Pricing pressure on commissions isn’t new in the brokerage and equity trading space. But it does feel like it’s accelerating. Just over the past few weeks, major brokerages — Schwab, TD Ameritrade, and E-Trade — eliminated commissions over a span of a couple of days.

JMP Securities’ Managing Director Devin Ryan joins us on the show to talk about all the moves in pricing in the investment industry and more importantly, where this is all headed. We discuss how investment firms will compete if not on cost and what the impact will be of many new competitors in the space.

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The following excerpts were edited for clarity.

How the industry is changing

It’s been an exciting time for the industry. Over the past 15 years, there’s been pretty substantial changes in the incumbent banking industry around pricing and the types of products they offer. There’s been an evolution of the business model. A big theme we’re talking about now is large cap public companies leveraging technology to move downstream to service customers that were historically not profitable.

That’s lead us in our coverage to parts of the market that are more technology-centric. I spend a lot of my time focused on businesses in the private markets that are competing with the public firms. There’s also changes around consumer preferences and options, creating an opportunity for consumers to have access to products and services they didn’t have historically.

Pricing changes in brokerage

What’s happened in recent weeks is really a product of what’s been happening for years. Trading has become commoditized and like any commodity, it tends to see pricing pressure. Every several years there’s been pricing cuts around trading. Over the past year, there have been a few new entrants to the market with free trading. We wrote a report about a month ago title Is free trading moving from an aberration to the norm?.

Many of the new entrants with free trading have strong financial backing and are brands that people know. That’s very different than the free trading options that have been out there the last decade. It’s very different this time because credible firms are offering free trading. You have to look at Robinhood’s growth over the past few years and be impressed. All the incumbent firms are paying attention. It’s not just Robinhood, either. These companies are potentially stealing a future customer from the incumbents.

An evolving business model

We’re evolving from a business model where trading moved from being a primary monetization mechanism for the industry to it being a service/product that is just part of the overall customer relationship. Many of the firms in the industry recognize this and are increasingly focusing on parts of the industry that are less commoditized and areas where they can monetize via advice and differentiated services and platforms.

It’s not just about free. As free trading becomes table stakes, you have to offer a differentiated experience to be able to maintain a profitable business model. If you look at Schwab, which just moved to zero commissions, even though its trading commissions have diminished, the firm’s margins have improved. It tells you that the industry understands that trading isn’t the monetization mechanism it used to be and has already shifted to servicing customers in different ways.

Advice as a defensible model

It’s about how you deliver the advice. I think the reason that financial advisors can still charge for advice is because it’s a very personal, but fragmented relationship. Commissions get advertised on a billboard. Not many people can tell you what financial advisors charge at the wirehouses. They’re also personal relationships — advice tends to be much more customized.

We are moving to a model where aggregation is a tool that allows the aggregator to see the full financial picture of the end customer. That’s where you can do real work around asset yields and liability costs.

Rise of challenger banks

There’s a convergence of business models. Big banks are becoming more like brokers and offering a full suite of services that many of the wealth management and brokerage firms offer. And vice versa: the firms that started as brokerages and banks are evolving their businesses to provide more banking functionality to the customer.

You can’t be in just one product. The data is also super powerful and will enable them to underwrite all kinds of products. The aggregation tools that provide a holistic view of the customer create better underwriting because of all the data behind it — powerful for both the firms and the end customer.

The firms adding high yield products will eat into the market share of banks over time. I think they realize it but the challenge is that they’re trying to protect their operating margins. Many of the challenger banks are seeing a lot of traction with their high yield products. They can deliver at a higher rate to the end customer because they don’t have the infrastructure. We think there is room for that to evolve. That goes back to the theme of providing a product to help customers optimize their personal balance sheets — either with a firm’s own products or through partnering.

The following disclosures are applicable to SCHW: JMP Securities currently makes a market in the security of The Charles Schwab Corporation.