Neo-brokers are shaping the future of retail investing

Key Takeaways

• Neo-brokers’ innovation is shaking up the wider industry
• Traditional firms need latest tech to enhance client experience
• Exchanges and tech vendors must understand brokers’ needs

The modern equities brokerage landscape is increasingly diverse and specialized, with firms tailoring their services to meet the needs of specific retail customer segments. Brokers in the retail space focus on providing individual investors with streamlined access to the markets.

A new generation of “neo-brokers” is emerging to attract a younger cohort of retail customers, by leveraging cutting-edge technology. These neo-brokers are markedly different from traditional retail brokerage firms and are reshaping both the market and the wider industry through their innovative approaches.

The distinction between neo-brokers and traditional retail brokers largely stems from the different customer segments they target. Retail brokers have traditionally catered to older and high-net-worth customers, shaping the premium service they provide. These brokers emphasize a comprehensive experience, including global market access, in-depth research, and a broad array of investment products. They dedicate substantial resources to advising and supporting clients, tailoring their services to align with each client’s investment objectives and risk appetite. This premium approach often comes with trading commissions, account management fees, and other charges, which limits their customer base to those who can afford these higher costs.

In contrast, neo-brokers are carving out a place for themselves by targeting a different pool of potential investors. They primarily target small-scale investors, often younger individuals who may be new to the equities markets. To attract this audience, they compete intensively on cost, typically offering commission-free trading as standard. Their emphasis is on creating an inviting, user-friendly experience, with intuitive mobile apps and accessible content on essential market concepts. Although they generally lack the extensive product range or tailored service of a traditional retail broker, their innovative approach presents a significant challenge to the existing models of retail trading.

Broader industry implications

The difference in business strategy between traditional retail brokers and neo-brokers has broader industry implications. Each type of firm has unique technological needs and distinct business priorities. For example, neo-brokers in the US place a very strong focus on fractional share trading. Many US stocks are extremely high-priced, which puts ownership of even one share out of reach of most individual investors. Fractional shares allow these investors to include high-value stocks in their portfolio, and are, therefore, an essential part of a neo broker’s offering. The neo-broker mission to commoditize trading and reach a wider market also requires robust technology, capable of handling millions of transactions daily.

In contrast, traditional retail brokers prioritize service quality to justify their higher fees, offering global market access and a more diverse array of financial instruments. Their technology must be more advanced, incorporating sophisticated order routing, algorithmic tools, and detailed analytics to enhance the client experience.

The global retail investor base is expanding rapidly in both size and diversity, and brokerage firms are expected to evolve alongside this trend. The need to differentiate from the crowd of competition, address specific market segments, and meet diverse customer needs will continue to fuel innovative strategies.

It is essential for exchanges, technology vendors, and other service providers to understand the distinct priorities and requirements of the various types of brokers. By collaborating effectively with both the new wave of neo-brokers and established brokerage firms, providers can play a critical role in supporting the ongoing global growth of capital markets.