Get smart about the future of trading

Technology and regulatory pressures are pushing advisers toward model marketplaces

Nov 27, 2017 @ 4:32 pm

By Tim Welsh

If there was ever an industry in transition, it's the investment management industry. The pace of change is accelerating and transforming investing.

This continuous march in industry transformation began in the mid-1970s with the de-regulation of commissions, which unleashed disruption that is still present. On May 1, 1975, and for the first time in 180 years, trading fees were set by market competition, instead of the government.

Online trading further accelerated this industry disruption, bringing trade commissions down from hundreds of dollars to just a few only 20 years later.

Fast forward a couple of decades, and technology and transparency are now the key drivers of cost reduction, particularly in newer investment products like ETFs. More efficient ways to conduct transactions and deliver advice, via advancements in technology, have driven these spreads from hundreds of basis points to just a handful, and in some cases, zero.

In order to accommodate for these cost reductions, the "Wall Street product machine" has been creative at packaging investment products and advisory programs to layer fees and costs back in. Take, for example, the fact that Morgan Stanley reported record earnings in the third quarter of 2017, despite a decrease in trading revenues, while its wealth management division set new records for revenues with fee-based assets hitting $1 trillion.


Nimble, technology-based innovators are capitalizing on their ability to lower these costs and transfer them back to investors. The growing crop of robo-advisers are an excellent example of how these innovators have broken investing into its core components (i.e. asset allocation advice, trading, rebalancing) and then unbundled those services within an investment program or product in exchange for low-cost basis points.

Another transformational force for further transparency is coming out of the fiduciary movement. While the Department of Labor's fiduciary rule is still being debated, the industry is rapidly moving to shine a bright light on high-cost investment products and programs due to the proposals' wide-ranging coverage and potential to impact all industry participants.

As a result of the regulatory focus, industry players are evolving their product development, distribution and marketing strategies to take advantage of these opportunities. In fact, the future of advisory trading is now being defined not only by asset managers, but also by technology platforms.


A prime example of this is the rise of model marketplaces. A model marketplace is essentially a platform for financial advisers to choose from a series of third-party-created investment models, while retaining control of their clients' portfolios, implementing the trades themselves while leveraging trading and rebalancing software.

Asset managers are seeking new ways to distribute their own investment products, as well as seeking new revenue opportunities from adding a layer of fees for model management, which is helping support the emergence of these model marketplaces.

Companies participating in this trend include Oranj, Betterment, TD Ameritrade via its iRebal, and Orion Advisor Services, which has rolled out Orion Communities. A sister company to Orion, CLS Investments, also has launched Smart ETF Models, which offer advisers a zero-percent strategist fee and partners with major ETF issuers.

Centralized model marketplaces allow advisers and strategists to share and access custom model portfolios while maintaining control and trade execution. The rise of the more advanced platforms in this category create interactive peer-to-peer exchanges that allow advisers, along with strategists, to share model portfolios on an open-source platform, many of which are being offered at zero charge for clients.

As investing costs continue to decline or become eliminated, the future of trading is rapidly becoming a different landscape, one that will be dominated by a new set of industry players.

The transformation started over 40 years ago and is still alive and well today, providing advisers and their clients with a better opportunity for investment success and the well-deserved ability to select from quality products.

Tim Welsh is founder and CEO of Nexus Strategy.


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