A couple of days ago numerous news outlets, including CNBC, Bloomberg, Reuters, and CNN, reported that JP Morgan Chase is launching a new kind of DIY investing service model next week that will be embedded as a part of the current Chase Mobile banking app and online banking service – an entirely new digital trading platform to acquire more investors and their assets (back) to JP Morgan. Releasing new functionalities and improvements for existing banking apps is not anything new, but JP Morgan’s announcement came with an incredible twist.
JP Morgan Chase chose to tackle the traditional discount brokers and new zero-commission brokers heads on with a new kind of bundled trading offering under their new You Invest investment management service line: free or discounted trades (i.e., a kind of price band model that is ultimately dependent on your loyalty/service level) 1)“Clients can get 100 free trades every year if they maintain an account balance above $15,000, and Chase Private Client customers, or those with at least $250,000 in balances, get unlimited free trades”, Darin Oduyoye, a spokesman for JP Morgan, told to Bloomberg., a sophisticated portfolio-building tool and no-fee access to the bank’s stock research for self-managed client accounts. 2)“A sophisticated portfolio-building tool” sounds like prehistoric robo-advice but that’s not the point. It will be most likely some advanced tool to do portfolio analysis and screening. JP Morgan’s new offering is targeted at too broad groups of investors, according to Dr. Kelli Keough, Managing Director, Global Head of Digital Wealth Management at JP Morgan Chase. Essentially, JP Morgan wants to encourage, especially Millenials, to start investing and also, JP Morgan intends to engage those “people [i.e., JP Morgan’s current clients] who have a Chase account but invest elsewhere” as Keough pointed out to CNBC. The penetrated, target and served available market are huge, and I expect JP Morgan to make sure that they will use smart ways to reach their potential clients as effectively as they possibly can.
Basically, JP Morgan’s tactical approach is to create a new investing service to “combat deposit displacement–the displacement, or diversion, of funds away from traditional checking accounts into other accounts” as pointed out by Ron Shevlin from Cornerstone Advisors. According to Shevlin, the whole idea of convincing those who have never invested before to invest is basically nonsense – it’s a nice slogan, but there are much more strategic reasons for the launch. 3)I pretty much agree with Shevlin’s analysis, but I also think that targeting young investors is both tactical marketing as well as a real option, i.e., an opportunity to extend their customer base and attract those people that would become Chase’s clients if investing is made hip and cool and cheap. Instead, as Shevlin argues, the fundamental issue is to proactively protect JP Morgan’s deposit products from unnecessary customer loss (i.e., migration to competitors or investing via other providers). I would like to add that (passive) mutual funds and money market funds are nowadays available almost everywhere, and funds have made it possible for retail savers and investors to save (or invest) even on a monthly basis in pretty small sums (e.g., in Finland, some offer subscriptions for no extra fees starting from €15 ~ $17 per subscription). As a result, there is a lot of money invested in these investment products and some investors and savers might end up thinking that these investments act kind of a substitute for actual deposits.
Basically, there are at least three things that support Shevlin’s line of thought. 4)Spencer Lazar at venture capital firm General Catalyst seems to agree with Shevlin as well. First of all, the plain vanilla trading service (stocks, ETPs, etc.) is pretty much commodified, and brokers and broker-dealers need to find other means to generate revenues. Consumers are not blind and instead of staying with a single broker, there are multiple ways that they can try to enhance their bargaining power. This means, for example in Finland, that clients can (and will) utilize some service providers almost for no continuous fee at all and access market data with one broker here, execute ETF trades there and trade with Japanese stocks with someone else. There are zero-fee products already available, Vanguard effect is real, fees have been compressing for a long time now – and this does not mean that it’s just trading but financial advice is also becoming cheaper all the time (and clients can choose their level of advice from the continuous spectrum ranging from DIY to full mandate).
First, the basic product lines are pretty homogeneous and therefore service providers find it hard to differentiate themselves solely by their plain vanilla offering. Brokers need to highlight other dimensions of their value propositions instead of direct market access, size of the investable universe, etc. – and this means that they need to sell margin lending, IPO distribution, short selling, proprietary products, etc. Second, it’s quite easy to make basic background work and comparisons based on their subjective preferences (e.g. “Am I ready to pay a flat fee plus the variable fee, flat fee or variable fee, fee-per-stock, etc.). It isn’t very hard to make the choice to stay, leave or separate “total portfolios” to different brokers (or other service providers) after doing some basic Google searches, running some simulations in Excel and optimizing trading activity. Third, and most importantly, it is pretty easy even for the retail consumers to present credible threats to get what they want as it’s quite easy these days to switch from full-service brokerage to discount brokerage.
