This content is from: Wealth Management

Beholden to Hedge Funds, Is One RIA Custodian in a Commission Quagmire?

Interactive Brokers eliminated commissions for its retail investors. Its RIAs shouldn’t hold their breath for the same.

On Tuesday, hours after Charles Schwab announced plans to eliminate commissions charged to investors and financial advisors trading U.S. and Canadian stocks, ETFs and options, TD Ameritrade followed suit and also slashed fees to zero.

Schwab’s stock tumbled 10%, dragging down shares of other discount brokerages by even more. E*Trade(ticker: ETFC) plunged 16%, TD Ameritrade (ticker: AMTD) lost a quarter of its value, and Interactive Brokers (IBKR) fell 9%. On Wednesday, the group fell further amid a broad market selloff.

After Wednesday’s close, E*Trade announced it was axing commissions on the same securities. The company also does not charge RIAs commissions, according to an employee familiar with its fee schedules.

RIAs celebrated Schwab’s move, as well as TD Ameritrade and E*Trade’s reactions, as a triumph for investors and their businesses. Clients and wealth management firms stand to save a lot of money on trading costs.

But RIAs that custody with Interactive Brokers Group shouldn’t hold their breath hoping the custodian will do the same.

Last week, Interactive Brokers unveiled IBKR Lite, a simpler, commission-free version of its discount trading platform for retail investors, which might have sparked a flurry of fee-slashing. After seeing the news, Evan Rapoport, the founder and CEO of SMArtX Advisory Solutions, which offers managed accounts and a turnkey asset management platform, reached out to Interactive Brokers to ask if the cost-saving would extend to RIAs.

“Unfortunately IB mgmt has made it very clear internally to sales that IBKR-LITE is not available for RIAs at this time (perhaps never),” an employee told Rapoport in an email last week. 

The news didn’t surprise the executive, who said Interactive Brokers is in a commission quagmire because of its focus on institutions, including hedge funds and mutual funds, introducing brokers, proprietary trading groups, and financial advisors. Those institutions accounted for approximately 51% of its nearly 600,000 accounts and approximately 65% of total customer equity ($128.4 billion) at the end of 2018, according to the company’s annual report.

How can it ask one group of institutions to pay and not the other?

Interactive Brokers might also struggle to compete against Schwab and other custodians now, according to Rapoport. It could do the same as others and eliminate commissions for RIAs, but it would then lose revenue to put toward its supporting services that are lacking compared to other custodians, he said.

There are positives to choosing Interactive Brokers over other brokerages, Rapoport said. For example, interest rates for its margin loans are as low as 3.90%, compared to 9.32% at Schwab, 10.25% at TD Ameritrade, 9.32% at Fidelity, and 9.35% at Vanguard at the end of last year.

Still, barring some significant changes, Rapoport said he guesses the number of RIAs custodying with Interactive Brokers will decline.

“If you can’t compete on commissions, and the secondary services are lesser, what’s the reason to choose [Interactive Brokers] over a Schwab or TD Ameritrade?”

The Greenwich, Conn.-based custodian doesn’t agree.

Interactive Brokers is currently focusing on IBKR Lite and there are no imminent plans to eliminate commissions for its RIAs, Steve Sanders, an executive vice president of marketing and product development at Interactive Brokers, told RIA Intel.

But he said “never” is not the word he would use to describe the elimination of commissions for RIAs and Interactive Brokers already has various commission schedules for institutional clients. “Creating different commission schedules is never a challenge for Interactive Brokers.”

Interactive Brokers has also been investing in its services to support RIAs, including its Greenwich Advisor Compliance Services, which offers tailored solutions for RIAs going independent as well as day-to-day compliance, among other services, according to an employee familiar with the investments.

The employee also challenged whether Interactive Brokers was wholly participating in the fee war between the other custodians. IBKR Lite was created to attract retail investors to the brokerage who previously might have been overwhelmed by IBKR Pro or found it too expensive given their trading and investing needs, the employee said.

Other RIA custodians have not commented in detail about whether they will follow the immediate path of Schwab and company or Interactive Brokers.

“The value offered at Fidelity is unmatched and we will always look for ways to leverage our scale to deliver even more value. Our customers benefit from industry-best order execution and price improvement, the industry’s lowest index mutual fund expense ratios, more than 500 commission-free ETFs, an award-winning brokerage platform, and access to choice on our cash sweep offering,” a Fidelity spokesperson said.

“Our business model is different than many of our competitors. As a purely B2B company, we put our clients—advisors and wealth managers—at the core of what we do,” Ben Harrison, the managing director of Advisor Solutions at BNY Mellon’s Pershing, said in a statement sent to RIA Intel.

“We constantly evaluate our pricing schedule in light of the trends in the industry, which are moving more toward transparency, unbundling fees, acting in the best interests of investors, and a fiduciary standard. Our goal is—and will always be—to provide our clients with an open platform that offers one of the broadest product choices in the industry so they can best meet investors’ needs.”

When asked to clarify whether the evaluation of the pricing included weighing a decision to eliminate commissions on trades for RIAs, Pershing declined to comment further.