In the 1980s, if you wanted to buy stocks, you had to call your broker, place the order and pay almost 1% of the gross value in brokerage. We have come a long way from there.
Stockbrokers of that era were memorialized by Gordon Gecko's character in the cult classic movie 'Wall Street.'
In the years since, the brokerage commission rate has gown down consistently and is now a small fraction of what it was.
Wealth management is another business that was available only to high-net-worth individuals. The landscape for retail investing has undergone massive changes, and it continues to evolve with the advent and proliferation of data-driven Fintech players.
The global securities brokerage and stock exchange services market revenue pool is expected to grow from $1,075 billion in 2020 to $1,249 billion in 2021. The market is expected to reach $1,738 billion in 2025. At the end of 2019, top online brokers had combined client assets of close to $18.4 trillion.
Democratization of brokerage and wealth management
Opening up the brokerage market to the underserved segments of the society began with low, flat fees and gradually moved towards the now-common zero-fee model. Zero cost accounts drove hordes of customers to open new accounts. The brokerages themselves benefitted by having access to order flow data, which are sold to algorithmic trading firms and market makers, offsetting the loss of commissions. Companies like Robinhood were pioneers in this movement.
Another addition to the model was the introduction of the no-minimum investment criterion. This feature was very attractive to both the millennials and others with smaller investment budgets.
A third major shift occurred with the introduction of fractional shares. Several large American companies have stocks that cost a few hundred or even thousand dollars a share. With fractional investing, owning a piece of these famous names has become affordable.
While technology and the new age of fintech companies have transformed retail brokerage, the more prominent and established players have not lagged in adopting these innovations. In recent years large corporations like Morgan Stanley, J.P. Morgan, and Charles Schwab have acquired many fintech businesses.
The Covid Pandemic has also played a role in popularizing low-cost models as millions of investors opened new trading accounts.
Let us look at some of the leading players in operation in the retail electronic brokerage space.
Robinhood is one of the most popular Fintech companies in the brokerage business and is a leading trading platform as well. It is especially hit with the millennials and has one of the most attractive user interfaces. It is expected to go public in the next few months and has filed its prospectus with the SEC. In addition to trading, the firm also provides instant deposits. Robinhood had approximately 13 million users as of 2020 data.
Webull is a Fintech player with brokerage and electronic trading systems and is equally popular among the younger investors. This firm is expected to go public through an IPO this year.
ETrade is one of the earliest players in trading systems. This online brokerage firm is also one of the pioneers of low-cost brokerage and was acquired by Morgan Stanley, in 2020.
TD Ameritrade was also one of the earlier players to adopt technology and owns the award winning Thinkorswim trading platform. It was acquired by Charles Schwab in 2020.
This electronic broker boasts of one of the largest platforms in terms of daily average revenue trades. It still is independent and trades on the Nasdaq under the ticker IBKR.
EToro is a rapidly growing social trading and multi-asset brokerage company that hosts over 20 million users. The company will be going public through a merger with SPAC Fintech Acquisition Corp. V.
The Wealth management space has also seen an equivalent revolution. Here too, the market has opened up to smaller investors and has attracted millions of new customers. Two crucial developments in this area have been the rise of Robo-advisory and AI-driven solutions. These types of solutions provide a low-cost and inclusive model for managing assets.
Robo-advisors provide quantitatively run wealth and portfolio management solutions using sophisticated computer programs. The portfolios are re-balanced mechanically, eliminating human intervention. Automation is an attractive alternative to young professionals who are more comfortable dealing with machines and apps.
Artificial intelligence and big data are altering the way risks are evaluated, and estimates of probabilities are calculated.
This market is much more fragmented than the brokerage market, with many private players. Nonetheless, many established wealth management firms have made their entry into this nascent market as well. Wealthfront, Betterment, Personal Capital and M1 Finance are some of the up-and-coming players in the Robo-advisory space.
Many traditional wealth advisory companies offer at least some form of an automated evaluation system that measures the client's willingness and ability to handle risk. The more popular and fuller Robo-services are provided by Merrill Lynch, ETrade, and Interactive Brokers.
Market data
Many publicly listed companies operate in this market. The brokerages and wealth advisories have differentiated themselves from the banks and other lending organizations and their stock price has reflected that. Here is a snapshot of the market performance of some of them.
Source: Yahoo Finance
Emerging trends and the future
There are a few factors that are lined up to influence the future of the retail investment space. Of these, the most important is in ESG investing. Socially aware investors are betting on ESG investing to play a significant role in driving the performance of their portfolios. ESG investing screens out companies that score better concerning their impact on society and the environment and those with better governance standards.
The ESG investing market is currently valued at $45 trillion and is expected to hit $53 trillion by 2025. Retail investors are increasingly playing a role in driving this trend. J.P. Morgan recently acquired OpenInvest, a Fintech company providing ESG tools to the wealth management industry.
Augmented reality and virtual reality are also becoming tools to understand client profiles by simulating situations and as an additional communication channel. Citi already offers an AR system for data visualization.
Investment routes
For investors from India, the Globalise platform offers several options to invest in the fintech theme and one could buy stocks directly or participate through ETFs such as the Global X Fintech ETF (FINX) or the ARK Fintech Innovation ETF (ARKF). Globalise also offers a curated portfolio in the Future Innovation Globe, where Fintech is one of the key themes.
Open your Globalise account now to participate in the Fintech revolution.
Previous Article
In the current scenario, one question on the minds of both investors and speculators is that are there more opportunities in the commodity space, or is it too late already?
The Russian invasion of Ukraine is the most aggressive military action to happen in the European region since World War 2. From the perspective of the capital markets too, this has been a dramatic event.
Public utilities are an absolute necessity and have predictable cash flows. In this article, we discuss the investment landscape and the key players within the utility sector.