The reform of the public fund rate is a major event this year, and the draft of the commission reduction draft was issued a few days ago, which once again reflects the determination of the supervision to reduce the cost of investors and optimize the ecology of the industry, which is conducive to the sustainable development of the financial industry in the long term, and will bear certain pressure in the short term.
As a key link in this industrial chain, the securities industry has suffered from three aspects of income pressure in the short term: the decline in the income of fund subsidiaries and the decrease in the net profit of shareholders consolidated with brokerages; the reduction of the management fee rate of equity products, and the reduction of the management fee share (i.e., trailing commission) of the fund holding scale charged by the brokerage; the decline in the transaction commission rate, the reduction of the contribution ratio of a single fund, and the reduction of the scale of the sub-position commission.
"Wealth content" is the proportion of wealth management business income (including asset side and channel side) to the total income of brokerages, which is used by the industry to identify the wealth management quality of brokerages. So, after the fee reduction and commission reduction, is the investment logic of the "financial content" of brokerage stocks still valid?
The income contribution of fund subsidiaries decreased
The reform of public fund rates has been launched since July this year, and the management fees and custody fee rates of active equity and partial equity hybrid fund products have been uniformly reduced to 1.2% and 0.2%, and the first phase of fee reduction has been basically completed.
According to estimates, based on the scale of public funds in 2022, the management fee rate of active equity funds will be adjusted from 1.5% to 1.2%, the corresponding income will decrease by about 20%, and the total income of the whole industry will fall by about 10%, and the management fee is the main source of income for fund companies, so the revenue of public fund companies will also be affected to varying degrees.
Most securities companies control or hold shares in public fund companies, among which fund companies with a high proportion of active equity fund products have large short-term performance fluctuations, and the net profit attributable to the parent company will also decrease. In the past few years, the most recognized wealth management brokerage in the capital market has obvious advantages in wealth management assets due to its control of leading public fund companies, and its market valuation often receives a premium that exceeds the industry average.
According to the statistics of brokerage China reporters, from the perspective of the proportion of revenue contribution, Great Wall Securities, GF Securities, Orient Securities, Industrial Securities and other securities firms, as well as their public fund subsidiaries and asset management subsidiaries, will contribute as much as 81.55%, 33.33%, 28.36%, and 28.59% of the cumulative revenue in 2022, respectively, which is commonly known as the "wealth rate" in the market.
The industry estimates that the net profit of the holding fund subsidiaries has declined due to the fee reduction, and the net profit attributable to the parent of the securities industry has declined, and the decline is about 1%, but the original fund subsidiaries will have a high proportion of profit contribution of the brokerage will be more obvious, which may change the investment logic of short-term brokerage stocks, but in the long run, the asset management ability is still the core competence of financial institutions.
The management fee share is the trailing commission shrinkage
At present, more than 70% of the public funds in the mainland adopt the agency sales model, and the proportion of direct sales is less than 30%, and the cooperation model between the fund and the agency is usually the public fund to earn management fees from investors, and part of it will be distributed to the agency.
In other words, in addition to earning the fund's subscription/subscription fee and redemption fee, the agency will receive an additional percentage of the management fee share or trailing commission during the fund's holding period, which varies depending on the fund, ranging from 50% to 30%.
From this point of view, the impact of the rate reduction of public funds is not as large as expected, and the decline in income is actually less than the above 10%. Because part of the management fee is used to pay for the sales service fee and trailing commission, not all of which are owned by the fund company, the income of each link of the industrial chain caused by the fee reduction will decline, but the cost side of the public fund will also decline, and part of the proportion of the decline in the management fee will be borne by the agency, and the decline in the custody fee will mainly affect the custodian (most of the banks).
Xu Kang's team of Huachuang Securities has made calculations, based on the scale of public funds in 2022, assuming that the average trailing commission of the industry is 35%, and the actual management fee rate of domestic active equity funds after the fee reduction is estimated to be 0.75%, which is basically close to the average management fee rate in the United States.
As of the end of the second quarter of 2023, the holding scale of non-monetary funds in the brokerage channel reached 1.53 trillion yuan, accounting for about 18.01%, and the holding scale of equity funds was 1.31 trillion yuan, with a market share of 23.49%.
If the management fee of equity funds is reduced by 20%, assuming that the trailing commission rate is 50% or 35% respectively, and the trailing commission income is reduced by 7.4 billion yuan or 5.18 billion yuan, it will be transmitted to the channel end of the brokerage agency (accounting for 23.49%), accounting for about 4.46% or 5.58% of the operating income of the securities industry in 2022 (394.973 billion yuan).
The total amount of split commissions is reduced by one-third
A few days ago, the second phase of the reform of the public fund rate was also launched, following the reduction of management fees, the China Securities Regulatory Commission issued a draft to reduce the trading commissions of public funds, and the distribution ratio of public funds to a single brokerage company to pay trading commissions from the upper limit of 30% to 15%.
According to static estimates, the average trading commission rate in 2022 will be 0.0758%, and according to the draft opinion, the trading commission will be reduced to 0.04%-0.05%, a decrease of about one-third. If the scale of public fund trading commissions decreases by 35.64% from 18.874 billion yuan to 12.148 billion yuan, the operating income of the securities industry will decrease by 1.7%.
The commission reduction is aimed at the transaction link, and the corresponding partner of the public fund is the securities company, and the reduction in the net profit attributable to the parent of the above-mentioned fee reduction fund subsidiary and the shrinkage of the trailing commission income brought about by the reduction of the commission will reduce the operating income of the securities industry due to the fee reduction and commission reduction as a whole, so as to achieve the effect of reducing the cost of investors to purchase and hold public funds.
Next year, the third phase of the public fund rate reform, that is, the reform of the distribution side, will also be launched, when the brokerage as the main distribution channel will still be affected, but this will also force the securities industry to find a healthy and benign new development path, and at the same time open up more private equity funds, insurance asset management, bank wealth management and other customers other than public funds.
Explore fund investment advisory and bond settlement models
At present, there is a certain difference between the business model of public fund sales in mainland China and the United States, where public fund sales are driven by buy-side investment advisors, investment advisers charge investors a fixed management fee rate (generally 0.6%-1.2%), and investment advisers provide wealth management services to help investors purchase funds.
Referring to overseas experience, the mainland fund investment advisory pilot has become conventional, and the supervision has also encouraged fund companies to broaden their income channels, and the cost of fund investment advisory fee allocation will also decrease after the fee reduction and commission reduction.
The fund investment advisory business is still in its infancy, and there are only a handful of brokerages with a scale of more than 10 billion yuan in fund investment advisory, but the wealth management business of the brokerage company needs to further increase the transformation to the buy-side investment advisory has almost become a consensus, and it is no longer based on the seller's sales model of the single sale of the initial fund, but into a more sustainable and win-win buy-side investment advisory model with investors.
In addition, the bond fund may also become the focus of the next vigorous development of the securities industry, after all, the public fund transaction commission using the bond settlement model can be 100% owned by the cooperative brokerage, not subject to the 30% or 15% limit, but at present, most funds still use the lease trading unit model (corresponding to the bank settlement model).
Editor-in-charge: Yang Yucheng
Proofreading: Liao Shengchao