What Schwab’s free trade move means for RIAs
Following the firm’s decision to eliminate fees for trades of stocks and ETFs, competitors TD Ameritrade and E*TRADE followed suit. Here are 10 implications of this broader trend of free stock trades.
Charles Schwab’s announcement on Tuesday to eliminate trading fees on stocks, ETFs, and options sent waves through the media and soon after pushed competitors TD Ameritrade and E*TRADE to follow suit. The industry still awaits news on the other two largest RIA custodians – Pershing Advisor Solutions and Fidelity Custody & Clearing Services – and how they will respond to Schwab’s strategy.
Yet many in the wealth management space – regardless of channel affiliation – are left wondering what this really means for their businesses. Here are 10 implications we foresee:
- It’s great news for advisors launching their own RIAs as the economics of independence just became more appealing (assuming the RIA wraps trading costs with their advisory fees). RIAs typically pay between four and 10 basis points on advisory assets for custody, so logic says most of this expense can now flow to the bottom line as profits.
- It puts pressure on independent broker-dealers (IBDs) – who often have more expensive ticket charges and advisory administrative fees – to also significantly lower trading costs.
- For advisors considering a move from an IBD in favor of the RIA space, it represents a more compelling economic case – since the elimination of trading costs, platform fees, and administrative expenses now amounts to an even greater uptick in their take-home economy.
- It should increase the number of advisors looking at starting a practice in the RIA space – because the long-term economics of an increased payout and the building of enterprise value stacked up against taking a recruiting deal from a traditional brokerage firm or even staying put have now become that much more compelling.
- Broker-dealers (wirehouses, regionals, IBDs) and their advisors still rely upon trading commissions as a meaningful source of revenue. With competition for retail investors at an all-time high and perceived pricing compression already in force, will broker-dealers be forced to rethink charging commissions for trades or lower commission rates? Perhaps this is yet another catalyst for the shift to advisory from traditional transactional streams of revenue.
- The economics to RIA custodians is completely different, so it remains to be seen whether this leads the custodians to lower the ‘business development dollars’ or ‘transition assistance’ typically offered to prospective breakaways.
- It raises the question of how the major RIA custodians will make up for this lost source of revenue: Will they introduce more services and capabilities? Will they rely more upon their lending and cash management solutions? Will they emphasize their asset management products that much more? Will they acquire complementary businesses already existing in the RIA channel?
- For firms with less scale in the RIA custody market — i.e. LPL, Raymond James, and First Clearing – will they follow suit to make their pricing better align with their major competitors or will they be comfortable as more of a premium-priced custodial model?
- Wirehouse advisors currently at firms with discount brokerage platforms (i.e. Merrill EDGE) face the prospect of heightened competition and additional channel conflict as it is likely these platforms will move to reduce trading costs and further increase the pricing delta between the ‘human’ advisor force and the automated/web-based products.
- It increases the probability that existing RIAs and advisors who are launching RIAs will more strongly consider becoming multi-custodial as the logic around pricing power with a single custodian largely disappears.
While many advisors might dismiss the announcements as just another round in the competitive battle amongst custodians, the reality is that the ripple effects reach much further, making it an imperative for all advisors to pay attention to the changes going on around them – and begs the question of, ‘What comes next?’