Special Promotions in the Online Brokerage World: Friend or Foe?
21 September 2011
The online brokerage market continues to evolve, with customers demanding more tools, enhanced trading functionality, and faster execution speed. Amidst these technology improvements, competition is forcing online brokerages to lower commissions and adopt a pricing model that emphasizes simplicity and transparency. In this environment, it should come as no surprise that active traders are an extremely valuable customer group. Attracting and retaining these high value accounts requires a multi-faceted strategy that focuses on platform functionality and tools for the active trader, product access, multi-channel trading, and low commissions. Over the past 18-24 months, Celent also has noticed that brokerage firms have been more aggressive in making use of special promotions as a way to incentivize new account openings. There are two types of special promotions that have gained traction over the past year. The first involves offering commission-free trades for a period of time (typically ranging from 30-90 days) upon opening a new account. This is particularly attractive to active traders, whose frequent activity makes them especially price-sensitive. Another common promotion is to give away a free smartphone once an investor opens a new account and signs a two-year wireless plan. This promotion not only suggests to potential clients that the firm is “up to date” on the latest technologies, but also encourages investors to make use of the brokerage’s mobile trading functionality. But are these promotions worth it for the brokerages? The answer appears to be “yes”, since firms continue to offer new promotions every few months. These special offers may seem trivial, but given the active investor’s propensity to open multiple brokerage accounts and this customer’s price sensitivity, such offers may provide enough incentive for active investors to move their assets. Furthermore, in such a competitive environment where economic recovery is still fragile, trading activity has been falling all summer, and commissions continue to decline, no one brokerage can afford to stay above the fray and not participate in these promotions. There is one caveat to the effectiveness of these promotions: They are worth it for the brokerage only if an investor opens an account and moves over enough assets to cover the cost of the promotion. To that end, a few firms have added a minimum funding requirement to qualify for these promotions. This requirement exceeds the typical minimum for opening a new brokerage account. However, this additional qualification detracts from the ease and speed of opening a new account for active traders, which is what these promotions are intended to highlight in the first place. So does this create a double-edged sword? If there is no funding requirement, will brokerages end up giving away tens or even hundreds of commission-free trades for a few thousand dollars in assets, or will high minimum funding requirements undercut the promotion? Celent believes that firms should carefully consider effective requirements to qualify for these promotions. In the case of determining a minimum deposit requirement (to qualify for promotions), each firm should understand what type of customer they are trying to attract, what the competition is offering, and how this offering matches the active trader's preferences. Celent’s 2010 report entitled, The Self Directed Market
outlines the active trader’s product and technology preferences, behavior, and demographic attributes. Celent has also recently released a Case Study of Charles Schwab
which highlights the firm’s retail brokerage strategy and how this firm is implementing its strategy to attract active investors.