As you can see from my digital wealth management timeline, JP Morgan invested in Motif Investing back in May 2014, made an equity investment in and partnered with wealthplattech InvestCloud, and in December 2017 JP Morgan Chase filed disclosures with SEC to test our robo-advisory in 2018. This new service line will not have any robo-advisory offering from the getgo. Instead, as Co-
Without the still ongoing ICT revolution, especially the Internet, there would be no discount brokerage – and there would not be JP Morgan’s You Invest. The Internet has made it possible to deliver and distribute financial products and services efficiently and affordable, and for the discount brokers, the Internet was and still is the ultimate technological enabler of the whole business model. Basically, stockbrokers serve a straightforward function in financial markets. Namely, they act as a facilitator of direct finance. Traditionally stockbrokers have focused mainly on execution-only trading services (and many of them also have custody and nominee services as well) that are carried out only on the specific instructions of the customer in question. Technology, whether we are talking about advanced digital platforms or sophisticated algorithmic trading functionalities, have been and still are the spreadhead of execution-only service providers, and many stockbrokers pay a lot of attention to attractive pricing and to the size of potentially investable universe (e.g., assets, instrument types, exchanges, account types, etc.). Now we are witnessing the next industrial wave of the brokerage industry – business model innovation is already here!
I don’t know a lot about JP Morgan Chase’s retail investing business in the US but I assume that retail investing is not their primary business area. As Shevlin argues, “Chase can afford to give away the trades that You Invest customers”. And even more importantly, as Jeff Kauflin said, “You Invest is primarily a customer-relationship play, not an effort to create a new source of revenue with brokerage commissions”. Fundamentally, zero-fee trading is not very interesting in itself, but rather it will be interesting to see how the investment management and brokerage industry will evolve as customer acquisition costs are rising thanks to these kinds of broad client acquisition strategies. Essentially, JP Morgan Chase is creating a multitude of real options to maximize their potential to attract as much attention and (new) investors as possible in order to clearly upsell (i.e., premium instead of basic) and cross-sell (i.e., sell related products, services or bundles) something else for their current and new clients in the future, e.g. credit cards, loans, mortgage, tax and retirement planning, financial advice etc. This is pretty smart move, i.e., the new investment services are going to be tiered – and now JP Morgan is positioned to compete against new investtechs like Robinhood and wealthtechs like Betterment and Wealthfront (when the You Invest-themed robo-advisory is launched next year). Financial advisors should be pretty worried about JP Morgan’s latest announcement as they are most likely to incentivize their clients and prospects to move assets from other brokers (back) to them. 5)It’s very hard to move clients from DIY investing to the advice-centric service model. Moving back from the top of the value stream is a bit easier, i.e. from “sticky money” to “swift money”, but will need a lot of thinking and probably separate line of business.
As one might have expected, discount brokers tumbled pretty heavily on Tuesday. TD Ameritrade, E-Trade Financial Corporation (E*TRADE), Fidelity Investments, Interactive Brokers and various other discount brokers have been performing pretty well after the financial crisis that shocked many to-be DIY Millenial investors. But as Jefferies analysts Daniel Fannon and Gerald O’Hara pointed out, “We do not view this as much a threat to existing brokerage clients at [Ameritrade, E-Trade, Schwab] … but more likely to have an impact on new account growth over time (i.e. millennials).” Some analysts have pointed out that well-established actors are already adequately equipped to act in a low-cost, intensely competitive environment. 6)It should be reminded that there is a possibility that JP Morgan doesn’t have to directly monetize their new DIY AUM. Transaction-based business is somewhat volatile, and transaction volumes aren’t as predictable as ongoing charges from mutual funds, financial advice, and discretionary portfolio management.
I believe that JP Morgan Chase has made an attractive bet, i.e. strictly limited downside, significant upside. We’ll see what happens next.
References [ + ]
|1.||↲||“Clients can get 100 free trades every year if they maintain an account balance above $15,000, and Chase Private Client customers, or those with at least $250,000 in balances, get unlimited free trades”, Darin Oduyoye, a spokesman for JP Morgan, told to Bloomberg.|
|2.||↲||“A sophisticated portfolio-building tool” sounds like prehistoric robo-advice but that’s not the point. It will be most likely some advanced tool to do portfolio analysis and screening.|
|3.||↲||I pretty much agree with Shevlin’s analysis, but I also think that targeting young investors is both tactical marketing as well as a real option, i.e., an opportunity to extend their customer base and attract those people that would become Chase’s clients if investing is made hip and cool and cheap.|
|4.||↲||Spencer Lazar at venture capital firm General Catalyst seems to agree with Shevlin as well.|
|5.||↲||It’s very hard to move clients from DIY investing to the advice-centric service model. Moving back from the top of the value stream is a bit easier, i.e. from “sticky money” to “swift money”, but will need a lot of thinking and probably separate line of business.|
|6.||↲||It should be reminded that there is a possibility that JP Morgan doesn’t have to directly monetize their new DIY AUM. Transaction-based business is somewhat volatile, and transaction volumes aren’t as predictable as ongoing charges from mutual funds, financial advice, and discretionary portfolio management.|