, industry revenue is expected to increase an annualized 0.7% to $157.3 billion.
Slow economic and financial market recovery, coupled with contracting securities trading volumes, caused
revenue to drop in 2015 before slowly starting to improve. Moreover, the average industry profit margin
has also been constrained due to intense competition from online trading platforms that eliminate the
need for financial intermediaries. Operators have responded to this trend by increasing their financial
services offerings and transitioning to an asset-based fee structure characteristic of the Financial Planning
and Advice industry. Consequently, securities brokering remains lucrative, with profit, defined as earnings
before interest and taxes, comprising an estimated 12.8% of industry revenue in 2019. Furthermore, rising
household income and corporate profit have bolstered trading volumes over the past five years, and
continued growth is projected to increase industry revenue 1.1% in 2019.

Over the five years to 2024, industry revenue is forecast to decline an annualized 0.1% to $156.3 billion.

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Securities Brokering in the US October 2019

Following many years of growth, the industry's lackluster prospects stem from increasing investor
uncertainty in 2019. External factors such as the US-Sino trade war, monetary policy changes and global
growth concerns serve to lessen investor appetite for risky assets. Nevertheless, economic fundamentals
are expected to remain stable over the next five years. Thus, industry revenue is expected to stagnate due
to the highly uncertain nature of the aforementioned external factors as well as the upcoming 2020
presidential election.

Industry Issues Threat

New regulations or changes in existing rules enforced by the US Securities and Exchange Commission
may adversely affect industry operators by disrupting their business activities and hurting their profit
margins through higher compliance costs. Other US or international governmental, regulatory or self-
regulatory authorities could also add new regulations or modify existing rules. Regulation for the
investment management sector is expected to remain high in 2019, presenting a potential threat to the
industry.

Opportunity
The performance of the stock market affects institutional and retail investor trading. Retail investors, or
individuals who trade for their own personal account instead of for an organization, are more active in the
stock market when it is performing successfully because they perceive opportunities for high returns with
low risk. Higher stock prices also cause the value of client assets held by brokerage firms to increase,
driving up industry revenue from asset-based fees. The S&P 500 index is expected to rise in 2019,
presenting a potential opportunity for the industry.

Call Preparation Questions

Role Specific Sales & Marketing
Questions
What media channels are you using to attract consumers and investors, if any?

Discount brokerages frequently use multimedia marketing (i.e. TV and print advertising).

Brokerages have large advertising budgets given the highly competitive environment.

How has the shift toward conducting business online affected demand for your services?

It has enabled brokerages to offer more value-added services.

Mobile apps have become a dominant medium for discount brokerages.

Strategy & Operations

Is your company exposed to fintech competitors? How is it effecting your strategy moving forward?

Yes, traditional brokerages are experiencing pressure from Robinhood, a commission free online
brokerage.

Traditional brokerages should increasingly invest in value-added services.

What international operations do you conduct, and how could you benefit from increasing your
international reach?

Many brokerages in the United States offer services in Canada.

Domestic brokerages experience barriers to entry in the form of varying financial regulations in
international markets.

Technology

How have you taken advantage of rising online and mobile penetration into the financial services industry?

Brokerages have increasingly offered more software solutions to clients such as trading platforms.

Brokerages compete on mobile app functionality and ease of use.

What new IT and data systems have you invested in recently?

Companies are investing in better mobile apps with increased functionality and better user experience

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design.

Brokers also have the opportunity to utilize big data to suggest products to customers based on usage
statistics.

Compliance

How have the increased capital requirements under Basel III affected your operations?

These regulations do not pertain specifically to brokerage operations.

How do you expect the proposed changes to Dodd-Frank might affect your business?

A decrease in regulation will benefit the industry indirectly.

Investor confidence will likely rise as stock prices increase.

Finance

How do your profit margins compare to those of your competitors?

Profit margins are very reliant on the value-added services offered by brokers.

Advisory services are among the most profitable in this industry.

What methods have you adopted to improve cash flow in recent years?

Increasing value-added services to shy away from commission based revenue over time.

External Impacts Impact: Regulation for the Investment Management industries

Questions How do you keep up to date with the latest legislation and regulations? Are you a member of a self-
regulatory organization or exchange?

New regulations or changes in existing rules enforced by the US Securities and Exchange Commission
may adversely affect industry operators by disrupting their business activities and hurting their profit
margins through higher compliance costs.

Impact: Investor uncertainty

How do you monitor changes in investor uncertainty? What can you do to mitigate this threat?

Rising investor uncertainty negatively affects the level of trading in financial instruments. In the short term,
rising investor uncertainty over economic conditions boosts trading volumes as investors seek to limit
their losses or exit investments.

Impact: S&P 500

How do you encourage increased trade when the stock market is not performing well? How much have
you explored other markets?

The performance of the stock market affects institutional and retail investor trading. Retail investors are
more active in the stock market when it is performing successfully because they perceive opportunities for
high returns

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Internal Issues Issue: Well-developed internal processes

Questions What internal management systems and practices do you employ? How often do you update your
standards and practices?

Efficient and cost-effective clearing and settlement systems are important to ensure that each trade is
recorded in an accurate and timely manner.

Issue: Must comply with government regulations

Do you monitor changes in government regulations? Have you had any issues with government regulations
in the past?

Broker-dealers are subject to regulations covering all aspects of the securities business. Broker-dealers
are also subject to the Securities and Exchange Commission's net capital rule, which specifies minimum
capital requirements.

Issue: Access to highly skilled workforce

How do you attract and retain qualified staff? Do you have a high turnover rate?

A major player's ability to sustain or improve competitive position will substantially depend on its ability to
attract and retain qualified and licensed employees.

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