The downward pressure on trading commissions in the U.S. retail brokerage industry is likely to intensify as large U.S. retail brokers engage in a “price battle” that is “likely to accelerate alongside rising interest rates,” according to a new report from Fitch Ratings Inc.
“Rising rates should boost net interest income, which is likely to incentivize more trading competition among brokers to attract cash accounts and asset-management flows to grow wallet share — a trend that has been ongoing in the sector for several years,” the Fitch report states.
For example, Fitch notes that Charles Schwab Corp. recently lowered commission rates to US$6.95 from US$8.95 for online equities and ETF trades, which sets a new low among the large U.S. retail brokers.
“This move is an outcome of a broader and longer developing trend of revenue diversification among U.S. retail brokers, with lending and wealth/investment management activities growing in importance,” the report says, noting that trading commissions at Schwab make up a smaller share of total revenue, with net interest and fee income taking up the slack.
Commissions only accounted for 11% of total revenue at Schwab in 2016 compared with 42% for TD Ameritrade Inc. and 23% for E-Trade Financial Corp., the Fitch report states.
“The shift to different business segments is part of a broader initiative to diversify earnings to a greater variety of services, including ETFs, automated advisory and some banking products,” the Fitch report says. “To the extent that this could lead to more stable earnings, it would be credit positive for the sector”
From a risk perspective, the shift toward a greater reliance on fees alters, “some of the risk dynamics for brokers, with investment performance and credit risk becoming more relevant for credit profiles,” the Fitch report says.
In addition, consolidation remains a likely prospect in the U.S. retail brokerage business, the Fitch report says, “given the scalability of the business model.”