The U.S. financial market has undergone a gradual change over time as the financial markets have seen a higher influx of e-brokers. These e-brokers have several advantages over traditional brokers. However, they also face a few challenges, which means they face strong competition.
Broadly, e-brokers offer a better value proposition and provide a lot of business to asset managers. Having said that, e-brokers are reaching the top of the rising rates, andthe circumstances make it harder for them to make money in a highly competitive environment.
On the other hand, if brokers and asset managers work together and enter into self-indexing at low price points, the competition can effectively be dealt with. It will give both asset managers and brokers the upper hand over index providers.
Sneak peek into the new launches by JPMorgan and Fidelity and the implications
JPMorgan e-Broker launch
JPMorgan is launching a new e-broker service that is priced very competitively. Customers will get 100 free trades the first year, and those whose balance remains higher than $15,000 will have free trades available to them in the second year as well. The e-broker service offers a low trading commission rate of $2.95 and also supports automatic portfolio building.
This new launch will make the market all the more competitive. Other brokers like Schwab may also lower their commission rates. This will make the environment more difficult for the already-competitive e-broker market, and making a profit is expected to become riskier.
Fidelity Zero-Fee Index Fund launch
Meanwhile, Fidelity has also launched two zero-fee index mutual funds. These are the United States’ first zero-fee funds. Fidelity has also lowered its expense ratio on numerous other funds, pushing the average management fee for its funds down 35%.
The zero-fee index funds are being marketed as mutual funds and are only available through Fidelity’s brokerage platform. It plans to offset the loss from not charging a fee for those funds by increasing its securities lending revenue. However, competitors like BlackRock and Vanguard do not have the option to compensate for losses through alternative sources of income.
