Scrapping trading costs at discount brokerages will prompt soul-searching on compensation and business models
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The zero-commission trading trend is escalating among discount brokerages south of the border, with analysts expecting increased revenue pressure, a pickup in consolidation, and a host of other outcomes for the industry. Most have focused on how it would change self-directed investing, but the trend also has potential ramifications for financial advisors.
From the view of Charles Schwab, whose namesake firm set off the chain of commission-cutting moves in the last few days, their move will be a win for advisors who use his company’s platform.
“The advisors who try to masquerade both as an advisor and a broker who charges commissions … are going to have a tough time competing with advisors that use Schwab and get the tremendous advantage of zero-commission transactions,” he said in an interview with ThinkAdvisor.
He contended that traditional firms that try to engage in investment banking, advisory, and other businesses simultaneously have a lot of conflicts to grapple with. But as advisors adopt the use of zero-commission trading, they’ll be encouraged to adopt a compensation model charging “a small amount per annum for their services.”
Veteran recruiter and industry watcher Jon Henschen echoed that view in another ThinkAdvisor interview. Citing the CFP Board’s rising focus on pricing, as well as a fiduciary standard on investment advice that will be enforced on CFPs as of June 30, 2020, he said “costs like ticket charges, administration fees, markups and platform fees will become increasingly important to weigh out.”
Another result, he argued, is that more advisors’ clients will look at the ticket charges they pay, and consider shifting to a zero-commission trading platform. Large clearing firms, he added, may be pressured to lower their ticket charges to broker-dealers.
The trend toward zero trading costs, he added, will prompt advisors to “seek out dual-clearing-friendly broker-dealers,” especially if they are active traders. There’s a short list of small or mid-size independent broker-dealers that harbour a “friendly” attitude toward the use of more than one clearing firm, which he suggested would prompt more wirehouse advisors to break away and join the IBD space.
Depending on the platform, widespread use of 0% trading could also offer a proving ground for the idea that the average investor cannot make good decisions on their own. In the wake of the launch of Wealthsimple’s free-trading app last year, Woodgate Financial Jason Pereira argued that the firm has the means to show investors how much they really need advice.
“One of the things that no discount broker has ever done, to my knowledge, is benchmark your performance [as a self-directed investor] versus either a benchmark or a portfolio you should have been in the first place,” he told Wealth Professional. “[Wealthsimple] has both points of data. It has how you’ve done on your own, and it can very easily show how you would have done in comparison if you’d just taken the portfolio that your risk tolerance said you should have taken.”
