To our shareholders and customers:
During the three years since the inauguration of the Abe Cabinet, the Nikkei 225 has approximately doubled. Given that the Nikkei 225 had remained at around ¥10,000 previously under the regime of the Democratic Party of Japan (DPJ), I believe that the Abenomics has been significantly successful in terms of the contribution to the stock price appreciation. Naturally, the market reflects the politics in its value. However, the Abenomics seems to have faded. The new “three arrows” recently announced by the Abe Administration can be interpreted as a message that the administration no longer has effective political measures.
By the way, the term “Fintech” has been recently spotlighted. However, it just means a use of information technology in the financial field. In this sense, the typical example should be regarded as online stock trading business that was commenced by our company in the late 1990s just before the introduction of the Japanese Big Bang initiatives. The development of Fintech could surely lead to innovation to disrupt traditional financial businesses that provide financial services through a large number of personnel. It is evidenced by the fact that stock trading volume via online brokers now accounts for not less than 80% of the total transaction volumes of retail investors. In the future, the impact of Fintech is likely to penetrate, not only in stock brokerage business but also in asset business.
There are forecasts that Artificial Intelligence (AI) and robots will replace nearly a half of the work currently being done by human beings in Japan in the near future. Since the financial industry has a high affinity for IT, as compared to other service industries, the replacement ratio could be much higher than the average. However, irrespective of the degree of evolution of AI, we cannot replace services that require the sensitivity involved in the subtleties of human nature. Accordingly, it is essential to clarify a boundary between human intelligence and AI.
In order to explore the solution of this issue, it is necessary to carry out the restructuring of the business. One of the key points is “to restructure the organization.” We will not be able to forever obtain any optimal solution as long as we stick to maintain the bloated organization. The reconstruction of organizational structure would be the most troublesome problem for large companies doing business in the financial industry to make effective application of Fintech. This was the greatest reason why major securities brokers in Japan were hesitant to introduce the online stock trading.
The other point is “to restructure the operations.” Upon deregulation of stock brokerage commissions in 1999, our company broke down the conventional functions of stock brokerage operations into three parts: “Execution,” “Market information service” and “Consulting”. Then, we gave up the Consulting function formerly provided by sales representatives. Instead, we decided to provide solely the remaining two functions by utilizing the technology of the Internet in order to lower the stock brokerage commission significantly. Then, as you know, many retail investors have come to select online stock trading.
More than ten years have passed since the online securities business was launched in Japan. Now is the time I feel it is necessary to develop a new business model, in considerations of the latest trends, including a large number of newcomers resulting from the popularization of online broker business model as well as fierce price competition. In order to address the rapidly falling profitability due to the excessive competition of the stock brokerage business, our peers have entered into mutual funds business to seek new revenue sources.
I was hesitant to participate in any kind of mutual funds business based on my strong belief. Specifically, mutual funds business in Japan has not been structurally in favor of retail customers due to the expensive costs that have been driven under the initiative of distributors. This is because asset management firms operating in Japan have not been virtually independent from distributors. I tried to make a breakthrough to overcome to the structural obstacle. However, I had a bad experience that ended in complete failure. Since then, I have been waiting for an appropriate timing to participate in mutual funds business without pursuing immediate profits by just distributing mutual funds.
Nowadays, a new structure called “wrap account” has become a hot topic. Wrap is a structure to delegate the management of assets, in a comprehensive manner to securities brokers and banks. The management fees are predetermined according to the outstanding assets under management. It has been an issue for some time that distributors are engaged in "churning" mutual funds - the practice of trying to earn sales commission by encouraging customers to switch to new products. In response to the strong guidance conducted by the FSA to limit "churning" mutual funds, distributors are changing their business policy to focus on boosting assets under custody. One of the instruments used for that purpose is a wrap account. However, since distributors are required to give up sales commissions that have been collected every time they sell mutual funds and to obtain only custodian fees on the basis of the outstanding assets under management, they need to have a certain device to offset a reduction in revenues. In the case of “fund wrap” which invested assets are mutual funds, distributors newly charge from customers fund wrap management fees equal to around 1.5% per annum for the outstanding assets under management in addition to custodian fees for the mutual funds itself. I believe this is exactly the device.
Through fund wrap services, sales representatives bring proposals on model portfolios in combination with several mutual funds. However, the operations for constructing model portfolios are automated with the aid of Robo Advisor. If we secure a scheme in which customers can utilize Robo Advisor by themselves, we will be eventually able to significantly reduce fund wrap management fees through offering greater flexibility to customers as well as eliminating sales representatives. If they want to demonstrate that services provided by sales representatives are superior to those provided by Robo Advisor in spite of the higher costs, I believe it necessary to disclose to customers information exactly on how much impacts the commissions have on the investment performance in a more comprehensive manner. This is because the validity of costs cannot be convincing without disclosure of specific numerical values.
Every retail investor knows that it is the most effective investment approach to construct a portfolio at a lower cost, without being biased from sales representatives on investment decisions. The recent evolution of technology as well as the emergence of low cost mutual funds could provide us supports to realize the optimal investment approach. I feel confident that now is the time for our company to commence dealing with mutual funds. During this year, leveraging the information technology, we are going to launch “asset management services” at significantly lower costs as compared to fund wraps offered by major securities brokers. This is similar to our ideas in stock trading where we have been successful in reducing brokerage commissions drastically through eliminating consulting services by sales representative and specializing in execution and information services allowing customers to use trading tools by themselves.
I strongly believe that certain companies, which maintain flexible organization and have the strategies going against practices and traditions, are able to adapt to the changing times and to survive. Our belief is solely “to create innovation and flexibly adapt to the changing times.” In the past more than 25 years up to now, I have run our company, keeping in mind what we should be with the aim of fulfilling our belief. After two years, in 2018, Matsui Securities Co., Ltd. will mark the 100th anniversary. I believe that this year we should prepare for strategic initiatives towards the next 100 years.
Your continued support is greatly appreciated.
President & CEO
Matsui Securities Co.,Ltd.