No Fees, All Service: The Changing Landscape of Online Discount Brokerages

By Josh Book

Remember when E*Trade’s low-cost trading benefit message was so simple they used a baby as their spokesperson? Visit the site now and you’ll be met with significantly more sophisticated messages about how they can help simplify investing through personalized wealth management guidance, thematic investing, and prebuilt portfolios, all at a great value (of course!).

E*Trade is not alone in this shift. In fact, the entire online discount brokerage industry is undergoing a landscape change, moving from simply “trading” to full online portfolio management. Why?

It’s largely due to two fundamental drivers:

1.     Dwindling trade commission fees. In the late 1990s, online discount brokerages disrupted the decades-old investing marketplace by providing a readily accessible, lower-cost alternative to traditional stock brokers. Popularity surged again in 2008 following the global financial crisis as regulators and consumers demanded greater transparency into money management services. With fees increasingly in the spotlight, online brokerages have spent the last decade in a tight race downward to zero-fee trading commissions.  

2.     Low-cost portfolio building products. Exchange-traded funds (ETFs) provide individual investors with a low-cost way to simply “buy the index,” rather than worrying about constructing a portfolio with individual stock positions. First introduced over a decade ago, the ETF market has grown at an unprecedented pace: Global ETF assets have risen from around $700 billion 10 years ago to $4.8 trillion at the end of October 2018, according to industry data provider ETFGI. Quick to recognize the allure of ETFs, online discount brokerages have added ETFs of all varieties to their platforms, allowing clients of all ages and wealth levels to construct long-term diversified portfolios that will largely see them through to retirement. The subsequent rise in more static investor portfolios has, in turn, lowered demand for higher trading frequency within commission-based trading services.

Taken together, these two consumer efficiency-focused trends have nurtured investors’ growing comfort with online financial transactions, encouraging growing adoption and usage. Over two-thirds of Canadians and nearly 90% of Americans recognize at least one online discount brokerage brand within their respective markets, according to recent consumer research from ParameterInsights.

 US

US

 Canada

Canada

In the US, Fidelity and E*TRADE are the most popular self-directed platforms with usage rates of 9.5% and 6.1%, respectively. The fact that Fidelity has recently offered a pair of “Fidelity ZERO” index funds carrying no management fees seems to underscore the appeal of no-fee, self-directed investing with US consumers.

 So awareness is strong and adoption is on the rise...what’s not to like?

As online discount brokerages shift away from a reliance on trading and commission-based fees, executives must rethink how to position their firms to replace lost revenues. As we’ve seen in the case of E*Trade, that means integrating their online discount brokerages with broader lines of financial services to replace lost revenues, while continuing to delight all customers across the value chain.

At ParameterInsights, we recently published the first installment of our annual two-part study covering the online discount brokerage space across North America. Our data-driven findings highlight how dramatically the race to zero commission fees is changing the competitive landscape, as firms nervously rush toward the latest trends and technological developments.

However, as the data demonstrate, there is still a large gap between awareness and adoption of online financial services. Similarly, brand awareness does not necessarily translate to good customer conversion. The goal of our ongoing research coverage at the intersection of wealth management, digital and technology is to provide executives with insights and dynamic strategies to boost adoption and help them to focus their businesses on what matters, to win.

We examine data-driven answers to questions like, given the attitudinally favorable state of affairs, what’s stopping people from using discount brokerage products? Which brands are winning on customer conversion and why?

As the pace of innovation slows and the once-imminent sea change for the broader financial services industry remains on a seemingly distant horizon, the challenge becomes one of maintaining focus and commitment. To learn more about our new data and research coverage of the Online Discount Brokerage industry, please start a conversation with us at www.parameterinsights.com/online-discount-brokerage or email at info@parameterinsights.com.