Retail brokerage used to be simple. Reps pushed stocks, and they were paid handsomely when their clients traded. The business model was simple, even if the investments that reps pushed sometimes conflicted with their clients' goals (oops!). Fortunately (or unfortunately, if you were a commissioned broker), the Internet killed that model. But it also created two opportunities. The first was online brokerage; and the second was day-trading. Both of those models worked well for a few years, until market maker technology improved (reducing day traders' opportunities) and until the dot-com crash blew up both individual investors' and day traders' portfolios alike.
Out of the dot-com crash, we realized that maybe we didn't know everything, and that maybe we actually did need an investment professional. This became the Golden Age of wealth management, in which online growth slowed and fee-based advice became the standard. The credit crisis in 2008, however, challenged everyone's wealth, as managed portfolios cratered as well as investor-driven portfolios. With the crisis, wealth evaporated along with the value of individuals' homes, and selling U.S. equities became more popular than buying them.
This leads us to the present, where technology, business models and investing strategies are as nuanced as investors themselves, and the provision of services is as complex as solving a Rubik's Cube. Today, some investors want help, some are self-motivated and some have developed proprietary trading strategies. Some investors still buy equities, while many are moving from funds to ETFs. And all investors are thinking more globally about their investing strategies rather than investing only in their own backyards.
The service model is almost as complex. Wire-house brokers are peeling off to independents, portfolio managers are migrating to an RIA-based model and Dodd-Frank is threatening to hold commission-based brokers to a greater fiduciary standard that aligns them more toward asset managers than toward the brokers of yore. Getting this right is incredibly complex.
Increasingly, however, there is a new class of retail investor: the semi-professional. As the financial markets firms become increasingly automated, more cost conscious and less trader-centric -- and as online traders find themselves increasingly at a disadvantage to fully automated proprietary trading shops -- individuals are demanding greater and greater trading technology and tools. Instead of just U.S. equities and options, semi-professionals are trading across asset classes and geography. They are using advanced technology that functions more like the tools they used on professional desks than the traditional order entry screens typically employed by novices.
While this cadre of traders is small in ranks, the beauty of this core demographic is their turnover strategies, which push their trading velocities past the two or three trades of a typical online brokerage client to dozens of trades a day. And with more-advanced automated strategies, and under-employed professional traders on the rise, we will see even these numbers increase, in terms of traders, turnover and the desirability of this demographic.
Increasingly, the trading tools for professionals and individuals will align as machines shrink the professional class and economics and client demand push the individual class. While the ranks of these traders won't be large, they will be increasingly profitable as lower cost tools and scale make this a more interesting and profitable demographic.