As investment industry giants adopt commission-free trading, low-cost investing startups will be pressured to widen their offerings or face extinction.
Some of the largest fintechs providers, like Robinhood and Acorns, grew in popularity on the premise of offering trading and wealth management services for free.
These fintechs now face a similar predicament to that of independent robo advisors, like Betterment and Wealthfront. These firms were built to disrupt traditional wealth management with bargain basement prices — only to see incumbents match similar technology to the same price points.
Even before incumbents like Schwab and TD Ameritrade entered into commission-free trading, a number of trading and lending apps tacked on a buffet of financial services, like credit, debit and retirement products.
But have the incumbents effectively disrupted the disruptors?
“There’s a lot of soul searching going on,” says Josh Rowe-Huepler, general manager of investing at MagnifyMoney. “Folks certainly have less incentive to move their money. The startups are going to have to figure out how to add more value than just free trades.”
Top fintechs will likely need to find new growth trajectories, experts say.
Robinhood launched a new
“We’ve certainly seen the rise of customer-centric fintech companies push the industry in a more client-friendly direction, part of that is lower fees,” says Adam Grealish, director of investing at Betterment. The winners could be fintechs that best leverage technology to achieve lower operating costs — and pass those savings onto customers.
“It’s forced incumbents to follow suit,” Grealish says.
The cash product is
However, the hiccup didn’t stop
It's the latest move in the race to offer products at the lowest possible prices.
The micro-investing app Acorns has continually diversified its offerings into a suite of services, like checking and debit cards, as well. Acorns now has over 6.2 million accounts and $1.7 billion in AUM, and its robo-generated “smart portfolios” cost as little as $1 a month, according to the firm.
“The changes taking place across the brokerage industry reflect a focus on the customer that‘s been inherent to Robinhood since the beginning,” says firm spokesman Jack Randall. “We remain focused on offering intuitively designed products that reduce barriers to our financial system, including account minimums and commission fees.”
Robinhood clearly gained the most traction with commission-free trading, experts say. They also may have the most to lose.
“Robinhood has had so much success with acquiring clients. They’re ahead of the game here,” says Eric Sandrib, an analyst with Aite Group, pointing to the ease and simplicity of the firm's onboarding process. Robinhood has over six million brokerage accounts, as of last year, according to the spokesman. The average client age is 32.
While Robinhood may have the scale necessary to withstand a new onslaught of incumbents offering zero-commission trades, smaller players may not be as lucky, experts say.
The mutual fund giant’s automated advice plan could price independents out of the market — and commoditize advice even further.
The change to no-commission pricing created a credit negative for the retail brokerage industry, according to a Fitch Ratings report. Brokerages may be pressured to emphasize other sources of revenue and will likely
“When growth rates go down, consolidation usually comes after,” says Robb Baldwin, CEO of the custody and clearing firm TradePMR. “When scale starts to matter, the smaller players will need to team up with competitors to get themselves in a position to have sustained growth.”
One way discount brokerages could make up for lost revenue is by pushing clients into their managed portfolios. Schwab has shifted more of its revenue toward recurring fees and made waves in April when it made the fee for its
Brokerages make money when customers trade more frequently, says Grealish. That means firms will need to learn how to better influence customer behavior. “If offering free trades encourages clients to trade more frequently, the client is more likely to perform worse and the brokerage will still be generating revenue through activities like selling order flow.”
Traditional discount brokers have long earned additional revenue in ways that aren’t always easy for investors to understand, experts say. Those include collecting interest on client cash accounts, selling buy-and-sell information to high-speed traders and channeling orders through the most lucrative exchanges. Robinhood has generated as much as 40% of its revenue from payment for order flow,
To attract clients, digital-first advice firms are borrowing tactics from incumbents and putting a spin on traditional industry offerings.
To be sure, the path forward could be rocky for all financial service providers competing on such thin margins — including the incumbents.
There may also be another wave of disruption on the horizon. Other startups are looking to take the floor off of the so-called race to zero. All of Us, a new social media trading platform, pays investors to trade. The firm charges a 50 basis points fee but will return other profits made from assets back to investors,
Similar pressures are emerging in the equally competitive index fund marketplace.
Ultimately, fee compression on products and trades may yield a positive result for the wealth management industry, says Baldwin. As firms look to make up for lost revenue, asset-under-management fees will begin to look more and more enticing. Schwab’s recent move to subscription pricing for Intelligent Portfolios could be an early sign that low-cost brokerages will shift revenue toward wealth management revenue.
“All of this is going to drive revenue growth back to the advice side,” Baldwin says. “It will be really positive for these firms to actually start getting paid for that piece.”
