Fidelity gives RIAs real-time fractional trades, stopped before demanding and rival Schwab hesitation, but just filed a request to launch direct indexing of at least $ 100,000 in 2022

As with digital assets, the Boston giant hangs the nascent service with faith that RIAs will seize the opportunity, but its Westlake, Texas rival wants to see better evidence of demand before prioritizing a so big push on its institutional platform.

Note from Brooke: Fidelity Investments applies Gretzky’s adage about skating where the puck goes by deploying fractional stock trading as it claims to be with cryptocurrency, Schwab is not. Still, it will likely be some time before we know which approach is the right one. Gretzky had the otherworldly ability to know where the puck wanted to go before the puck did. Maybe Fidelity is doing it, or not. Schwab just seems to skate to where the puck is now and guess what? Sometimes it gets stuck in one place making it the right move. In an age when many of the more popular stocks like Google or Amazon are trading at the price of mortgage payments, the time for split-stock trading seems near. There is no doubt that some RIAs will be happy to hear that Fidelity is starting to make it available, especially those ready to go after investors under 35 who have just gotten on their investment skates.

Fidelity Institutional launches free real-time fractional equity trading at RIAs, making it the first of the two major custodians to make this offer.

Its aggressiveness on the supply side contrasts sharply with the more demand-driven Schwab advisory services, which see little interest in split trading among its institutional clients.

Sanjeeb K. Rajput: “It will be a huge benefit for Fidelity.”

Still, Fidelity was determined to act, according to Matt Goulet, senior vice president of portfolio solutions at Fidelity.

“Why wouldn’t we want to do this? ” he asks.

Boston’s third-party middleman division announced in September that it had expanded the service offering on its retail side to advisors on its institutional side – following a build and build strategy.

Fidelity’s RIA split launch exceeds a low common denominator among a host of competitors, says Sanjeeb K. Rajput, who previously sold RIA custody services for Fidelity and Folio Institutional.

“All of the other RIA custodians currently on the market that provide fractional shares or dollar trades do not have this ability to execute real-time fractional trades during market hours,” he said. . “It will be a huge benefit for Fidelity.”

Multi-year project

At this time, RIAs can only trade split shares on WealthScape, which is the shared custody and clearing interface with Fidelity for brokers and RIAs.

Ryan plotner
Ryan Plotner: “Advisors looked for a way to refine investor portfolios. “

Many RIAs would prefer to place trades on rebalancing software or other third-party applications, but that will take a few more years to roll out, according to Goulet,

“It’s on our radar,” he says. “Complexity is important, which is why it will be [a] multi-year [project.]”

RIA customers can access real-time transactions through the Schwab Alliance, a retail access point, Schwab spokeswoman Mayura Hooper said via email.

She says end-investor clients have the option of trading “Schwab shares of shares” through their individual brokerage accounts, starting at just $ 5, even if the shares cost more. Only fractional shares of S&P 500 companies are offered.

“However, advisers cannot perform these transactions on behalf of their clients,” she says.

Backdoor execution

There is an underhand demand for this real-time split service from RIAs, Rajput says.

“This is extremely important for RIAs, re: showing best execution,” he says. “It also contributes to risk management, being more tactical with the precision of managing client portfolios of surgery and laser beams and allows them to be better trustees in the service of their clients.

“I can tell you from personal experience when I was Head of Sales at Folio Institutional, and Folio was one of the few RIA custodians to provide fractional trading capabilities, that not being able to execute split trades in real time was a frustration for startups. , robo-advisors, RIA clients and prospects.

“We would have certain trading hours (windows) throughout the day during trading hours and then we would match multiple orders to get full shares. I know of other RIA custodians who execute fractional shares at the end of the trading day. “

Discern customer needs

Fidelity identifies two green lights for commercial launch, which its executives admit took “significant” resources and attention to achieve.

Two million retail accounts – many of which are held by customers 35 and under – have completed at least one transaction in their first year. Fidelity also did a limited pilot project with RIAs and enjoyed adoption. He declined to say how many AIR attended.

Like Fidelity, Schwab began offering real-time fractional trades to its retail investors last year. But Schwab would rather see clear demand from its 10,000 advisory firms before rushing to extend the real-time fractional trading offer to them.

Collectively, they hold approximately $ 3.2 trillion in RIA assets on deposit, and Schwab owns approximately $ 4 trillion in retail assets.

“Our priorities are guided by the needs of advisors and their clients,” says Hooper.

“The ability for advisors to trade fractional shares on behalf of their high net worth clients is not a capability that we have in high demand at this time.”

Rhetorical drift

Fidelity does not view advisor demand and retail demand as two different markets for fractional shares.

“Why would an advisor be any different? »Asks Goulet.

Schwab can agree with his rhetorical drift, in part.

Schwab filed with the SEC last week to provide RIAs with home-prepared direct indexing. Its service, “Schwab Personalized Indexing”, uses fractional stock trading.

Schwab’s ‘personalization’ will debut as three institutionally designed index portfolios. including one using environmental, social and governance (ESG) filters, but will require a minimum investment of $ 100,000 per account. See: RIAs are just not useful for ESG investing – at their peril, new study finds. This makes a leap: this is the only case where clients – both RIAs and their clients – get it wrong.

Fidelity’s fractional program itself also has limitations, although the company promises to solve them.

But for now, advisers have a way to start as fractional traders.

“With our industry offering more personalization to investors, advisors have been looking for a way to further refine investor portfolios,” Ryan Plotner, head of transactional and banking solutions at Fidelity Institutional said in a statement.

“With fractional equity trading, we are now giving advisors the opportunity to meet this challenge. “

Cryptographic divergence

Fidelity uses a similar hold on breach approach as it deepens the cryptocurrency supply for a seventh year. See: Fidelity Investments applies its proven Peter Jubber to its unproven bitcoin unit and its launch of Fidelity Digital Funds signals that it’s all in blockchain currency

The Fidelity crypto initiative contrasts sharply with Schwab’s more cautious approach to Bitcoin and other digital assets. See: Charles Schwab & Co. is a budding cryptocurrency convert and will enter the market in a big and ‘disruptive’ way, its CEO says – but not before the SEC says it’s barking or making charlatans

In 2019, Charles Schwab & Co. declared crypto to be off its “radar”. Then CEO Walter Bettinger did an about-face last April.

He told analysts the company was poised to explode the cryptocurrency market in a “very competitive” and “disruptive” manner – as soon as federal regulators know how to define it.

Schwab and Fidelity currently offer access to Bitcoin futures contracts.

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