Stronger U.S. equity markets have both boosted revenues for retail brokers and enhanced client engagement, says Fitch Ratings in a new report.

The rating agency affirmed its ratings on a couple of U.S. retail firms, Charles Schwab Corp. and Scottrade Financial Services, after reviewing the sector. It says that the rating actions “reflect their improved operating performance and leverage metrics over the course of the last year, increased revenue diversity and potential benefits from a rising interest rate environment and increased retail investor engagement.”

Indeed, Fitch notes that the “Fundamentals for the retail brokers have improved over the last year as tailwinds from rising stock markets have brought many retail investors off the side-lines and more engaged with the markets. This has had a dual benefit for the retail brokers of increasing both their fee revenue and trading revenue.”

Fee revenue, primarily driven by growth of assets under management (AUM), is now the largest revenue component for Schwab, it says; noting that these revenues grew by 12.9% in 2013, and now comprise nearly 47% of its overall revenue.

Fitch says it views the contribution from fee revenue as “a significant positive” for retail broker ratings, as it is recurring and helps to solidify customer relationships.

Additionally, it says that trading revenue for the retail brokers also improved during the year amid higher stock markets. That said, it cautions that trading remains a very competitive business and it expects pricing to erode over the long-term.

These revenue increases have, in turn, led to higher returns on equity, stronger pre-tax operating margins, and improved leverage metrics, Fitch says. Looking ahead, it’s also expecting meaningful revenue growth for the retail brokers, given a rising short-term interest rate environment.

“These strong positives are counterbalanced against the inherent cyclicality of the retail broker business model and the persistent threat of an idiosyncratic technological or operational loss that results in reputational damage that could cause clients to flee a particular firm,” it says.

Fitch notes that these types of risks are inherently difficult to predict and quantify, and that a large event at a particular firm would likely prompt it to consider negative rating action. Similarly, an industry wide event may also impact ratings, “but may allow each firm to better maintain its client base”, it says.