Equity broker or investment advisor? Who cares.

Ping pong

Aphrodite, a Femtech leader, has moved countries half a dozen times and maintains accounts (or trails of accounts) in each place she lived and worked at.

Three different currencies and a mix of accounts, from checking, savings, to investment accounts; comprise her financial holdings. The accounts include some passive, “hosted” under a universal bank’s non-discretionary “division”, an IRA account, and a “private banking account”.

Boy, did Aphrodite wish there was an aggregator platform at her service, to monitor and manage her “diverse” portfolio. All that currently exists is country specific and has no cross-border capabilities (am I missing a cross-border account aggregator?). Such diversification across financial institutions is typical to HNW but Aphrodite isn’t a HNW femme. She happens to be an affluent mobile professional, who has moved from intrapreneurial positions to entrepreneurial ventures. She isn’t as advanced as Andreas Antonopoulos, who over the last 3 yrs is only compensated in bitcoin while traversing the world to preach for a decentralized monetary system and against the central surveillance system that is entrenched in our financial habits.

During her recent move to a European country, Aphrodite and her husband started discussing consolidation of their scattered financial holdings. Her husband’s coworker tried to introduce them to a broker with international capabilities and Aphrodite’s female local business partner suggested a fairly globalized investment advisor. A can of worms opened up between the couple, as to which is the right and more suitable approach.

While there is no oath for brokers or advisors, like the Hipppocratic oath for physicians, there is a basic distinction between the two professional functions. Financial advisors have sworn to put their client interests ahead of their own. And particularly in the US, the recent DOL rule focused on the fiduciary duties for retirement accounts. Brokers on the other hand, have been traditionally selling products (earning commissions) and are basically constrained by suitability guidelines. So, level 1 distinction is fiduciary standards versus suitability rules. Sounds like female versus male stereotypical approaches?

In the US actually, the two functions are regulated by different agencies. The SEC takes care of investment advisors and FINRA oversees those involved in brokerage.

Aphrodite and co., are mainly focused in equity investing and trading. The couple played broker vs. advisor ping-pong conversation for a couple of days.

  • Ping: Most brokers are also custodians; so they’d better be trustworthy and run a solid business. Broker blowups aren’t uncommon.
  • Pong: Your advisor will have to use a custodian anyway; so we aren’t moving towards a one-shop location.
  • Ping: Brokers are innovating at a faster pace and offering commission free ETFs, institutional commission levels on individual stock trades and CFDs plus many resources for self-directed investors. Why pay the professionals for investment advice that we can extract with the new financial apps?
  • Pong: Advisers aren’t behaving like kids in a candy store, downloading financial apps here and there simply to offer cheap access to their clients or to impress them with information via digital media. Advisers are more sensible because they understand the complexity of customer needs. They are professionals and dedicated to this domain. Are you fooling yourself that you can compete with them? And actually, know that I think of it, “I want them to have advantages” as Matt Levine in BloombergView “Bad supervision or No supervision” argues.
  • Ping: Fees have been eating into long-term returns. That’s why there aren’t enough billionaires as you would expect around. As Victor Haghani points out in his Ted Talk “Where are all the Billionaires? And why should we care?”, from the 4000 billionaires in the 1900 there are only 400 left. If only these 4000 had matched the market returns, we would have had 120,000 billionaires today.                                     How can I resist singing up for slashed equity commissions as low as 80% or for some combination of indexed investing and active rebalancing?
  • Pong: Right, but do these brokers acting more as platforms with financial apps offering directly to us investment advisory tools, cover all my needs and fears? Can they hold multi-currency accounts? What are their custody fees? Do they have a dividend-reinvesting program? Can they be a one-shop place with no hidden costs?

Brokerage businesses are innovating faster because they feel the disruption threat banging on their door. Price differentiation cant remain the solid foundation of a business at a time that financial services are becoming integrated and the world is moving towards being able to offer holistic financial wellness programs.

Financial digitization is blurring the lines between brokers, custodians and investment advisor services. The established large players are already re-positioning themselves day by day, as platform businesses catering to changing dynamic customer needs. They are integrating online portfolio management capabilities (robo-advisors), content, and investment discovery tools. They are realizing that most clients can’t be canned and directed in one category, passive, active, beta, or alpha. A customer can be partly all of those; or active in one asset class and passive in another. Service has to be agile to accommodate the dynamic needs of Aphrodite and her husband, who change behavior, risk profile and therefore, their needs and expectations.

Fintechs specializing on offering freeways for equity investing are Robinhood and iDealing (coverage on Daily Fintech). These freemuim brokerage businesses are making money on margin accounts and cash balances (much like Schwab intelligent portfolios does). Schwab intelligent is currently the closest to a commission free robo advisor. Although, I sense that a standalone full blown commission free robo-service, with really no hidden costs, will sprout out of Asia. I heard on the grapevine that a brokerage collaboration is in the works with a seasoned asset management practice; the necessary basic ingredients.

Robinhood started in the US and is expanding in the UK. Idealing started in the UK and will focus in Europe. Degiro, is a fintech broker, that gives access to retail equity investors at institutional level commissions, across more than 19 countries. Their agile approach for crossing country borders, is their claim to fame.

