The end of cheap online brokers?

New government rules could result in the demise of cheap online brokers

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published November 27, 2012 4:50 pm AEDT

Retail investors could see many smaller online brokers disappear, if the government implements new rules for brokers.

Some of Australia's major banks also look likely to lose lucrative revenues, after the government outlined plans to restrict brokers receiving commissions on margin lending, and new rules for 'indirect' brokers. Indirect brokers are those that aren't members of the ASX.

According to the Australian Financial Review (AFR), the government is considering total bans on individual brokers receiving commissions from retail share trades funded through margin loans. Such a move is likely to hit the big margin lenders like Commonwealth Bank of Australia (ASX: CBA) and Bendigo and Adelaide Bank (ASX: BEN).

Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corporation (ASX: WBC) are also in the firing line, as the government looks to force brokers who are not members of the ASX, to a 'fee for service' model, such as the one being introduced for financial planners. These brokers are generally known as indirect brokers.

ANZ's E*Trade business is a major provider of back office services to a host of indirect brokers, and will suffer from any new restrictions imposed on those brokers. Westpac will also suffer as it is an indirect broker.

Individual brokers who work for firms that are members of the ASX, and subject to market integrity rules, will be free to earn commissions. Full service brokers had been pushing for stricter rules on indirect brokers, who have been able to charge lower fees and steal market share.

It could mean the end of some of the smaller indirect brokers, according to Jamie Coote, head of the Australian Securities Dealers Association, and the end of low brokerage fees for retail investors. As an example, BellDirect charges $15 brokerage for most trades compared to up to double that for CommSec. Full service brokers charge even higher rates.

The Foolish bottom line

These new rules seem to be a backward step, with retailer shareholders the main losers. We'll have to wait and see if the plans actually get implemented now.

In the market for high yielding ASX shares? Get three "Rock-Solid Dividend Stocks" in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.