How Interactive Brokers Lures RIAs From Rivals

What You Need to Know

Interactive Brokers continues to grow and add new RIA clients by differentiating itself from rivals.
Easy access to crypto and stocks outside the U.S. are among the key ways it attracts RIAs.
In some cases, investors will shift part of their investments to Interactive Brokers to access crypto and move all their assets to the brokerage later, an exec says.

Interactive Brokers attracts RIAs to its platform through a number of features that separate it from rivals like Schwab, according to Steve Sanders, the electronic brokerage’s executive vice president of marketing and product development.

Those areas of differentiation start with its use of automation but also include the easy way in which it allows RIAs and other clients to invest in stocks around the globe and now cryptocurrency, he told ThinkAdvisor in a recent interview just ahead of the firm’s Tuesday earnings announcement for the first quarter ended March 31.

“We have 5,884 registered advisors on our platform,” Sanders said, referring to the count at the end of its fourth quarter. The company also has 17,610 of what it calls “friends and family advisors” — those with about 15 clients or fewer — as well as advisors who have yet to become registered and individual investors who just want to manage all their family’s accounts, he added.

Assets under management by RIAs alone grew to $42.3 billion in Q4, up 14% from a year earlier, he told ThinkAdvisor. “Even with a down market it’s grown,” he noted.

Comparable first-quarter data wasn’t immediately clear.

Total client accounts increased 36% to 1.8 million in the quarter, up from 1.3 million a year ago, Chief Financial Officer Paul Brody told analysts on Tuesday’s earnings call. Client assets grew 8% to $355.9 billion, up from $330.6 billion. The firm’s headcount at the end of Q1 was 2,683, Brody said.

Automation and Crypto

“We generally automate everything,” including flexible client billing, Sanders told ThinkAdvisor. From the beginning, that has helped Interactive Brokers attract RIAs and other advisors of all sizes, including “very large advisors or people just starting out with a few clients,” he said.

Echoing that during the firm’s earnings conference call, Brody said: “Automation remains our key means of maintaining high margins as well as continued expense control while we hire talented people and invest in the future of our business.”

The company has no account minimums, and there are “no huge markups so, for small to medium advisors, we’re still a great place,” Sanders told ThinkAdvisor, adding that larger custodians charge clients more “because their processes are more manual.”

Also, “we don’t have any minimums, custody fees or anything else” along those lines, he explained. “So that is number one in terms of competitive advantages in the advisor space.” And “our pricing is very transparent,” he said, noting it’s “always on our website.”

Meanwhile, the firm’s universal accounts allow advisors to “invest or trade in stock options, forex futures, bonds, ETFs and funds, and now crypto,” which Interactive Brokers recently added, he pointed out. “I think we’re one of the only custodians that really offer that to advisors, at least that I know of.”

Using the Interactive Brokers online platform, advisors can trade all of those products from the “same screen, all integrated together — and not only in the U.S. but they can trade all these products … all around the world,” he said, noting the company continues to grow its bond marketplace.

With universal accounts, Interactive Brokers’ clients can deposit their local currency and then, “let’s say you’re sitting in the U.S. and you want to trade U.K. or Hong Kong stocks, you can either convert the U.S. dollars to pounds and then buy the U.K. stock, or you can take out a collateralized loan against your U.S. dollars at the lowest possible rates and we’ll lend you the pounds to buy the British stock,” he explained.

Another part of the firm’s strategy that clients like, he said: “We don’t compete against our advisors. This is an important point. We don’t have our own advisors. We’re not trying to compete. What we’re hearing more and more from people coming over is that they’re worried about some of the larger custodians doing this.”

Interactive Brokers, meanwhile, provides “what I believe is the largest agnostic mutual fund marketplace because we don’t offer our own mutual funds,” he pointed out.

Interactive Brokers also offers free tools, including its own portfolio analysis and built-in integrated customer relationship management system that he said “makes life easy” for clients using its platform.

An RIA’s Take

Several RIAs have moved to Interactive Brokers to gain access to its crypto and other investment options, Sanders went on to say, noting some of them have clients that may continue to trade some assets at Schwab or another rival.

Those advisors “may split their business and put newer clients at Interactive Brokers, and they may trade crypto or futures at Interactive Brokers and some of the other products at Schwab,” he explained.

Interactive Brokers’ portfolio management system “will aggregate all of the clients’ information into one place, and they’ll be able to create common reports” through “our portfolio analyst tool,” he said, adding some clients opt to eventually move all their investments to Interactive Brokers.

One of the RIA clients that custodies with Interactive Brokers is McKinney, Texas-based Nashional Independent Investment Management.

“In August 2017, my wife Whitney and I formed” that independent RIA, Jeff Nash, a certified financial planner who serves as NIIM’s chief investment officer, told ThinkAdvisor by email.

“At that time, we explored different platforms and decided that [Interactive Brokers] was the best fit for us,” he said.

His decision to go independent was “directly related to wanting more autonomy and flexibility as a business owner and active trader, which was achievable through starting our own independent RIA,” he explained. “I wanted to be able to offer clients both traditional and alternative investments and have better control over establishing a competitive fee structure.”

Interactive Brokers has “supported this goal and our objectives in nearly every respect,” he told ThinkAdvisor.

“In comparison to other popular custodians and investing platforms, [its] Trader Workstation (TWS) is exceptionally robust which, depending on your business model and objective (investor or trader), can be both a strength or weakness,” he said.

“TWS offers a vast combination of order types, direct access to international markets (can trade all day and night), and different asset classes like cryptocurrency,” he said. Another “competitive advantage” is Interactive Brokers’ “lower margin rates, which has been helpful in certain situations. I am also impressed with their lineup of third-party integration partners that support our technology stack,” he added.

Interactive Brokers’ support team, meanwhile, is “very open-minded and responsive to requests,” he noted.

“For example, they did not initially have a relationship with a prominent risk assessment software company that I knew would be extremely helpful to have a direct integration to eliminate manually processes,” he said. “I made an introduction between [Interactive Brokers] and the risk assessment company and they followed through and completed the partnership.”

However he said: “I think the client onboarding process when multiple accounts are involved can be improved. As it currently stands, there are redundancies and a separate user login and password is required for each account. After the process is completed, you have to make a request to household the accounts. Combining them at the onset would be much more efficient for us and our clients.”

Also, he added, “our firm occasionally uses structured products that are offered through a fintech platform. But Interactive Brokers “does not custody them; it would be beneficial if they could.”