Discount and online brokers will outgrow full-service brokers and independent advisors, a market expert predicted. This will happen as the discount shops attract younger millennial investors with “episodic” financial advisory needs, he said.
Not only do discount brokers offer basic help to retail customers, but they also serve as custodians for independent advisors, said Chip Roame, managing director at Tiburon Strategic Advisors. Roame made his remarks a client webinar Thursday.
The largest discount and online brokers own hundreds of branches. As discount brokers expand into retail-related brokerage activities such as trade clearing and 401(k) management, that expansion will fuel the growth of these firms.
“I actually think everybody is underestimating the success of these firms,” said Roame, a former senior executive at Charles Schwab & Co., one of the nation’s largest discount and online brokers.
The discount and online brokerage segment of the financial industry is larger, “more important, more impactful, larger than most people think,” and deserves more attention because they are “in the right place right now,” he said.
Top Five Command Largest Shares
Five or six discount and online brokerage firms dominate the market, which is made up of about 52 companies controlling an estimated $4.6 trillion in retail assets, Roame said.
The 52 companies can be ground into three separate segments: 11 can be classified as discount brokerage firms, 37 as online-only brokerage firms and four as direct access brokerage companies, he added.
Not all of the discount and online brokerages aspire to be in the advice business. However, those that do — Vanguard, Schwab, Fidelity and more recently ETrade, for example — have made inroads using internet-based algorithms known as roboadvisors.
Five discount and online brokers — Fidelity, Schwab, TD Ameritrade, ETrade and Scottrade — dominate most of the common indicators of size: assets under management, number of accounts, number of clients.
The only metric where the dominant companies don’t necessarily have the largest share is the trades per day category.
Companies such as Trade King and Investors Brokerage Group cater to high-volume, active or day traders who pay commissions. These companies tend to dominate the trades-per-day category, Roame said.
Active traders aren’t sought after so much by mutual funds or exchange-traded funds because active traders don’t buy funds.
Fees, Trading Commissions Break $5 Barrier
How much of a discount do discount and online brokerages offer?
Companies such as TradeKing and TradeStation, whose lifeblood is the active trader, charge less than $5 per trade.
Merrill Edge charges $6.95, while Scottrade and Vanguard each charge $7, and Fidelity charges $7.95. Schwab charges $8.95 while ETrade and TD Ameritrade each charge $9.99, according to Roame’s research.
“Online stock trade commissions are extremely low,” he said. “I remember the days when these were $49 and everyone thought that was low, so we’re now down to $5 and $10 price points.”
The average stock trade commission has stagnated over the past several years. The $5 to $10 price point range seems to be “where everyone is going to settle in.”
On the mutual fund side, discount broker Scottrade charges $17 for a fund with transaction fees while Schwab charges $76. Transaction fees are charged by the discount brokers when mutual fund companies decline to share fees with the discount broker.
Advisors looking to buy funds without a transaction fee might gravitate toward more expensive discount brokers such as Fidelity or Schwab because they have thousands of funds to choose from.
Advisors seeking funds which charge a transaction fee might think about buying those funds through Scottrade, TD Ameritrade or Merrill Edge since those discount brokers charge lower commission.
“There’s no right or wrong answer, it depends on what type of investor one is,” Roame said, addint that the answer also depends on the kind of investor or client the discount brokers want to attract.
InsuranceNewsNet Senior writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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