Very few standalone robo-advisors have chosen to be both brokers and investment managers from their start. FolioFn is in the US and Swanest in Europe. Most of the robo-advisor value propositions are focused on the UX and on serving the underserved. The behind the scenes part of their businesses, which by the way doesn’t differ from a traditional service provider, has been “outsourced” often to incumbents. For example, Motif investing to Pershing for custody; and SigFig to Fidelity. Betterment and Wealthfront, on the other hand, have chosen a Fintech provider for custody and clearing, Apex clear.

Aphrodite and her husband, will ping-pong on their financial issues. We will follow them and explore with them. Their case would rest,

if a true commission free robo-advisor became available.

Will a traditional brokerage business deliver this innovation? Will a traditional wealth management business arrive first to market? Or will this come out of a collaboration of a brokerage and asset management business? Can you smell it coming?

Brokerage businesses are innovating faster than financial advisors. Customers will benefit in all possible scenarios.

Cross border aggregation of accounts is still missing. Anything brewing in Europe?

A commission free robo-advisor is still missing. Anything brewing in Asia?

Comment below on this ping-pong game and on the thoughts around it.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Efi Pylarinou is a Digital Wealth Management thought leader.


  1. Hi Efi, great contribution! You mentioned iDealing to offer commission free trading such as Robinhood. Latter started to work together with other fintech startups in the US providing them their back-end services. Do you know whether this is the intention of iDealing as well? Robinhood wants to come to the UK, do you know if they made some progress in this regard?

    • I am familiar with Robinhood partnerships with StockTwits, Quantopian, and ClosingBell. Robinhood is enabling these Fintechs, specializing in some kind of “Actionable advice”, to offer the “Action” button (https://dailyfintech.com/2016/02/22/dazzling-fintech-actionable-investment-advice-needing-a-bridge/). Are there are any more recent ones?

      Regarding the geographic expansion of Robinhood: In Jan there was the UK announcement. Last year the Australian one and just this month in Techcrunch, about a launch in China.
      To my knowledge, all of them are still work in progress. Any update welcome.

      No iDealing partnerships that I am familiar with.

    • Developers (Salesforce type of inhabitants), multinational citizens, Transferwise early adopters; they all seem to be banging on the door of @AskRobinhood on twitter to find out about their arrival in UK and EU.
      Idealing has gone silent?

  2. Regarding the commission free robo-advisory offering; this would certainly represent great value for the customers. However, how would build a sustainable business model?

    You could, such as Robinhood does, make money on the interest rates that are coming from the cash sitting on the bank accounts. However, in a low cost interest rates environment this will not be sufficient.

    You could redirect trade flows and get money paid for doing so from other market makers.. however, this could cover maximum up to 10% of your costs.

    Lastly, selling data is another potential revenue stream, but I doubt that users would feel comfortable with that..

    What are your thoughts around that?

    Best regards,

    • I think it is a scale game. If enough people sign on for free then the interest can be significant. The elimination of fees can lead to hockey stick growth, but this is clearly still a work in progress.

  3. Great article. Highlights the regulatory fragmentation that has evolved over many years. The new DOL rule only applies to ERISSA accounts and the industry wonders when fiduciary duty will become universal. And the question looms – can a robo-advisor even legally provide a fiduciary duty to their client? Meanwhile VC throw hundreds of millions into robo-advisors offering commission free, or nearly free, investing. Where do the margins come from? If the robo-advisors have shown us anything it is that demand for brokerage services is fairly elastic. So once they offer free where to go for profit? Will the clients of robo-advisors prove to be sticky? That is the great unknown. I continue to SMH when I see the money thrown at Robo-advisors. We have always been told that VC seek 30X returns. I don’t see that happening with a free business model in an industry whose clients are price sensitive.

  4. The irony these days is that Fintechs are claiming that “Customers are sticky” and talk about LTV of customers as more important than CAC. At the same time, incumbent financial institutions have evidence that “Customers arent loyal”.

    Well said Norman: “demand for brokerage services is fairly elastic”!

    • Kind of weird for robo-advisories to label clients as sticky. If brokerage clients are sticky, then the robo-advisors would not be growing at this pace. If sticky clients are somehow unique to only robo-advisories – well let’s just say that I would want to see that data after the industry niche is more mature. Eventually everything reverts to the mean…

  5. Thanks a lot for all the inputs provided! Here is some additional food for thought:

    Interest rates
    I do not believe this pillar to be sufficient to build a sustainable revenue model, even with hockey stick growth. You would need around € 10 Billion of AUM somehow be able to approach break-even, assuming the entire company to run very lean.

    Price elasticity
    When investing fees definitely play an important role, however, being cheap is not sufficient to assure growth. In the end, players like Wealthfront and Betterment are growing, but not as fast as expected. Moreover, there are lots of discount brokers out there, but they server only a little segment of the market.

    Customer stickiness
    Really true, it is not proven that investors will stay with robo-advisors. Currently, an investment advisor is able to serve a client for up to 15 years. However, new technologies, especially APIs, will make the switching between service providers much easier and therefore reduce the CLV.

    • Great points on customer stickiness and price elasticity of the low cost robo advisor customer model.

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