Who are the best brokers in Israel? What are the main considerations for dealing room customers, and are fees really so important? For the first time, “Globes” has conducted a survey among scores of investment institutions and public companies, mapped the brokerage industry, and examined which are the best Israeli firms, and what makes a broker a top-quality firm.
In first place, the firm rated as the best by customers and competitors by a wide margin is IBI Brokerage and Investments Ltd., mentioned by 54% of the respondents. The firm, the oldest in the market, was praised as a “professional firm with top quality people.” Even its competitors, which participated in the survey, praised IBI. One said, “It is a veteran firm, with experience, quality research, a distribution advantage, strength in corporate bonds, and very well connected.”
IBI CEO Julien Assous
”There is some confusion about the concept ‘brokerage’,” says IBI Brokerage CEO Julien Assous. “People often think that we’re only a pipeline to the TASE without added value, in which case price is the most important factor. But when the professional aspects are examined, such as by your survey, you see that that isn’t the case.” In second place is DS Brokerage Ltd., which is relatively new, founded just over two years ago, but within a short time it has become an important firm. It was mentioned by 46% of the respondents. Respondents praised the firm’s research and availability. One respondent cited, “Good research staff, professional contact persons, and a team with great experience.”
Third placed Leader Capital Markets Ltd. is described as having top quality, skilled, and proactive traders, professional distribution, and quality analysis staff.
Two firms tied for fourth place - Clal Finance Ltd. and Psagot Investment House Ltd., with 41% each.
It is interesting to note that the top five firms in the survey are investment houses. The top ranked bank in the list, in sixth place, is Bank Leumi (TASE: LUMI), with 35% of the respondents. In 2009, Bank Leumi marked brokerage services as strategically important, and greatly expanded its trading system and research department, winning plaudits from the market.
Customers described Bank Leumi as having good, skilled and knowledgeable traders. They also favorably noted its sophisticated information system, research, availability, and service.
Bank Hapoalim (TASE: POLI) is in seventh place, with 28%. Respondents cited its good quotes, access to many firms, and good returns. Closing the top ten are Excellence Investments Ltd. (TASE: EXCE) with 26%, closely followed by Mizrahi Tefahot Bank (TASE:MZTF) with 24%, and Harel Finance Ltd. in tenth place, with 17%. Other firms mentioned, but ranked lower, were Israel Discount Bank (TASE: DSCT), First International Bank of Israel (TASE: FTIN), Union Bank of Israel (TASE: UNON), and Meitav Investment House Ltd..
Price only in fifth place
What is most important to clients - transaction fees, or quality of service? The answers are surprising. The survey found that factors usually considered to be essential were less important to clients. Most firms believe that availability is the most important factor, far more than low fees or research.
The survey found that availability is the most important factor, with a score of 8.7 on a scale of 1 to 10. Half the respondents gave availability a score of 10. Three factors tied for second place, with a score of 8.2: professionalism of the contact person, quality of quotes, and quality of service. Price is only ranked fifth; the score for the fees factor is 7.5.
Research is in sixth place, with a score of 7.3. This is a surprising figure: heavy financial and human investment is made in firms’ research departments, under the accepted theory that good research attracts clients. It turns out that this is not the case.
Other factors earned much lower scores: pricing (6.9), access to distribution (6.8), average transaction size (6.6), initiated proposals (6.3), and foreign investment (4.6).
The common denominator of the high-scoring factors indicates that investment institutions and public companies are prepared to pay more for better service, and this is no small matter. There has been a real war between the brokers and the banks in the brokerage industry in the past two and a half years. The banks aggressively entered the sector, gradually increased their market share, and eroded the investment houses’ profitability, especially in the battle over fees.
Nonetheless, the banks received low rankings, with the best of them, Bank Leumi, ranked in only sixth place. The survey’s results for the most important factors for clients explain why: for clients, price, however important, is not the most important factor.
The top-ranked investment houses undoubtedly meet their clients' most important criteria: availability, good quotes, and better service than their competitors. It turns out that clients are willing to pay for this.
The winning formula
“Quality is the justification for our existence”
The survey’s results did not surprise the top three firms. As far as they are concerned, they confirm their oft-repeated arguments that private brokerages offer professional service, better than the banks. “The banks are currently competing on price. The bank chooses to exploit its strength and go only for the price. This is the result,” said DS Brokerage CEO Ron Sireni.
Execution fees are currently much lower than in past years, which may explain why they are a low-rated factor. “The effect of fees on a portfolio’s return is zero. The quality of service and professionalism are many times more important, and this is the justification for private brokers, when they can stand out against the banks in quality of service,” says Leader Capital Markets CEO Amit Vardi.
This raises the question how are the banks still able to win market share from the private brokers. “Sometimes, different interests cause clients to work with the banks,” says Vardi. “The banks are constantly increasing their market share at our expense, and the competition is liable to push out those who provide better service.”
How do the brokers explain the low rating of the research factor, despite their heavy investment in it? As far as they are concerned, research is part of the quality service. “A substantial part of research’s contribution is expressed in the traders’ professionalism and quality of service,” says Leader Capital Markets dealing room manager Sagi Posnerson. “Availability and quality of service are an integral part of the research. Analysts respond in time and in depth to a particular situation. We have an unequivocal instruction to our analysts that all information to the market that we publish must be with added value,” says DS Brokerage VP research department Eran Jacobi.
Trading and research
Confusion often crops up about what a brokerage firm actually is and what it does. To sort things out, a brokerage is a firm authorized by the TASE to conduct transactions in securities, and whose clientele are mainly investment institutions and large nostro firms.
Usually, a brokerage comprises a dealing room and a research department. In the dealing room are found the dealers who trade in securities - stocks and bonds - as well as in foreign currency. Their job is to make the deal, i.e. bring the buyer and seller together. Some dealers work at investment houses as independents; under their contracts with the investment house, they earn fees for the transactions they make, some of which can amount to millions of shekels.
There is nothing like this at the banks, where most dealers work under personal contracts, and their pay grade is different from that of regular bank employees.
The survey found that the research departments, which were established as a marketing tool to support trading operations with analysis, have become a well-oiled industry over the years, publishing constant reports and investment recommendations.
Survey methodology
The survey's database is based on a questionnaire that "Globes" distributed to 64 clients of brokerage services. The respondents included investment institutions - managers of mutual, pension and provident funds, ETFs, and life insurance, and Tel Aviv 100 companies with large nostro portfolios, and which routinely work with brokerages. Client services range from foreign currency conversion to hedge transactions and investments. These companies are large and important players in the Israeli capital market, and they are the main target clients for brokers.
"Globes" asked the managers to answer two key questions. First, to comment on 11factors that are part and parcel of brokerage services, and to rate each of them on a scale of 1-10, with 10 the highest score. The factors included a broker's availability to his or her clients, the quality of service provided, the quality of quotes (i.e. the best quotes at a particular moment for a buyer or seller), the professionalism of the contact person, whether the contact person understands his or her client's needs and can tailor a deal, the brokers' specialization in various securities, and the brokers' ability to provide the client with added value.
Additional factors included the importance of a research department, access to distribution, average transaction size (since large companies prefer to design large transactions in such a way as not to affect the market), and access to foreign markets.
In the second part of the survey, the respondents were asked to list their preferred brokerages, and explain their choices in a few words.
On the basis of the responses, "Globes" summarized the ratings into two tables: one table showed the factors most important to the respondents, each rated from 1 to 10; and the second table showed the respondents' top five picks of brokerages, as a percentage.
Published by Globes [online], Israel business news - www.globes-online.com - on March 7, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012