Why a Brokerage Needs to Diversify Asset Class Offering

Running a brokerage with a multi-asset business model is challenging. You need multiple licenses, a multi-asset trading platform or several of them to accommodate all asset classes, broader or more knowledgeable dealing and marketing teams, and a designated legal person to follow all regulatory changes and recommend how to act on them.

This sounds like too much hassle, but we’ll explain why you should consider expanding your brokerage offering with new asset classes.

What diversification means for brokerages

Diversification is a strategy in which a brokerage expands a particular area of its business. It can involve adding new asset classes, trading platforms, or a whole new branch like prop trading. Diversifying can be challenging, but it remains one of the most effective ways to achieve stability and long-term growth.

Benefits of diversification of asset class offering

Going multi-asset falls into the category of concentric diversification. This strategy involves adding related products or services that align with the brokerage’s core business, which can be an essential step in business development. By strategically adding related products or services, the brokerage can increase its revenue streams, attract new clients, and improve client retention rates.

A brokerage can implement this strategy in several ways. For example, a CFD brokerage may decide to add spread betting to its product range, which can help it cater to clients in regions where this activity is tax-free. Similarly, a stock or CFD brokerage may decide to offer cryptocurrencies to attract young investors interested in this emerging asset class.

A stock brokerage may also offer fractional shares or derivatives like options and futures. Fractional shares make investing more affordable, while derivatives enable investors to diversify their portfolios and manage risk more effectively.

Risk management

A broker with a diverse asset class offering can hedge clients’ positions in various markets. For example, a broker might hedge clients’ spread bet positions in the CFD market. This can significantly improve risk management and ensure the safety of brokerage revenue.

This might seem like a surprising benefit, but multi-asset brokerages are also safe because they have diverse income streams. Even if authorities tighten regulations or another crypto winter comes, you’ll divert efforts to other asset classes and won’t lose an entire business.

Expanded audience

Adding new asset classes will bring a fresh audience with varying interests. Cryptocurrencies, for instance, will likely attract younger clientele keen on exploring new investment avenues. On the other hand, fractional shares are poised to make investing more affordable for everyone, regardless of their financial status.

If you want to expand your investment portfolio and give your clients more options, consider offering them the chance to trade US-listed stocks and options directly or as a CFD derivative, even if they’re based outside the US. This will enable your clients to diversify their investments and achieve better returns.

Broader brand recognition

By attracting new customers and expanding your audience, you’ll increase the brokerage’s brand exposure. Offering diverse investment options can also help differentiate your brokerage from competitors in the market. This can help build your brand reputation as a reliable and trustworthy brokerage that caters to a wide range of investors. Expanding into new markets and regions further increases your brand recognition and establishes a stronger presence in the industry.

Diversification risks and challenges

Often, adding new asset classes means obtaining relevant licenses to ensure your brokerage is eligible to offer them and target clients in certain regions. This involves making sure your brokerage is compliant with regulations, paying fees, and increasing deposits in banks to ensure you can offer decent leverage. In a nutshell, you’ll need to spend a substantial amount on diversification. So before going multi-asset, please assess risks and compare them with the positive outcomes you expect from the expansion.

Conclusion

So, there you have it. Diversifying your brokerage’s asset class offering might seem daunting, but it can have numerous benefits. From risk management to expanding your audience and brand recognition, going multi-asset is a natural step to achieving stability and long-term growth.

Of course, diversification comes with its risks and challenges. Still, if you’re up for the challenge, explore new investment avenues. Who knows, you might even become the next big thing in the industry!