One Reason I Got Out Of The Brokerage Business...

Nathan Slaughter's picture

Wednesday, October 9, 2019 - 2:30pm

by Nathan Slaughter

"Don't get too accustomed to those big commission checks."

That's what my old manager at regional brokerage house Morgan Keegan used to tell me. I was less of a cold-calling stockbroker and more of a financial advisor. Still, every now and then I'd field a random call for 100 shares of something or other.

That could mean a quick $100 commission just for answering the phone. It was good money -- but it wasn't meant to last.

Even then (this was the early 2000s), online trading was becoming a real threat to full-service brokers. It was difficult to justify charging $100 to buy or sell a stock when an internet site could process the same order for $10. Many investors (particularly the do-it-yourself set) were willing to forgo personalized advice in exchange for thousands of dollars in cost savings each year.

Nobody wanted to admit it, but the discount online brokers were poaching customers left and right. The writing was on the wall -- adapt or become obsolete. That's the way of all business. Seeing a downhill slide in commission rates, we began steering clients away from transaction-based accounts toward fee-based platforms that charged fixed annual fees (maybe 1% to 2% of assets).

It's more of a win-win business model for both parties.

But it would seem the hunters have now become the prey. Did you notice that Charles Schwab (Nasdaq: SCHW) tumbled about 10% earlier this week? E*Trade (Nasdaq: ETFC) shares plunged nearly 17%. And TD Ameritrade (Nasdaq: AMTD) suffered a 26% collapse. And as the chart below shows, they haven't really recovered sinc then...

brokerages chart

What calamitous event could have triggered this massive selloff, driving these stocks to multi-year lows? Well, perhaps one that we should have all seen coming...

Ever since mobile phone trading apps like Robinhood came on the scene offering commission-free trades with no account minimums, life has been difficult for established players like e*Trade. Aimed primarily at Millennials, Robinhood lacks fundamental research, charting tools and other such bells and whistles. But it has already attracted more than six million users who are perfectly fine with no-frills if it also means no fees.

The simple act of placing a trade has become a commoditized service. So, if one company undercuts rivals' prices, the others must respond.

This process has been unfolding for years. That's why Schwab has dropped commissions from $8.95 to $6.95 to $4.95 per trade. Its rivals have countered with moves of their own. Fidelity, for example, has introduced zero commissions for exchange-traded funds (ETFs).

Schwab took this price war to another level, announcing plans to eliminate commissions altogether. It was truly a shot heard 'round the industry. Less than 24 hours later, TD Ameritrade said it would drop commissions, too. Shortly after, e*Trade caved and agreed to match its competitors with $0.00 trades. 

Going forward, trading commissions will largely be a thing of the past. I never thought I would see the day. Don't feel too bad for these guys. Commissions only account for about 5% of Schwab's overall revenues. These companies rake in far more money from margin loans and net interest earned on clients' idle cash.

Still, we're talking about hundreds of millions in annual revenues that are about to disappear -- that's a big financial hit.

On a personal level, I'm glad I left the brokerage business behind long ago to eventually take the reins of High-Yield Investing. I suspect we'll see a similar trend in the real estate world. Realtors may have to wave goodbye to those cushy 6% commissions on home sales thanks to listing services such as Zillow.

Action To Take
In any event, this is a good reminder that any industry can be upended by disruptive new forces. That's usually not a good thing for the incumbents, which is yet another reason why I love companies that are protected by tall barriers to entry. 

Look for companies that have these barriers -- and the next time you buy more shares, you won't pay a cent in commissions.

In the next few days, I'm going to write more about this idea... Because if you understand the different types of barriers -- and just how powerful they can be -- then you're one step closer to building long-term wealth for the ages.

In the meantime, if you're looking for high yields in this low-rate environment, then I invite you to learn more about High-Yield Investing. We're collecting the kinds of yields most investors dream about... I'm talking about 6%... 8%... even as high as 12%. Go here to learn more now.

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.