If you’ve ever visited a financial news site, you’ve likely been bombarded with offers for “Free Trades” or “Lowest Costs per Trade”. Since the earlier days of the online brokerage industry, the competition for the lowest cost per trade has been fierce. So fierce that the two largest and grandest in the space, Fidelity and Schwab, launched the latest fee war earlier this year which we wrote about.

You may also be aware that Robinhood, a venture-backed unicorn, is now offering “free trading” and even putting an interstitial in your log-in flow to entice you to move your assets from other brokers to them. What gives?

Mo’ Money, Mo’ Profits

While Robinhood makes money by selling customer order flow, the largest financial institutions make money having Assets Under Management (AUM.) The more money that they have under management, the more money they make. And it appears that investors have turned the screws on Robinhood to make more money given their aggressive (ab)use of competitor’s Trademarks & Logos (as seen above) to shift assets to the free brokerage.

The chart below shows just how much a brokerage can make when they have more assets under management—which is tied to where interest rates lie. In a zero interest environment, which we were between 2008-2016, it’s harder to put AUM to work, but once interest rates rise, those with the most assets win—which is why you see the financials of top public brokerages recording record profits despite lower trading volume.  

No More Soft Sell

Traditionally brokerages do not aggressively push customers to move their assets from one account to another. In fact, Fidelity was the only brokerage to not charge or put a financial disincentive to do so. However, as Robinhood has taken Trump-like tactics to the brokerage industry, we suggest the only way to beat them is to “hit them back 10x as hard.”

Here are a few examples of how to do that:

Rising Rates

Look at E*Trade, for example. ETFC had a 20% drop in their largest income generator of “interest income” and close to a 40% drop after the interest rate drop post 2008. Yikes! Their interest income earned has remained flat until the last year when for the 9 months ending 2017, they saw a 24% increase in interest income due to increased interest rates.

While the biggest driver or other income (which is still only ¼ as much as the interest income) is fees from derivatives (read: options), trading for equities is flat across the board but derivative products are increasingly important accounting for 34-50% of the volume.

In other words, with interest rates set to keep rising, companies can’t take their foot off the gas when it comes to increasing AUM. How do you plan to bring in more in the coming months and years? And moreover, what is your retention strategy once you have them? Is the race for AUM the beginning of consolidation? Or do you think that the AUM race will accelerate asset managers getting that much closer to retail customers?