The world of online investment brokerages continues to adapt. As poor markets and declining numbers of advisors push investors toward a self-service environment, online brokerages are positioning themselves to take advantage of future growth, according to a new report, Online Brokerages: Trends and Developments from Celent.
Key findings of the report include:
-The typical online brokerage client has multiple accounts, averaging three to four, and, more often than not, does not utilize a traditional full service brokerage account anymore. The advice component can be had from the online account staff, from online tools, or even from fellow investors, and the client will now pick and choose among their online accounts depending on the type of trade they wish to execute.
-Firms continue to enter the space as dedicated or stand-alone online brokerage providers. The plain and undifferentiated online brokerage model is a thing of the past. The retreat from the space by firms that heavily rely on the advisor model continues, possibly to their detriment.
-Revenue models continue to evolve for the online brokerage industry. Dedicated online firms have more options for earning revenue within the stand-alone model. Some firms are de-emphasizing their roots in online brokerage to take advantage of other trends in financial services.
-Options are growing as the investment product of choice for both the active trader and the stand-alone firm. Other derivatives, futures, and foreign exchange are all establishing a growing presence in the online brokerage world. The move to more sophisticated investment products is supported by huge improvements in online platforms in terms of capabilities and trading sophistication.
There is heavy competition between firms for the desirable active trader who, for many stand-alone firms, can be the difference between profit or loss.
The rise of social networking has resulted in newly incorporated features for many online platforms.
The accelerated growth of investment self-service, both despite and as a result of the massive market declines of 2008, may be the harbinger of even more rapid growth over the next few years for online brokerage firms.
The online brokerage world has changed significantly since Celent’s last report on the subject three years ago, especially in areas of: 1) Product mix, with more firms featuring options trading as the lead service. 2) Revenue models have adapted, however, options commissions have clearly revitalized the commission-based model.
3) Everyone is chasing the active traders, but as a small segment, not everyone can capture them. 4) Upward market movement may no longer be a driver of trading volume. Clearly, trading volume continues to follow volatility, but the rapid market declines of 2008 have seen no diminishment in trading activity.
The most successful firms in the online brokerage space will do the following: 1) Clearly understand the client segments they are seeking to attract. 2) Provide the tools and services necessary for a successful and satisfactory trading experience. 3) Price the services at a level where the client believes the value proposition is highly attractive for what they are receiving.
The report provides a detailed evaluation of many of the online brokerage firms; including Lightspeed, TradeStation, thinkorswim, optionsXpress, Interactive Brokers, Trade King, Schwab, E*Trade, and TD Ameritrade, as well as other stand-alone online brokerages and asset management firms. These firms are compared and contrasted to the advisor-centric online models of banks and full-service brokerages.
“Online firms have many more options for earning revenue today,” says Robert J. Ellis, senior vice president, Wealth Management practice and co-author of the report, Celent. “Combined with the rise of options trading and the battle for active traders, today’s online brokerage world is more exciting and client-friendly than ever before.”
L.D.