This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
The brokerage industry is in the middle of a structural shift, and the shift is driven by technology, regulation, and changing customer expectations. The full-service broker is no longer the dominant model, the discount broker is the new normal, and the robo-advisor is a growing segment. The trader who understands the trends can prepare for the future, and the trader who knows the direction of the industry can pick a broker that will remain competitive.
The shift toward digital and mobile
The first trend is the shift toward digital and mobile. The trader who used to call a broker to place a trade can now place the trade from a phone in a few seconds, and the trader who used to wait for a paper statement can now check the portfolio in real time. The shift is driven by the smartphone, and the shift is accelerated by the pandemic.
The mobile trading has become the primary channel for many traders, and the mobile platform is the most important part of the broker's offering. The broker who has a strong mobile platform can attract the next generation of traders, and the broker who has a weak mobile platform will lose market share. The trader who evaluates a broker should test the mobile app, and the trader should look for a broker with a strong mobile experience.
The rise of zero-commission trading
The second trend is the rise of zero-commission trading. Several large brokers in the US, Europe, and Asia have dropped the commission on stock and ETF trades, and the brokers earn revenue from the spread, the payment for order flow, and the margin lending. The zero-commission model has put pressure on the traditional brokers, and the traditional brokers have been forced to drop the commission to remain competitive.
The trader who benefits from the zero-commission model should still compare the total cost, and the trader should look at the spread, the platform fee, the inactivity fee, and the currency conversion fee. The total cost at a zero-commission broker can be higher than the total cost at a low-commission broker, and the trader should not assume zero is always the cheapest.
The growth of robo-advisors
The third trend is the growth of robo-advisors. The robo-advisor has become a significant segment of the brokerage industry, and the robo-advisor is expected to grow at a double-digit rate over the next decade. The robo-advisor is popular with younger investors, and the robo-advisor is popular with investors who want a hands-off approach.
The robo-advisor has put pressure on the traditional advisors, and the traditional advisors have been forced to lower the fees. The advisor who charges 1 percent of the assets under management is no longer competitive with the robo-advisor that charges 0.25 percent. The trader who uses an advisor should compare the value, and the trader should consider a robo-advisor as an alternative.
The role of AI and machine learning
The fourth trend is the role of AI and machine learning. The broker uses AI to detect fraud, to provide customer support, to recommend trades, and to optimize the portfolio. The AI is becoming a core part of the broker's offering, and the AI is expected to play a larger role in the future.
The trader who uses AI-powered tools can save time, and the trader who uses AI-powered tools can make better decisions. The trader should look for a broker that uses AI responsibly, and the trader should look for a broker that explains the AI's recommendations.
The impact of regulation
The fifth trend is the impact of regulation. The regulator is increasing the scrutiny on the brokerage industry, and the regulator is introducing new rules on the leverage, the disclosure, the reporting, and the cybersecurity. The regulation is designed to protect the trader, and the regulation is driving up the cost of compliance.
The trader who deals with a regulated broker has a higher level of protection, and the trader who deals with a regulated broker can rely on the regulator in case of dispute. The trader should choose a broker regulated in a tier-1 jurisdiction, and the trader should verify the broker's licence.
The rise of fractional shares
The sixth trend is the rise of fractional shares. Several brokers now allow the trader to buy a fraction of a share, and the fractional share allows the trader to invest in high-priced stocks with a small deposit. The fractional share is popular with beginners, and the fractional share is popular with traders who use dollar-cost averaging.
The trader who uses fractional shares can build a diversified portfolio with a small account, and the trader can invest in stocks that would otherwise be out of reach. The trader should look for a broker that offers fractional shares, and the trader should compare the fees on the fractional shares.
Common questions about the future of brokerage
Will full-service brokers disappear? No, the full-service broker will not disappear, but the full-service broker will become a niche service for high-net-worth investors. The full-service broker will continue to offer personalized advice, and the full-service broker will continue to charge a premium.
Will the commission go to zero? The commission is already at zero at several brokers, and the commission is expected to be at zero at most brokers in the future. The broker will earn revenue from other sources, and the trader should compare the total cost.
Will the robo-advisor replace the human advisor? No, the robo-advisor will not replace the human advisor, but the robo-advisor will become the default for many investors. The human advisor will continue to play a role for complex situations, and the human advisor will continue to charge a premium.
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Where to start
If you are evaluating the future of brokerage, the most useful first step is to identify the trends that are most relevant to your trading style, and to pick a broker that is well-positioned for the future. Our broker comparison lists the brokers and the trends they are following, which together tell you what the broker offers before you open the account.