Fintech News Today – The Best Online Brokers for 2021: The Rise of the Individual Investor and Fintech Apps
The past year has been extraordinary by any measure. The stock market experienced whipsawing volatility and rising prices. The Covid-19 lockdowns, zero-interest rates, stimulus checks, lack of sports, and apparently sheer boredom fed a supercharged bull run. And the year saw unprecedented growth in new accounts from individual investors at the full-service online brokerage platforms that make up Barron’s 26th annual Best Online Brokers Survey.
This flood of new investors also produced some drama more recently. In late January, the shares of struggling videogame retailer
(ticker: GME), whipped up on an online message board at Reddit called r/WallStreetBets, erupted. Suddenly, nearly everyone was opining on covered calls, short squeezes, meme trading, and the rapidly rising, then plummeting, prices of a group of beaten-down stocks.
This became known as the “Robinhood phenomenon,” a nod to a trading app used by 13 million millennials and Gen Zers, which stirred controversy, not to say litigation and regulatory scrutiny, after it was forced to restrict trading at the height of the mania. Robinhood, founded in 2013, had popularized fractional shares and zero-dollar commissions on an app and website featuring swipe-to-trade ease. The frenzy around GameStop highlighted how far individual investors had come in terms of numbers, influence, and strength—a trend that few had anticipated before Covid arrived.
You’ve seen over the past year that retail has had a meaningful impact on market movements.
— Christopher Larkin, managing director, E*Trade
The numbers are big. By the end of its fiscal year on Sept. 30, 2020, TD Ameritrade’s daily average trading volume had risen four times from the volume traded at the beginning of that fiscal year. The number of retail brokerage accounts at
Interactive Brokers Group
(IBKR) grew by 56% in 2020, while tastytrade’s smaller client base almost doubled. Fidelity added more than three million clients, giving it 26.5 million accounts by year end.
“In the past, generally, people felt that retail investors didn’t have that much of an impact on the marketplace, that it was controlled 100% by institutional players, and there was some truth to that,” says Christopher Larkin, E*Trade’s managing director for digital brokerage product. “But you’ve seen over the past year that retail has had a meaningful impact on market movements.”
Robinhood and other financial-technology apps such as Webull and Moomoo have never been part of the Online Broker Survey, an issue we’ve aired over the past few years. Our focus has always been on brokers that cater to a wide range of investors and offer a broad array of services and sophisticated analytical and research capabilities besides trade execution. That’s reflected in our survey, which has 76 separate questions, six categories, and 98 subcategories. We conduct remote interviews, and the firms demo their platforms for us, often responding with written answers to questions. And we independently put the platforms through their paces.
This year, we decided to see how Robinhood would fare against the full-service brokerages. Robinhood trailed the field, though it wasn’t a complete wipeout. Robinhood is easy to use, offers the ability to trade equities, some options, and cryptocurrencies, and has a clean, attractive design. The downside: It lacks the panoply of services and on-site resources of the full-service brokers.
“We’re making investing less scary, more accessible, personal, and easier, and offering features and tools that are optimized for mobile,” said a Robinhood representative in response to our survey questions.
Barron’s recognizes that, given the size of the user base, the fintech trading apps have become significant forces, and certainly bear close watching. And like many of their users, they haven’t been at this very long. The full-service brokers were once relatively rudimentary themselves.
For the full-service brokers, the year featured nonstop challenges. They had to suddenly adjust to pandemic-induced remote working while reassuring existing clients and absorbing millions of new clients, not to mention maneuvering through the GameStop affair.
Barron’s ranked 11 online brokerages that offer a broad range of tools useful to mainstream, self-directed investors of various stripes. Three brokerages did not participate (as they did not last year): Firstrade, Vanguard, and You Invest,
(JPM) self-directed brokerage.
In this year’s survey, Interactive Brokers again leads the pack, with Fidelity close behind. This echoes our 2019 survey; last year, the two tied for first. This year, it was close enough that we awarded them both five stars.
TD Ameritrade came in a strong third, E*Trade was fourth, and
(SCHW), which now owns TD Ameritrade, came immediately behind in fifth place, as it did last year. That marked a one-position rise for TD Ameritrade, while E*Trade dropped one position. Some of this is a function of rejiggering the relative weights in a few categories, although it also reflects some impressive improvements by TD Ameritrade and Schwab.
Tastyworks and Merrill Edge tied for sixth place, with just a single point separating the two.
