In an effort to stay competitive, brokerages are rolling out new pricing models at a rapid pace. The most touted is the zero commission pricing strategy, which is taking the financial services industry by storm – a topic which I discuss in a recent episode of my podcast ‘The Financial Advisor’s Advisor’ titled “The Race to Zero Commissions and The Lost Podcast”.
The zero commission trend began in early October with TD Ameritrade and E*Trade both announcing zero commission strategies. Most recent to join the zero commission game is Raymond James, which publicly announced their zero commission strategy last week. However, zero commission isn’t the only pricing model being used as a differentiator among brokerages. Cetera recently announced a new subscription-based pricing model. Subscription-based pricing is not a new strategy and is one which has informed the offerings of other brokerages, among them Charles Schwabb, which offers the subscription service Schwabb Intelligent Portfolios for an initial $300 fee and a monthly $30 fee thereafter.
The reasoning behind the flurry of pricing model activity at the brokerages, particularly as we are in the early stages of the fourth quarter, is easily decipherable. Brokerages are using bottom-dollar pricing as a means of gaining as many new clients and new assets as possible to bolster their bottom lines. It is a gamble that is currently working, at least for now. For instance, TD Ameritrade recently commented in media reports that they saw a 49% increase in new accounts across all income sectors after announcing the zero commission model, when compared to the September quarter. Further, TD Ameritrade has gone on to say that the initial financial hit zero commissions has had to their bottom line, to the tune of $220 to $240 million per quarter, is anticipated to be offset by customer growth initiatives it currently has in place or has strategized for in the future.
Which leads us to the chicken and the egg scenario which the TD Ameritrade example perfectly illustrates. In a financial services business model, what comes first – the revenue or the customer? It’s very easy for brokerages to give their bottom lines a quick hit by offering customers a price they can’t refuse. However, with the way things are playing out, it appears many a brokerage is deciding to join the party. Understanding which customers these new pricing models are targeting and how to best service those customers long-term will be key to the success of brokerages executing new pricing model strategies.
For instance, a zero commission model has the broadest customer reach. It allows the high net worth client to save substantially on their portfolio and entices clients with more modest assets to consider their financial services options. There is a vast chasm between these two client types and zero commissions has the ability to target a myriad of client types in-between. This creates a bit of a quandary for brokerages employing this strategy. It is indisputable that today’s leading financial services firms have, as one of their characteristics, a defined client demographic as part of their operational strategy. With zero commissions, laser-focused client targeting goes away. Rock bottom dollar pricing means everyone is rushing to the clearance sale. It remains to be seen how the brokerages will be able to implement cohesive client services over such a wide demographic base. Yet, this will become operationally imperative if the zero commission strategy is to be successful long-term.
In the case of the subscription-based pricing model, brokerages choosing to utilize this approach have expressed their definitive targeting of the millennial and younger financial services client. This demographic segment has a number of characteristics which make subscription-based pricing ideally suited. Among them are a propensity to do business online, a take-charge approach when it comes to all aspects of their life, and an affinity to highly researching and engaging with the products and services they use. A subscription pricing model checks all those boxes by primarily functioning as an online service which is highly driven by the client and their decisions. Additionally, the long-term and fixed pricing structure of subscription pricing models makes them attractive, from a budgeting perspective, to a client with an emerging asset base. Where the long-term challenge of the subscription pricing model comes in is scalability. With it’s emphasis on technology and online interactivity as its mains source of client engagement, those brokerages utilizing subscription modeling will necessarily need to plan for and invest in frequent technology upgrades and routine technology maintenance in order to not just survive but thrive as a leader in this pricing sector.
Ultimately, financial services is no different than any other business that does exist or has existed. Price and product. It is how capitalism works and it is the financial structure which has shaped our country and our culture since its foundation. As brokerages engage in the price wars we are seeing now, be it with the zero commission, subscription-based, or some other pricing strategy – it would behoove them to remember their business fundamentals. Supply and demand drive price and customer loyalty drives long-term business success. These are business truths and ones which will play out in the current financial services pricing game, the results of which we will wait for with much anticipation.