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.


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