How can broker-dealers survive and thrive in the brave new world of zero-commission trading?

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The recent decision by Charles Schwab to offer zero-commission trading and the resulting domino effect among its competitors have triggered tremors throughout the online brokerage landscape. Ever since free trading was pioneered by Robinhood in 2012, many observers expected this model to eventually become the industry standard. That perception became reality this month as major online broker-dealers Schwab, TD Ameritrade, E*Trade and Fidelity all announced their adoption of zero-commission trading. The problem for these firms is that the decision will likely cost them 5-30% of their annual revenue. Accordingly, they must investigate alternative methods of income generation to recoup those losses.

Offering access to capital markets

One of the fundamental ways to accomplish this is by offering access to capital markets, including IPOs, follow-on offerings, closed-end funds, and potentially structured products and preferred securities. Most broker-dealers don’t currently provide access to these valuable products because wirehouses have held a monopoly on that privilege, reserving them exclusively for their own clients.

The advantage of offering such products is twofold: generating income and attracting investors. Capital markets products typically include healthy built-in commissions, which online broker-dealers can enjoy a percentage of by partnering with a company like ClickIPO to gain access to these types of investments. Furthermore, when investors construct portfolios, they seek access to the widest variety of products to determine which combinations would provide the best return for the associated risk. Thus, capital markets present an appealing option to retail investors who have traditionally been excluded from this potentially lucrative sector.

Standing out from the competition

With the recent rush to zero-commission trading among online broker-dealers, there should be more potential clients up for grabs than ever. For several years, Robinhood was the only significant broker-dealer offering this incentive. Now that it has become pervasive, even Robinhood’s most dedicated clients will likely take a new look at other options because the previous competitive advantage no longer exists.

Additionally, retail investors with all major online broker-dealers suddenly have significant motivation to explore the competition and determine which firm they find most attractive in the new landscape. Furthermore, many investors will likely reevaluate whether to maintain their brokerage accounts with traditional advisory firms, because they could decide executing free trades with an online broker-dealer is a more appealing option.

In the resulting panoramic pursuit of potential investors, broker-dealers hoping to draw in new clients from wirehouses would do well to provide a full breadth of product offerings. Partners like ClickIPO offer broker-dealers an opportunity to outsource their capital markets platform in a low-risk, low-cost manner to generate revenue and attract new investors. Instead of devoting the time and shouldering the expense necessary to build their own platform and develop relationships with underwriters, they can leverage ClickIPO to quickly and inexpensively enter this attractive area of the market.

Online tools and investor education

Other elements that will dictate revenue streams for broker-dealers in this brave new world include the online tools and education they offer to enhance user experience and make online content more engaging. This is particularly true when it comes to attracting millennial and Generation X investors, who now represent the most coveted audience for broker-dealers due to their rapidly accumulating wealth. Members of these groups, especially millennials, might be relatively new to investing and are likely to appreciate the convenience and accessibility offered by user-friendly tools and education.

The times are a-changin’ and the playing field will only become more level as the democratization of investing continues to gain momentum. The transformative decision by major online broker-dealers to offer zero-commission trading is the latest step and will have far-reaching effects. In addition to benefiting investors, it offers broker-dealers an opportunity to attract clients who historically wouldn’t have entertained the notion. Amid widespread industry upheaval, ClickIPO provides a product differentiator that can greatly help these firms stand out from the competition and recoup lost revenue.


Risk of Investing in Initial Public Offerings (“IPOs”)
There are specific risks in investing in an Initial Public Offering (“IPO”). Among other things, the stock has not been subject to market valuation. Those risks are described at length in the prospectus, and we urge you to read the prospectus carefully to understand those risks before investing. An IPO is the first sale of stock by a private company to the public and may not be suitable for all investors. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. IPOs are a risky investment. For even experienced investors, it can be difficult to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, which are subject to additional uncertainty regarding their future values. Read more information regarding the significant risks associated with investing in IPOs.