Stagnation in the revenue creation capabilities of wealth management firms has developed a fertile soil for new ideas to come forth. Yet, signs of demand-saturation in new products (like those seen in new ETF issuance) suggest that wealth management trends have to be discovered and acted upon earlier and earlier in their life cycles.
Copy trading is one emerging financial service holding promise because it improves the outlook of all three pillars of wealth management (asset gathering, trading volume, and fees), particularly during this period of low yields and uncertain economic conditions. There is no clear leader in the copy-trading space, but there are a handful of technology specialists in a race for scale, looking for institutional partners to grow their unique brand of copy trading. Aite Group anticipates that this will be the year when copy trading will make serious inroads into retail investing.
TRADING VOLUME MULTIPLIER
Trading volume can be thought of as a byproduct of volatility and/or as the result of a popular tradable product. We have often heard brokerage leaders wish they could clone their active traders’ activity. Well, trading volume can also be thought of as a constant to which a multiplier can be attached. In copy trading, experienced traders trade their own account (the constant) but allow retail traders (the multiplier) to tag along. The net effect from a volume perspective is that a trading desk’s copy-trading volumes grow linearly as new traders join. Under copy trading, investors …
- Keep the investable funds in a brokerage account under their name and simply turns on/off the copy-trading service.
- Select one or multiple (pre-vetted) trader experts to follow, much like a mutual fund manager is selected, after viewing the managers’ investment styles and performance metrics.
- Through trade replication technology, copy the trades placed by the trade expert.
HIGH-RETURN POTENTIAL COMMANDS HIGH MANAGEMENT FEES
This type of model is gaining strong traction because of the potential for above-average returns and easy-to-implement turn-key solutions.
During an exclusive interview with Currensee’s CEO for this report, Aite Group learned that the firm’s Trade Leaders Program achieved a remarkable 70% client profitability for 2011. Although someone can open a copy trading account with US$5,000, a higher amount (US$38,000) would give exposure to all Currensee trade leaders and potentially achieve the type of quarterly returns seen on Figure 9. Ultimately, copy trading controls reside with the investor and he/she could conceivably make suboptimal choices of how to use copy trading.
ASSET-GATHERING FORCE
In theory, any bank or brokerage firm with a pool of consistently profitable traders could leverage such pool into a successful copy-trading program. In practice, copy trading requires considerable expertise and development time. The crux of the matter is to be able to cultivate a core group of trading talent and to set up the proper rules that will govern the program so that it benefits a wide retail audience. As a result, we anticipate that the majority of institutional players that start to adopt copy trading will do so in partnership with specialists. A copy-trading solution can be a powerful way to attract assets and gain a deeper share of the investor wallet.
But are U.S. investors ready to adopt this concept? If so, which groups of investors or traders are most ready. These are some of the questions our evolving coverage of copy trading are answering. Aite Group asked a group of traders, investors, and future traders their appetite for a service like copy trading. The survey question read as follows:
A new investment method available today allows people who are too busy or lack the desire to learn to trade to simply copy the trades of successful and dedicated traders. If copy trading offered a potential return of more than 10% per year, using the trading skill of others, and let you (the investor) keep total control of the trading account, how likely would you be to try this service with a minimum investment of US$5,000?
The level of intention to adopt it was much higher than we anticipated, and details are covered in the reports referenced at the bottom of this article.
The copy-trading model in 2012 has the necessary elements to help banks and retail brokerage firms to better gather assets and compete with online brokerage firms. It also stands to give an edge to small and medium financial advisory firms that have been looking for a way to differentiate their offerings.
RELATED READING
For more in depth information on this subject, Aite Group subscribers and qualified members of the press have access to the following:
See Aite Group’s report, Top10 Trends in Wealth Management, 2012, January 2012.
1 comment:
Three Pillars of the Wealth Management Business sounds like an empire to me. Ed Butowsky Wealth Management
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