CITIC SEC: Fund investment advisory service is expected to become a new growth engine for brokerage wealth management business.

CITIC SEC released a research report stating that in the long term, fund investment advisory services are expected to become a new growth engine for securities firms' wealth management businesses. Their income is more resilient, weakening dependence on trading volume. Looking ahead, the scale of wealth brokerage income is expected to reach around 110 billion yuan, with net income from investment advisory services expected to approach 60 billion yuan, becoming one of the pillars of wealth management business. Currently, the PB valuation of A-share brokerage sector is around 1.5 times, at the 40th percentile since 2016; the PB valuation of H-share brokerage sector is around 0.9 times, at the 70th percentile since 2016. With high activity in the secondary market and significant recovery in the primary market, the capital market is showing good profitability, and wealth management business is expected to take over agency business and enter an upward trend. The third quarter and full-year performance of the securities industry have strong growth certainty, and it is recommended to invest. Key points from CITIC SEC: Current situation: Scale expansion is expected to break through bottleneck, with investors having relatively good experience. 1) Development scale: Since the pilot started in 2019, 60 institutions have been included (mainly securities companies, fund companies and their subsidiaries, with 3 banks including ICBC/CMBC/Ping An and major third-party platforms participating); the scale and client base continue to grow, but the growth will slow down significantly in 2022-2023, showing effective recovery in 2025H1. 2) Investor experience: The "experience" of fund investment advisory service users in the past year and past three years is significantly better than direct investment in single products. Data from various channels show that users of fund investment advisory services perform better in terms of profitability compared to single fund investors, with penetration rate increasing. However, pain points such as sensitivity to fees and drawdown management still need to be optimized. Overseas market: The US investment advisory industry has maintained long-term growth, building a second growth curve for brokerage business. Since 2009, the number of brokerage firms has decreased, and competition in brokerage commission rates has intensified. Total revenue in the securities industry has significantly rebounded since 2020, but the cost-to-income ratio has been maintained at a high level in the long term. Brokerage business urgently needs to find potential transformation directions, with investment advisory services becoming a core choice. Regarding investment advisory services: 1) Continuous expansion of business volume and income: From 2015 to 2024, the investment advisory revenue from establishing "fee-based advisory relationships" grew from $150 billion to $260 billion, with a compound annual growth rate of 6.4%, being a major drive for the growth of the US wealth management industry. 2) Rapid growth of retail clients and international business: Retail (ordinary and high-net-worth) client numbers and AUM growth rates are leading, with most institutions conducting international operations, with overseas client AUM generally accounting for over 20%; 3) Relatively stable service and billing: AUM billing is the main method used along with fixed/hourly/performance-based compensation, and penetration of value-added services such as financial planning and retirement consultancy is increasing; 4) Asset allocation capabilities evident: Account asset allocation is increasingly diversified, with stocks, bonds, and funds being used, and medium and large advisors having a higher proportion of derivative use; 5) Excess returns fully validated: Vanguard's "Advisor's Alpha" study shows that qualified advisors can provide clients with a potential annual net return enhancement of approximately 3% through rebalancing, behavioral coaching, and tax/withdrawal optimization. Domestic observations: Policy-demand-supply multidimensional drive for development of fund investment advisory services: 1) Policy: Regulatory agencies will soon introduce the "Administrative Measures for Securities Fund Investment Advisory Services" and the "Regulations on Public Offering of Securities Investment Fund Investment Advisory Services" by 2025; comprehensive implementation of personal pension schemes, reform of public offering fees, "1+6" policy for the Sci-Tech Innovation Board, "Cross-border Wealth Management Connect 2.0", and new QFII regulations jointly expand the scenarios for fund investment advisory services while reducing costs. 2) Demand side: Residents' assets are continuously rebalancing from housing and deposits to diversified financial assets, with adjustments in housing prices and declining deposit interest rates increasing demand for residents' wealth allocation; deepening of aging society stimulates demand for third-pillar pension services, with a pressing need for account-level experience optimization. 3) Supply side: Trading commission rates have dropped to around 1.8 bps, and public offering sub-account commission rates have fallen below 4bps, with passive equity fund assets surpassing active ones. Brokerage business is becoming more channelized and homogenized, facing bottlenecks in wealth transformation. At the same time, various financial institutions are deploying large-scale AI models, which are expected to systematically enhance the overall strength of financial institutions in the long term. In summary, under the triple resonance of policy-demand-supply, focusing on the core business model of "client decision-making + account management", fund investment advisory services are expected to become a new growth engine for securities firms. After the trough of the fund investment advisory industry in 2022-2023, there is a noticeable improvement in the popularity of fund investment advisory services. Since "924", sentiment in the secondary market and profitability have recovered, public offering fee reform significantly reduces operating costs, and initiatives such as the "Action Plan for Promoting High-Quality Development of Public Funds", the Sci-Tech Innovation Board's "1+6" policy, and the "Optimization Plan for the Qualified Foreign Investor System" further expand the investment range and signal regulatory support for investment advisory services, jointly driving the recovery growth of the business. At the same time, the deployment and application of large AI models are expected to be an important driver for business iteration. Under the segmented business framework, securities firms with full-chain capabilities and synergies in "investment research and asset allocation - account management execution - channel reach" are expected to be the main beneficiaries of this round of development waves. Risks: Unexpected downturn in the secondary market; Unexpected rise in market interest rates; Unexpected changes in regulatory policies; Capital market reform falling short of expectations.