Free Trades Takeover At Brokers: What It Means For Your Business Model

The business model for brokers has been turned upside down since October, accelerating the need to transform. With Schwab’s acquisition of TD Ameritrade, the move to free trades is paying off, where the shake out could result in the company most reliant of fees getting bought up. Thankfully by 2020 we will see fewer campaigns about the price war touting ‘free’ and ‘zero’ or who is the most free, and change the conversation to one about new forms of value.

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Headshot of David Poole of Publicis Sapient (with permission)

So, how has the broker model changed? Commissions for trades generated hundreds of millions for Schwab, E*Trade, Fidelity, and notably TD Ameritrade where it makes up 36% of revenue. Free alternatives like Robinhood, JP Morgan You Invest, and Merrill Edge have reflected the growing demand for free trades, and in the course of a few days all the brokerages slashed prices from $6.95 or $4.95 to zero, with Bank of America and Wells Fargo following suit in December. The revenue forfeited is reflected in lower valuations, with brokers now racing to make up those losses.

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Lessons from the rapidly changing business model of broker deals

What can we learn from this end to commissions in guiding your company's transformation journey?

  1. The motivation for change matters. Consumers love 'free' but may wonder if they've been overpaying for years. Once one broker made the move, the others toppled to zero like dominos, revealing the extent of the oligopoly that kept prices fixed long past when this made sense. Be ready with a clear and authentic story to counter consumer skepticism about a sudden change of heart, like Schwab framing 'free' as part of its original mission to make investing affordable for all. The motivation to avoid losing customers among the brokers that caved will be evident and less attractive. When customers understand where you're coming from, they'll change with you.
  2. Plan for cultural change. The new business model happened overnight, yet changing people and culture takes longer. What attracted tens of thousands of people to work at discount brokerages is a sales culture rewarding matches between buyers and sellers, and the mission to democratize access to investing, The new model needs relationship bankers, empathy, stewardship of deposits, and rewards for financial wellness. This may not be a cultural fit and many will leave or get laid off in the inevitable industry consolidation. Brokerages will need to hire folks inspired by and aligned with the new model, and retrain the legacy workforce. Some brokerages have more mature banking divisions, yet others have a lot of work to do, or may become targets for acquisition.
  3. The race to zero is over, and the race for deposits is underway. Brokers are promising to make up lost revenue in old services—cash management, lending, and advice oriented around financial wellness. But bankers have a long head start, and the revenue from these banking services is inherently limited to stealing share. As brokers and investment managers all look to offer advice for a fee, they're entering a crowded space. With over 300,000 advisors in the U.S., and increased competition on advice from asset managers, insurers, benefits providers, banks, accountants, lenders, and fintechs—consumers are likely to feel that everyone wants to be their advisor. Similar to app fatigue when the app stores began to count apps in the millions, consumers will retreat to a manage-able set of services, and the price will drop. The price war on advice already includes free options, and monthly subscriptions like the $30 plan offered by Schwab, yet advice will be harder to commoditize.
  4. Trading habits. Until this week, brokers profited by encouraging trading. They now need to be in the financial wellness business, wellness that can be undermined by frequent trading. This about face is a challenge to communicate and design around. It is as radical as CVS stopping the sale of cigarettes to focus on remedies.

Brokers that succeed will win on experience, and not just distributing loans and advice but coaching customers to ensure impact. The biggest hurdle as always is not the tech or business model, but people, culture and communication. The winners will recognize these success factors in their own digital business transformation.



About the Author

David Poole
David Poole is the Head of the Financial Services Center of Excellence at Publicis Sapient, the digital business transformation hub of Publicis Groupe. David consults on digital business transformation through innovation, thought leadership and customer insight with fifteen plus years of experience. David has been a speaker on the future of payments at industry events including Money 20/20, FIMA, NextBank, and CXFS. He is a change agent with 20+ years of experience as a researcher, and planner.