Q4 revenue strong at IBDs, online brokers despite market declines

Increased trading and higher interest rates helped the firms weather volatility, Moody's says

Feb 13, 2019 @ 4:42 pm

By Ryan W. Neal

Independent broker-dealers and retail brokerages were able to generate good revenue during the final quarter of 2018 despite the significant drops in the market, according to Moody's Investors Service.

The market turbulence in December played into the hands of companies like Charles Schwab Corp., TD Ameritrade Holding Corp. and ETrade Financial Corp. by generating higher trading activity and commission income from retail investors.

Clients were net sellers in Q4, resulting in higher cash balances in their brokerage accounts. This allowed the brokerages to sweep more cash into deposits on their balance sheets, which generated increased revenue at higher interest rates.

(More: Ameriprise reports higher fourth-quarter earnings despite market drop)

"The shape of the yield curve helped them with that," said Fadi Massih, assistant vice president and analyst at Moody's, adding that every Fed rate hike should help the firms make more on their cash holdings. The most recent rate hike, in December, should have an impact on the current quarter's earnings, he said.

Higher rates also provided a enough of a boost to pretax margins at IBDs like Raymond James Financial, LPL Holdings and Oppenheimer Holdings to overcome the hit that asset-based fees suffered from the 14% market decline. The market rebound in 2019 should help IBDs regain some of their losses in this area.

(More: UBS saw decline in new client money in fourth quarter)

The IBDs also saw cash balances reverse course as clients sold positions, but Moody's expects clients will slowly reinvest in the market and boost the firms' commission revenue.

Clients at online brokers tend to keep a greater percentage of their assets in cash than clients at IBDs, helping the retail firms benefit more, Mr. Massih said. He called the report a testament to the online brokers' business model.

"It's an interesting case scenario," he said.

(More: Morgan Stanley wealth management revenue falls 6% in fourth quarter)

Firms also started passing along the benefits of higher interest rates to clients, with the deposit rates paid to clients increasing at both the retail brokers and IBDs. Retail brokerages also saw an acceleration in share repurchases in response to lower stock valuations and a reduced need for retained capital.

0
Comments

What do you think?

View comments

Most watched

INTV

How the 2020 elections could impact ESG investing

Joseph Keefe, president of Impax Asset Management, on the elections and how advisers can build a bridge to the next generation of clients with ESG investing.

Events

Jim Crowley, a new sheriff in town?

BNY Mellon Pershing's new CEO as of July 1st, Jim Crowley, discusses his vision for the future of the company.

Latest news & opinion

Departure of Alexander Acosta could slow DOL effort to revise fiduciary rule

Acting secretary Patrick Pizzella will have to make political decision to move ahead.

SEC member Peirce to brokers: Talk to us early, often about Reg BI implementation problems

She's willing to advocate for additional compliance time if firms have made a good faith effort.

Hub in talks to buy $40 billion LPL branch Global Retirement Partners

GRP, an LPL super-OSJ, would represent the latest in a flurry of acquisitions for Hub.

David Lerner Associates' financial condition deteriorates

Firm reported 'negative net worth' of $17 million last year in recent SEC filing.

Why healthy clients need to save more for retirement

Tax-free health savings accounts, Roth IRAs, insurance and annuities can help cover retirees' future health-care costs.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print