These full-service online brokerages have long attempted to cater to investors of all stripes. In 2020, the pandemic provided both time and opportunity, and boatloads of new investors came aboard. Many of these were younger. Ally Invest, for example, says that millennials drove about half of its overall growth last year. But this phenomenon extends further. Ally reported that the growth rate of women overall outpaced men.
In late 2019, Schwab agreed to a merger with TD Ameritrade, joining two online brokerage powers in the sector’s biggest deal yet.
- $26 Billion
In 2021, Schwab’s two platforms continue to operate separately, and may stay that way for another year.
The industry’s stunning growth put these platforms under great pressure. Fidelity says that it hired more than 5,000 new customer-facing personnel to handle the increased volume, while other brokerages scampered to find and train enough new employees to service them.
The brokerages didn’t just tread water. Many are actively transforming themselves, both functionally and aesthetically. They’re becoming more welcoming and less an amalgam of words, numbers, and line graphs that require endless clicks. Brokerages are layering ease of use and contemporary graphics on ever-more powerful and sophisticated investing and trading engines. In some ways, Merrill Edge led the way with its reimagined site stressing “stories” that the
((BA)C) unit rolled out over the past three years. Merrill’s emphasis on context continues, while others are refashioning their sites, as well.
“We’ve definitely seen a movement toward simplification in design,” says Jennifer Butler, the director of asset management and brokerage research at consulting firm Corporate Insight. Brokerages, she says, have begun to rethink site architecture and labeling to make everything more intuitive.
The top online brokerages marry clarity and sophistication, which is no small feat. This allows latitude for both expert traders and novice investors.
One big goal of these brokerages is to gain clients and keep them for the long term, not just entice them to sign up until the next cool app comes along. That includes a migration to different products, such as advisory services, which in turn provides additional revenue.
“What a lot of brokerage firms are trying to do is deliver on a promise of comprehensive financial management that addresses not just a consumer’s every product need, but also kind of a lifetime evolution of those needs,” explains Butler.
Part wizard, part content curation.
— TD Ameritrade’s Bob Leavitt, on its education offerings
A more thoughtful and intuitive approach to news, information, and research marks another aspect of this endeavor, and one that’s particularly important this year. Brokerages approach this differently. But at heart, this involves two separate realizations. First, with all of the new participants in the market, brokerages must put investing into some kind of educational context, or risk losing the very people they want to keep and nurture. Second, more-experienced investors demand both thoroughness and accessibility. Rummaging around for information just doesn’t cut it anymore.
Brokers must offer a wide array of material: entertaining tutorials, plain-language cues, portfolio builders, and useful financial planners for the novice investor; profit-and-loss algorithms, trading heat maps, advanced charting strategies, and graphically represented research for the more experienced. It’s a tricky balance, providing necessary content without information overload for a wide range of trading expertise.
“Part wizard, part content curation,” is how Bob Leavitt, TD Ameritrade’s director of content strategy and development, describes one of his firm’s educational efforts.
We examined all of these and dozens of other elements in online brokerage offerings for this year’s survey.
Both Interactive Brokers and Fidelity demonstrated just how extensive and contextual these services can be. Each excels in multiple facets of the online trading universe. However, Interactive Brokers scored higher in three of the six scoring categories—information, trading, and international, a category that it easily won. It also won first place in active trading. (See How We Ranked the 2020 Best Online Brokers, below.)
Some brokerages do a much better job than others in key segments. For example, tastyworks offers a superb platform for active options and futures traders, but its strengths and trading prowess would be lost on more-occasional investors, and it lacks some of the foundations that we believe a novice investor needs.
Tastyworks is also the latest example of high stakes industry consolidation. In late January, the brokerage firm’s parent, tastytrade, announced that it would be sold for $1 billion to the United Kingdom fintech and trading company IG Group Holdings (IGGHY). According to Tom Sosnoff, tastytrade’s co-founder, there were five offers on the table for the company. Sosnoff and his partners chose IG Group, he says, because tastyworks has designs on a global presence. With licenses in 17 countries, IG Group will make that process quicker and simpler.
“I wanted an opportunity for us to take the world by storm,” Sosnoff says.
The tastytrade acquisition followed two blockbuster deals. In early 2020,
(MS) announced the acquisition of E*Trade for $13 billion, demonstrating how well-heeled institutional firms have their sights on the retail trade. A few months earlier, Schwab and TD Ameritrade Holding announced a $26 billion merger, constructing a mammoth operation that rivals Fidelity in the number of clients.
