Securities dealer considers management fees as it builds out sale force, reduces debt
ON the face of it, Stocks and Securities Limited (SSL) has lost a big chunk of its revenue with the sale of its repo book.
Up to the beginning of the year, the portfolio, which totalled $2.5 billion as at December 31, provided the securities dealer with 30 per cent of its net operating income.
Perhaps more importantly, getting rid of the risk altogether fits neatly into the securities dealer's strategy of improving operational efficiency, cutting interest costs and boosting profitability.
"We have got rid of all of the risks but we have given up some income. We are still profitable," said Mark Croskery, president and CEO of SSL. "In April, we increased our financial advisory targets by 100 per cent and we are achieving 80-85 per cent of that new target."
Moreover, in May, the company restructured $490 million of its corporate bonds with more than half of its 42 bondholders — which were originally issued in 2010 under an exempt distribution registered wth Financial Services Commission (FSC) — to extend maturity to 2016 and lower interest rates enough to save $14 million annually on interest expense.
SSL has since been negotiating with remaining bondholders whose instruments mature tomorrow, with an aim to paying back a portion of the debt.
"Our overall strategy is to continue to reduce our leverage or debt," said the SSL CEO.
Indeed, reducing its repo liabilities from its peak of $11 billion, reached before the Jamaica Debt Exchange (JDX) in early 2010, has taken quite some time and the biggest hurdle has been "getting it to zero".
But Croskery reckons that most of the funds that were invested in repos transitioned into other products as assets under management, which now totals $19 billion, for the same clients who were willing to take lower interest rates after a government debt exchange.
Now, the company is seriously considering introducing management fees for its advisory services, which up to now has been free, in order to bump its income even higher.
"We know our competitors are looking at management fees and I am confident it is going to happen," said the investment house's CEO. "For example, if a one per cent fee is accepted by our clients it could potentially generate another $65 million a year for us."
The business, which now generates net operating income of US$250,000 to US$300,000 a month from fees and commissions, trading gains and cambio services, had to become more aggressive in pursuing revenue streams from its financial planning and management services.
The securities dealer's business model, which typically earns US$20,000 a month from fees and commissions from trades on the Jamaica Stock Exchange (albeit it likely earned a good deal more than that this month when it handled a billion-dollar transaction for a client), now makes the bulk of its income from trading gains.
"We don't make trading gains by trading government of Jamaica bonds or having a proprietary book or trading overseas and taking risk," said Croskery. Instead, the company purchases bonds and sells them to clients to satisfy their investment needs.
"For instance, a customer may want to buy US$100,000 of Nestle bonds, we might buy it at US$94 and sell it at US$95.50," explained the SSL CEO.
The invesment house is also building out a sales force comprising independent financial advisors — who, like insurance agents, would be compensated largely through commissions and not tied to an office — in order to expand its reach islandwide.
"We don't want brick and mortar," said Croskery, "we want to be able to have an independent advisor to be able to meet with a client within an hour of being contacted, wherever in Jamaica the potential customer may be."
SSL is now in the process of shortlisting the candidates from a field of 60 that will form the sales force, but it is also looking at additional ways to improve efficiencies internally.
The company had cut its staff from 50 to 43 in February upon recognising that reducing its repo liabilities would also reduce the amount of work involved in assigning securities for repos and doing numerous contracts per day.
"The repo business is highly administration driven," said Croskery. "In an advisory business, the number of transactions drops tremendously. We are also looking to increase the number of trades (not related to repurchase agreements), but we are looking to do it electronically, to be more efficient."
The financial advisory and management company launched online access in September, and it already has more than 200 of its over 5,000 active customers
using the service, which provides porfolio valuation information as well as entire statements of accounts.
The next big step for online is to deliver electronic trade confirmation that would give investors complete details, including all costs, via email by the end of the business day on which the transaction was conducted.
But a key objective is to increase the proportion of employees that are considered revenue earners — about half of the staff complement of the investment bank and the cambio (which generates up to US$20,000 in revenue in a good month) as well as the 15 existing financial advisors.