It was only a matter of time before it happened, some thoughts on what we'll see next.
When Robinhood launched its app in January of 2015, offering commission free trading to the masses, it was a shot across the bow to the brokerage industry....free trading is here. Somewhere in the backdrop big brokerage was thinking "errrrrr, it's an app targeting millennials and millennials don't buy stocks and are broke." Ok, boomer.
Within 3 years, Robinhood had 3 millions accounts (at the time, as many as E*Trade). So....I guess you could say Robinhood is kind of a big deal. Fast forward to Sept. 26th of 2019, Interactive Brokers, who was already only charging $1/trade, was the first to jump on the Robinhood bandwagon and go to zero. The bloodbath that followed with the shares of TD Ameritrade, E*Trade, and Charles Schwab was not unexpected. Of course, they all then followed suit and here we are.
In the aftermath, Schwab decided to acquire TD Ameritrade who, arguably, was going to be most affected by the cut. The race to the bottom complete, two brokerage giants merging.....what happens next? Here are a few things to consider given the landscape in the brokerage industry.
The Behemoth and leaving RIA's in the Lurch? - The battle for custodians in the RIA space just got a lot smaller. Cerulli Associates estimates that after the TD/Schwab....or Thwab union is consummated, it will custody assets for 51% of the RIA market. Sounds a little Googlesque no? This is madness. I have no doubt It was a huge consideration as Schwab was deciding whether or not to put a ring on TD, however it seems like it has Antitrust written all over it.....coming from a nonlawyer guy on the outside. This has led to a fear that a consolidated landscape will leave the little guy in the lurch and rightfully so, it significantly decreases competition for custody services. Schwab currently has around 7,500 RIA’s on board, with TD at 7,000. While there is some overlap, you can rest assured that this means A LOT of new firms into Schwab’s network. It also means competitors such as Fidelity are going to go after these RIA’s hard and FAST. With the custody market in disruption, other competitors such as Pershing and smaller firms like E*Trade and Apex will benefit. The transition from TD to Schwab may be highly onerous and nobody seems to know what that will look like yet. E*Trade has already put a massive push into marketing to these RIA’s. Like the markets themselves, advisors don’t like uncertainty. And one thing they can do to create more certainty is to go elsewhere. With the merger expected to take anywhere from 18-36 months, you will see many firms decide to make the switch. It feels this slow digestion will bring a lot of changes to the landscape. Be interesting to see how it all shakes out.
More Consolidation - Schwab’s acquisition of TD is a legit, big boy move further taking aim at Fidelity, Vanguard, and others, which shows how serious the acquisition war is. Once complete, and with USAA’s brokerage assets, the firm will have around $5.35 Trillion in total customer assets, rivaling Vanguard at $5.6 Trillion. The three-and-a-half headed beast of Fidelity, Schwab, Vanguard, and E*Trade will continue to making moves attempting to assert dominance in the industry. I see the RIA industry continuing to consolidate itself as bigger firms continue to scale their businesses adding other independents both large and small. There is also a large appetite for smaller firms, especially ones that are millennial focused as the belief is while they’re small today, they will be the bigger firms of tomorrow.
E*Trade has been the target of buyout rumors for over a decade now, they still seem ripe for the picking in the retail discount brokerage space. However with a paltry $346 Billion in total customer assets, the target on their back may be growing. While there is no overt for sale sign, a larger firm or even a bank looking to break into retail could easily take on E*Trade. We will most likely see large firms acquire RIA's and/or merge, (see Goldman Sachs/United Capital, and Edelman/Financial Engines), in a further validation of the RIA space. Banks and Credit Unions, who can't seem to unload their wealth management units fast enough, will continue to look for deals to merge with other firms or scoop up assets....if they stay in the wealth management space at all.
Assets are an even BIGGER deal - While many firms derived significant revenue from trading costs, the average client is not an active trader. A typical client wasn’t going to leave over a couple bucks here or there on a stock trade. Most of them want their statements regularly, have an easy to use interface, and know they can get a hold of someone when they need to. With trading revenue all but gone, what matters most? A$$ets. Many of the firms that led the race to the bottom are going after new money and HARD. Gone are the days where free trades would get you in, firms are offering big money. I've heard of examples of up to 20k given to HNW clients transferring accounts over. 20k is some serious cash. Firms are taking it on the chin to get assets in, and why wouldn’t they? The more assets you have, the more at-bats you’ll get turning those into something that will generate revenue….revenue that was lost in the race to the bottom perhaps? Managed accounts, insurance, fixed income, ETF’s, cash balance spreads, margin, something that will generate revenue for the firm. Firms will continue to drive acquisition of assets at a breakneck pace and shell out hefty sums to do so.
Retail Won the Day - This move was a clear one by Schwab of their intent to focus on the retail business and also increase their footprint in the independent space. While LPL is the largest independent broker-dealer, the combination of Fidelity, Schwab, and TD is a monster and the competition is fierce. While the majority of the independent firms on these platforms are building their businesses on their own, many of them are also part of a referral network at the custodians. These RIA firms will continue to play a role in the overall offerings, however there will be a heavier focus on keeping those assets on the retail side since this is ultimately more lucrative for the Fidelity's and Schwabs of the world. One thing that TD has lacked at least to some degree is a robust comprehensive guidance and planning offering, which Schwab does have. These firms will continue to bolster their internal offerings, placing a premium on the planning and guidance they provide internally.
Further Cost Cutting? Fee compression won't go away now that commissions are zero, so what gets cut next? Many in the industry believe there will be further fee erosion on advisory fees. Large firms, particularly in the wirehouse space, have seen this coming for some time and have been transitioning their advisors to less commissionable investments and into more fee-based assets. While cost clearly isn’t the only reason people do business with a firm, it doesn’t hurt to pay less (see Vanguard) and we will continue to see management fees fall, similar to what has happened in mutual funds with ETF's and index offerings. In my opinion, firms will continue to get creative in their beta testing including: utilizing subscription type models, a la carte offerings, something app-based or even a ‘free’ model that offers advice for inconspicuously placed ads on your web page or mobile device….who knows what it will look like. Every industry has been Netflixed, maybe someone can figure out a way to "Netflix" financial advice. Seems like that could go south quickly.
Price for Advice - Advice will continue to be a big differentiator. This is one of the main reasons the robots haven't taken us over. That and the robot version of Wolf of Wall Street sounds terrible, maybe Scorcese can direct it. What is the value for advice? Well, that's a loaded question, but there’s a lot that goes into it, the research, the trade execution, the financial planning, tying people into their long-term charitable giving and trust and estate planning and working with their accountants — it really is a lot. And being wrong on this, and the tax implications of being wrong absolutely overwhelms a few basis points on the fees. There are some things a robot simply cannot do, and this will continue to be true until robots start to have emotions and can put together complex tax and estate planning strategies. There is too much to leave to chance, which means, at least for the foreseeable future, the advice advisors provide will still be a big deal. This means having excellent advisors giving high quality advice, in my view, is THE winning strategy.
In the end, it's all about relationships - It goes without saying that the relationships clients have with their firms will be critical. Ever since the meltdown of 2008/9 and even before then, clients have pined for some kind of relationship. It doesn't always have to be the 1:1 full-service kind, this isn't dating, there are a lot of ways to capitalize on relationships. Firms that prioritize relationship development with a team of easy-going, personable, talented advisors and support staff, will continue to win market share. Customers want to feel that they are valued, especially if they are paying a fee. It goes without saying that people gravitate to where they feel valued and/or find value. Everyone’s perception of value is different, and capitalizing on these different levels at scale, will ultimately be the key to maintaining and growing relationships.
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