The recent offer by Morgan Stanley to buy discount broker E*Trade has been widely publicized – and for good reason. The move is emblematic of a number of important trends in the banking and wealth management industries, including:
• The strategy of leading investment banks to move down market to build their share of the growing mass affluent segment
• The realization by still another large financial adviser that a significant commitment to technology is an existential imperative, particularly in appealing to next gen clients
• The likelihood that discount brokerage as a standalone business is not viable and that brokerage offerings need to be part of a broader holistic offer that includes banking and potentially other financial services
But perhaps the greatest significance of the E*Trade buyout is what it suggests about the pace of change in the investment management business and how impactful a disruptive startup can be to a large and well-established business.
It was only five years ago that Robinhood, with $3 million of venture capital, built a better mousetrap. The firm launched a slick, easy to navigate mobile app with a social network aspect and commission-free trades in stocks, funds, gold, options and cryptocurrencies. By 2018, the platform had reached 4 million accounts surpassing E*Trade. This year, Robinhood reached the 10 million mark, almost halfway to the combined accounts of TD Ameritrade and Charles Schwab.
TD Ameritrade and Charles Schwab had been building their businesses for nearly 50 years, E*Trade for nearly 40 years. Robinhood, in less than 5 years, has reached scale and challenged these entrenched leaders forcing significant strategic shifts and consolidation.
We expect the pace of change to continue to accelerate in financial services as new technologies offer new solutions and value propositions. This only increases the importance of current industry leaders to stay ahead of market and technological change.