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The deal for TD Ameritrade closed on Oct. 6, but Schwab says it will take another 18 to 36 months for integration to be complete. Schwab isn’t saying a lot more about what a future combined platform will look like, although Jeff Chiappetta, Schwab’s vice president of trading and education, notes that the merged company would definitely embrace TD Ameritrade’s groundbreaking active-trading platform, thinkorswim, as well as what he calls “the whole thinkorswim ecosystem.”
Last year, Schwab also acquired the fintech Motif for an undisclosed amount. Motif specializes in technology that crafts customized thematic portfolios, underscoring two more developments in the industry—thematic investing and direct indexing.
For instance, E*Trade offers themes that range from the traditional, such as undervalued large-caps or emerging markets, to ones that might resonate more with younger investors, including cybersecurity and videogaming.
These are beginning to migrate from themed exchange-traded funds and mutual funds to individual stock screens. Some brokerages, including Interactive Brokers, Merrill Edge, and Fidelity, prominently display on their trading and research sites environmental, social, and corporate governance, or ESG, ratings and peer comparisons. Interactive Brokers also offers an impact dashboard that vets investments through social and environmental indicators, and will soon launch a stand-alone app that performs the same task.
All of this is a nod to more-socially conscious investors.
Direct indexing enables investors to track an index by buying a sample of individual stocks, instead of simply owning exchange-traded funds or mutual funds that do the same. In the past, direct indexing was the domain of wealthier individuals or institutional clients. But it’s now being democratized, thanks to another major industry trend: fractional-shares trading.
Robinhood was a pioneer of fractional-shares trading in 2019, followed by Interactive Brokers among full-service brokerages late in the year. Fidelity came a few weeks later, and both Schwab and TD Ameritrade embraced the development in May.
Big, Getting Bigger
Fidelity, like other online brokerages, saw a flood of new customers in 2020.
- 3 Million
That left the firm with some 26.5 million accounts by year end.
Fractional-shares trading arose because even one share in some of the biggest names in stocks—
((TSLA)), not to mention
(BRK.B)—may be beyond the reach of many individual investors. Why not provide the ability to invest a dollar amount instead? This entices the less affluent, but also those who tend to think of investing in dollars instead of shares.
The days are over when trading fees and account sizes were barriers to such strategies. The industry is deep into a zero-commission, no-account-minimum environment, which has become the new normal only a year after brokerages eliminated fees.
With commissions pretty much dead, many wonder just how brokerages make money. This skepticism gained credence in mid-December, when Robinhood paid $65 million to settle Securities and Exchange Commission charges that it misled customers by failing to explain that it collected substantial fees for routing trades to other firms for execution—what’s commonly known as payment for order flow. This practice, the SEC said, resulted in inferior trade prices and outweighed zero commissions.
Online brokerages come down on both sides of the payment-for-order-flow issue, and our survey awarded points to those that don’t engage in this practice. But those accepting payment for order flow stress that they disclose the practice in SEC filings and still provide the best execution prices for their clients. Firms also insist that their revenue models no longer depend on trade commissions.
Fidelity has led the charge against order-flow payments, while Interactive Brokers splits the baby and offers two plans. This is needlessly confusing. Its IBKR Lite plan, which was launched in October 2019, is designed for less active investors and doesn’t charge commissions. It does pay for order flow, and limits access to some of the firm’s more sophisticated tools. IBKR Pro bundles commissions, but offers what it calls “smart routing,” which improves price performance as well as preferential margin rates and other financial inducements. So far, only about 5% of Interactive Brokers’ one million clients have opted for its Lite version. However, Interactive in December acquired 70,000 retail brokerage clients from Folio Investments and expects many of them to choose the Lite version.
How brokerages balance active and less active traders, and how consumers respond, have been issues for several years. The brokerage survey has migrated more to the demands of longer-term investors, which our scoring reflects. It’s our belief that the vast majority of self-directed investors aren’t day trading, formulating complex options strategies, or able to spend every waking moment scrutinizing the markets. Their needs, requirements, and habits now dominate, although mainstream brokerages can’t afford to turn their back on active traders, either.
Brokerages are scrambling to meet customers wherever and however they can. TD Ameritrade now counts nine different platforms in which clients can interact with the brokerage, everything from live TV to video on demand, and from Amazon.com’s Alexa to Apple CarPlay. Some of these may be gimmicks. Others may be sweeteners. But it’s the totality of what brokerages provide that makes the difference, as they strive to become indispensable to the financial lives of their customers, new and old.
Fintech News Today – The Best Online Brokers for 2021: The Rise of the Individual Investor and Fintech Apps
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