As Brokerage Firms Consolidate, RIAs Expand
Schwab's drop to $0 commission was expedited by fintech company Robin Hood, making it more difficult for the large firms to attract new customers, particularly younger investors with limited resources to invest and spend on commission. By acquiring TD Ameritrade, Schwab is able to increase margins by eliminating many redundancies in back office jobs. One major side effect of massive scale though, is loss of personalized financial advice. When I was at TD Ameritrade, I had over 700 clients and $500 million in assets I was responsible for. It's the only way for a firm competing primarily on costs can stay relevant - massive scale.
I managed a Scottrade branch office when TD Ameritrade acquired Scottrade. I left TD Ameritrade just a few months ago as I saw continued pricing pressures force cuts of over 80 branches. At that time, I made the decision to launch my own RIA rather than wait around to become irrelevant.
With the rise of robo-advisors and cookie cutter portfolios designed to attain massive scale, investors tell us time and time again they want a deeper relationship with their financial professional. It's something the large discount brokerage firms struggle to deliver.
These are all areas Registered Investment Advisors (RIA) are prepared to deliver on. RIAs are sworn to a fiduciary standard. They are also able to provide more personalized service to their clients and customize their advice. This is because to be successful as an RIA, you only need 50-100 clients. Once you have those clients, an advisor is compensated for the ongoing advice they provide making it an attractive alternative to the quotas that reset each quarter for representatives at discount brokers.
The very technology that is forcing price competition in the discount brokerage space is also enabling highly customizable, personalized financial planning advice at RIAs. Both Charles Schwab and TD Ameritrade have advisor facing platforms that also benefit from $0 trades. The same fintech space that is pressuring large brokers to innovate, is helping small RIAs access tax efficient, cost efficient, convenient solutions for their clients at a price they can break-even at just 10 clients or less.
While the financial services industry is experiencing growing pains, the end result will be more individual individuals having access to financial planners that can deliver quality and customized advice at an affordable fee-only price.