MiFID and China Are Upending CLSA's Old-School Broking Model

(Bloomberg) -- Jonathan Slone, chief executive officer of CLSA Ltd., is the first to admit that overhauling his firm’s 30-year-old business model won’t be easy.

But he doesn’t really have a choice.

CLSA’s institutional stock brokerage, the firm’s mainstay since its founding in Hong Kong in 1986, is getting squeezed by technological and regulatory changes sweeping through the global securities industry. To weather the downturn, Slone is expanding into asset management, retail broking and investment banking -- moves that could dramatically reshape a firm that’s done more than almost any other to connect Asia’s stock markets with the wider world.

“We’re changing the engine in the car while the car is going on the highway at 70 miles per hour,” Slone, 55, said in an interview detailing his plans for the business, which was acquired by China’s Citic Securities Co. in 2013.

MiFID and China Are Upending CLSA's Old-School Broking Model

CLSA’s push to diversify shows that Asian brokerages aren’t immune to the relentless decline in equity trading commissions fueled by cheap electronic execution and dwindling market volatility. Downward pressure on fees is likely to intensify next year as Europe’s new regulatory regime, known as MiFID II, encourages the industry to compete more fiercely for execution and research clients around the world.

“There’s no doubt MiFID is giving us a big kick in the ass and forcing us to rethink what was a very simple, old broking model,” Slone said.

CLSA, whose no-holds-barred research and star-studded investment conferences have lured generations of money managers to Asia’s markets, jumpstarted its transformation in May after merging with the international unit of Citic Securities.

The combined entity gets about half of its revenue from executing trades on behalf of institutional investors, down from 85 percent at CLSA before the integration. That contribution may fall to as low as 30 percent in two years, Slone said.

Revenue from asset management will probably climb to 20 percent of the total, from 15 percent now and 6 percent before the merger. The firm has entered talks to acquire a real estate investment boutique and has started preliminary discussions with several asset management companies in Europe, Slone said, declining to disclose names. CLSA, which already runs real estate and private equity funds, will focus its expansion on alternative asset management, he said.

The retail brokerage, which CLSA absorbed from Citic’s international unit, may grow to 10 percent of revenue from 6 percent currently, Slone said, adding that he’s looking to acquire a Hong Kong-based retail competitor. Citic Securities shares slipped 0.2 percent at 9:48 a.m. in Hong Kong.

Slone declined to provide more detailed figures on CLSA’s earnings or the firm’s plans for pricing research under the new MiFID rules. (See the chart below for more details on CLSA’s changing revenue mix.)

MiFID and China Are Upending CLSA's Old-School Broking Model

While the importance of CLSA’s institutional equity business is poised to shrink, that doesn’t mean Slone is letting it languish. The firm says it has gained market share in India and rolled out a new China equity platform in May that helped spur a fivefold year-on-year increase in broking revenue in that market. Client activity in China is poised to increase even further after the country’s shares enter MSCI Inc.’s global indexes next year.

Still, the glory days of trading stocks for big money managers aren’t coming back, according to Paul Schulte, chairman of Hong Kong-based Schulte Research, an independent research firm that focuses on the financial industry.

The combined Asia Pacific cash equity revenue at major securities firms slumped about 27 percent from 2015 to 2016 and continued its decline in the first half of this year, according to data compiled by Coalition, a financial services research firm.

Last September, CLSA asked more than 1,500 workers globally to take as many as 10 days of unpaid leave. The firm shut its U.S. equity-research operation in February.

It makes sense for CLSA to reduce its reliance on institutional broking, but success in areas like asset management isn’t guaranteed, said Roy C. Smith, emeritus professor of management practice at New York University’s Stern School of Business. “Whether they can pull this off depends on the firm’s ability to execute a major business and cultural transformation,” he said.

CLSA’s combination with Citic’s international unit, which brought together two different corporate cultures, has added another layer of complexity to the challenge. More than 90 employees departed between May and August, while about 50 new staff have joined.

Some of the people who left were frustrated by the process of integrating the two businesses, Slone said. Yet he insists the firm is now on a stronger footing.

“We’re still not where we need to be in certain parts of our business,” he said. “But we’re getting there.”

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