Asset Class Diversification for Brokerages – Why is it Important?
Articles
Launching a brokerage firm from scratch is one of the most challenging aspects of owning a financial business. You need to consider various legal, economic, technological and managerial factors that will determine your success.
You can select a single asset class or a niche brokerage service to excel at it or expand your offerings with a combination of trading securities and assets. Asset class diversification has become more attainable thanks to technological introduction and facilitated market access.
Professionals believe a multi-asset trading system is better for increasing your chances of success and establishing a solid brand name. Let’s explain how an asset diversification strategy works and what makes it crucial for launching your business.
Key Takeaways
- Multi-asset trading platforms offer investment opportunities across various markets rather than focusing on a single asset class.
- Asset-class diversification enables brokerage firms to attract more traders and institutional investors to boost their revenues.
- Offering multi-asset investment opportunities requires diversified trading solutions, payment methods and risk management.
Creating a Multi-Asset Brokerage Firm
Multi-asset brokers offer financial services that allow traders to invest in more than one security using the same platform. As such, they do not only offer Forex trading or cryptocurrencies. Instead, they offer investing opportunities in crypto/fiat currencies, stocks, commodities, ETFs, equities, NDFs and more.
Asset class diversification is highly demanded by traders of all levels, including new entrants who want to find their most suitable investment and institutional investors who prefer multi-asset class trading to expand their portfolios.
Sticking to a single asset class might seem easier to launch, but multi-asset brokers have higher chances of converting successful traders. However, it comes with various challenges.
Acquiring a multi-asset liquidity source is the first step in managing a diversified brokerage firm. You need to look for a reliable multi-asset liquidity provider that offers a consistent stream and broad order books at fast execution times to ensure the proper functioning of your platform. Otherwise, slippage might happen, trading fees may fluctuate, and your investors will leave your platform.
Why is Asset Class Diversification Important?
Financial markets are highly dynamic, and an asset class that is trending and profitable today might not perform as well within a couple of weeks.
If you offer a limited selection of securities or a single-asset brokerage service, traders will switch between platforms to pursue financial gain where profitable assets or strategies are available.
Therefore, serving these changing needs and offering asset class diversification increases your brokerage customer retention because traders can find their preferred assets or investing strategies on your website.
This approach instils stability, allowing your business to resist seasonality or market fluctuations if, for example, cryptocurrencies become more in demand than stocks or gold becomes more profitable than foreign currencies.
Benefits of Multi-Asset Class Diversification
Thanks to simplified access to industry news and trading strategies, investors have become more knowledgeable of financial markets and asset classes, which encourages them to pursue gains in various assets, strategies and investing tactics.
Working as a multi-asset broker allows you to get the following benefits.
Better Risk Management
Launching a broad range of investment options and strategies makes your business more resilient to market changes. For example, if the crypto market is going bullish and you offer multi-asset class trading, investors will swiftly switch to other profitable options available.
In fact, when one market is declining, another asset class is most likely to grow as traders switch to better options without leaving your platform and affecting your revenue stream.
Moreover, when you build a strong user base across all available securities, your platform’s liquidity increases and your business becomes less affected by short-term market changes.
Broader Reach
The financial world has become more available, and more investors are making their way to trading, utilising various strategies like copy trading, which enables them to automate their investments with minimum effort.
Additionally, proprietary trading is common among institutional investors, who look to invest using larger capital and advanced technologies.
Offering these functionalities across various asset classes and an expansive assets list expands your reach to new markets and attracts more investors to your platform.
However, you must consider the licensing requirements of expanding to new markets and jurisdictions, which can further boost your growth and reach.
Expanded Revenue Stream
Creating a large user base and offering asset-class diversification strategies increases your business profitability. Classically, brokers charge fees for trading and other financial services; hence, the more active users you have on your platform, the higher your revenues are and the more diverse they become.
Improved Brand Recognition
Your business is more likely to be recognised by institutional investors and professional traders when you offer a wide range of tradeable assets. These market participants can spread your brand’s name, which suits your marketing strategies.
Additionally, integrating more markets, instruments, and liquidity sources into your platform requires comprehensive regulatory compliance, which boosts customer confidence and improves your brand recognition.
Single-Asset vs Multi-Asset Trading Platform
Focusing on a single asset class gives limited opportunities for traders. Some investors may prefer investing in a specific instrument or market because they have deep understanding of how these assets fluctuate and how to apply the best trading techniques in that particular market.
However, this focused approach does not offer various hedging possibilities against unpredictable price movements. Additionally, if investors want to capitalise on emerging trends, they will have to sign up with a broker, adjust to new systems, and bear other overhead costs.
On the other hand, asset class diversification enables hedging and netting, exploring new trends, capitalising on growing market opportunities and more.
Diversified markets come with different strategies and trading systems, such as algorithmic trading, copy trading, PAMM accounts and other investing techniques that attract more investors to your platform.
Asset Diversification Strategy for Brokers – Step-by-step
Launching a multi-asset trading platform requires careful planning and analysis to understand what instruments and features are in demand and how to build a solid base for asset class diversification. Here’s what you must consider for your business.
Technology Stack
Acquiring an advanced technological infrastructure for your brokerage platform enables you to serve a more extensive customer base with ultra-fast execution time and rapid market updates.
You can start by using a white label brokerage solution that equips you with all tools and features that your traders require. This includes having an advanced back-office management CRM, algorithmic trading capabilities and interactive customer support that offers quick support.
Copy trading is rising in popularity among beginners who want to follow the steps of successful investors, while seasoned traders use this system as master accounts to explore new revenue streams.
Solution Diversification
You can increase your platform’s functionality by integrating various solutions that improve your customer’s trading experience and improves their engagement with your software.
For example, you can offer prop trading and set challenges for professional investors to join your platform and compete for awards while earning your cut from each successful trading session.
In 2020, proprietary trading was estimated to be worth $6.7 billion, and it is expected to grow at a 4.2% CAGR until 2028.
Mobile and Web Cross-Functionality
Ensuring seamless compatibility between your multi-asset’s web and mobile versions is crucial to improving user convenience and uninterrupted trading opportunities.
In fact, more than 55% of global trading markets’ revenue in 2022 came from mobile trading applications. This trend is expected to grow in the coming years, making mobile trading indispensable for your success.
Payment Gateway Integration
Traders use various payment methods to deposit money and start exploring trading markets. Traditional users are more likely to use credit/debit cards and direct bank transfers. However, crypto payments and digital wallets are becoming increasingly popular due to their fast and reliable transaction models.
Conclusion
Not putting all your eggs in one basket is a famous saying that completely suits asset class diversification, especially for brokers who earn from investors’ trading activities.
Diversifying your financial services enables you to reach more markets, land more investors and improve your revenue streams. However, you must offer services that traders demand, such as interactive platform interfaces, advanced trading techniques, and multiple payment options.
Seeking answers or advice?
Share your queries in the form for personalized assistance
