The Brokers Are Going Broke
Trading commissions are falling for investors, and the sky is falling for brokerages! TD Ameritrade led tumbling broker stocks yesterday as investors questioned if the business model was going obsolete.
Back in the olden days, the stock market was for the few, not the many. Brokerages were as filthy rich as their clients, and routine thousand-dollar investments made a per trade commission of $25 work. However, as the years rolled on, markets became more democratized. Broker business models needed to bend and flex for a new crop of investors.
Commissions have been whittled down to around $6, but now investors have to navigate a minefield of new costs intended to replace them. 1-3% platform fees have become the new norm. That money is taken from the balance of your account every year, so if your portfolio goes up 10%, you only take home 9%. Brokers like Schwab have also declared themselves superstar fund managers and wise financial advisors, getting customers to give them their money and charging an additional fee for the privilege. All this is the stockbroker’s idea of a compromise to the old ways. However, there’s still a problem.
The more you know, the less you pay, and millennial investors aren’t stupid. They want to make fractional, micro-investments investments through free apps. Sleepy broker investor-bases woke up yesterday, selling news that Schwab (-7%) had gone all ‘zero commissions’ on everyone. The likes of TD Ameritrade and E*Trade also need to take massive u-turns with their business models, and that promises pain for shareholders.
The ripple effect may have almost washed away E*Trade (-23%) and TD Ameritrade (-17%), but some opportunists in the market are betting these brokers will fight for their lives and bounce back. Who knows? The customer’s the real winner!
