It’s interesting but maybe not surprising that the greatest organizations ever created to empower self-directed investors were created away from Wall Street. The eponymous Charles Schwab and Larry Waterhouse, Ned Johnson (Fidelity), Joe Ricketts (TD Ameritrade), and Rodger Riney (Scottrade) built their companies to challenge Wall Street hundreds and thousands of miles away from “The Street.”
The staid, oligopolistic full-service brokerage business had been ripe for disruption with entrepreneurs from places like Boston, Omaha, St. Louis, and San Francisco. Innovators in these places were not caught up in the hype of Wall Street—where so many believe that theirs is the only way. Wall Street had been the epicenter of American finance and capital markets almost since the country’s founding. The entrepreneurs that built their companies away from Wall Street could envision a future business model built around technology, customer service, education, and empowerment even as the Wall Street players were hell-bent on maintaining the highly lucrative status quo.
These entrepreneurs lived and worked in places that gave them a decided advantage as the business environment began to change. They saw the world at ground level rather than from a high-rise office building in New York City. They asked some basic questions, including: Why does it cost $200 to trade one hundred shares of stock? Why can’t individuals do their own research and investing? What value does the stockbroker add in the equation?
What is the track record of brokers who are recommending stocks and receiving massive commissions? If individuals and brokers could be armed with the same information at the same time, would brokers be that much smarter? Could education be a substitute for broker services? Why is it that brokerage firms are so incredibly profitable?
As these questions circulated, it became clear that the end consumer was not getting a good deal under the Wall Street model. Several entrepreneurs, all at roughly the same time, determined there had to be a better way, a way that put the client rather than the broker at the center. With that, the self-directed investor emerged, and the nascent discount brokerage industry was about to explode. These firms worked tirelessly to level the playing field. Largely due to a superior value proposition, the discount brokerage industry would take market share from the full-service firms for the next thirty years.
The essence of the value proposition for the discount firms was this: We will help you (versus We will do it for you) or, said another way, We’ll do it with you, not for you. Home Depot was revolutionizing home improvement with their approach of “You can do it, we can help.” Home Depot made it easy by providing support and education for millions of Americans to learn how to complete simple home repairs themselves. For example, they held seminars to teach Americans how to lay tile and do simple plumbing jobs.
Similarly, the discount brokerage industry hosted thousands of conferences in hotel ballrooms to teach willing investors what they needed to know to take control of their investments. The idea that an individual had to fully delegate investment decisions to a full-service broker for high commissions began to fade away. Timely information, education, the internet, and easy-to-use technology was leveling the playing field. A new and better value proposition for many investors had arrived. With the middleman largely cut out, commission prices could be cut by as much as 90 percent (eventually this would become 100 percent as trading commissions fell to zero).
The industry evolved over the years, but the basic premise that individuals could invest and trade on their own, unencumbered by a high-paid broker, remained. The full-service firms continually lost market share to these upstart firms and have never fully recovered.
The advent of the internet allowed the discount industry to massively scale. Even today, there are new challengers to current incumbents, reframing the self-directed investor value proposition with new technology, products, services, and pricing conventions. Like others before them, Robinhood, Square, SoFi Invest, Acorns, Webull, Ally Invest, TradeStation, and others are altering the arc of the industry. Once again, not even one of these firms was spawned on Wall Street.
–Excerpt from Taking Stock: 10 Life and Leadership Principles from My Seat at the Table. Available on Amazon.com