What do brokerages get out of incentives?

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Toller
Posts: 14
Joined: Wed Mar 27, 2013 12:03 pm

What do brokerages get out of incentives?

Post by Toller » Thu Jun 14, 2018 12:45 am

I have accounts with two brokerages, but no real preference.
About once a year, they offer me a significant incentive to transfer stock to them.
So I move stocks around. It takes 10 minutes and it very profitable. (Well, the return on capital is not big, but in terms of $/hour...)
As they must know, I rarely trade and they will never get even a tiny bit back in commissions.

However, they do pay for it, so it must be important to them.
Why. What do they get out of it?

student
Posts: 2294
Joined: Fri Apr 03, 2015 6:58 am

Re: What do brokerages get out of incentives?

Post by student » Thu Jun 14, 2018 6:03 am

I think they are just trying to increase the customer base and remain competitive. The incentive game is probably not as good as before. I think Fidelity has stopped offering cash incentives publicly.

neilpilot
Posts: 1728
Joined: Fri Dec 04, 2015 1:46 pm
Location: Memphis area

Re: What do brokerages get out of incentives?

Post by neilpilot » Thu Jun 14, 2018 6:26 am

I’ve even been paid a generous retention bonus not to transfer assets out of my account.

Nate79
Posts: 2995
Joined: Thu Aug 11, 2016 6:24 pm
Location: Portland, OR

Re: What do brokerages get out of incentives?

Post by Nate79 » Thu Jun 14, 2018 10:21 am

I think it is a form of marketing and is just another way to bring in customers.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: What do brokerages get out of incentives?

Post by dbr » Thu Jun 14, 2018 11:18 am

For one thing they hope you will trade, buy investments that do profit them, even hire advice from them.

I can tell you a story about transferring funds to Fidelity to get airline miles. At one point I tried to play the game a second time and got back the message that I was "no longer qualified." So I called up and the first line CSR had no idea what was going on, so after escalations two steps up the deciding question that I was asked was "How much trading are you going to do?" So the answer was "None, I guess that means you are not giving me the offer." "Right." Strangely enough after the expiration of some months I tried again and had no problem getting the bonus.

Call_Me_Op
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Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: What do brokerages get out of incentives?

Post by Call_Me_Op » Thu Jun 14, 2018 11:23 am

Toller wrote:
Thu Jun 14, 2018 12:45 am
I have accounts with two brokerages, but no real preference.
About once a year, they offer me a significant incentive to transfer stock to them.
So I move stocks around. It takes 10 minutes and it very profitable. (Well, the return on capital is not big, but in terms of $/hour...)
As they must know, I rarely trade and they will never get even a tiny bit back in commissions.

However, they do pay for it, so it must be important to them.
Why. What do they get out of it?
Commissions and fees from the money you have added to your account.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: What do brokerages get out of incentives?

Post by dbr » Thu Jun 14, 2018 11:27 am

Also, if you hold substantial cash they will make money on that.

jminv
Posts: 464
Joined: Tue Jan 02, 2018 10:58 pm

Re: What do brokerages get out of incentives?

Post by jminv » Thu Jun 14, 2018 11:59 am

Scale. Brokerages need to build up scale to remain competitive or they might be acquired. There’s been a definite consolidation trend. There’s also a trend to ever lower fees that only companies with scale can remain competitive in. Scale is important for the trend toward 0% ETFs. Scale is also something publicly listed brokers tell their investors about which moves the stock price, so many new accounts and so much more assets in a certain period. Increasing the stock price through this is one way to help hit executive compensation targets.

Fees. Trading fees, advisory fees, management fees, margin interest, selling you ancillary products, miscellaneous account fees.

Income from your cash. If you transfer in an account and keep some of it in cash, they will lend it out at interest.

Advertising and signaling. If you switch to new broker you might like them and tell your friends and family and bogle heads about it. One reason you might like them even more is because they’ve given you ‘free money’. On average, this will lead to more new accounts and not all of them will come requiring transfer bonuses. Signaling to other brokers that they’ll match or exceed whatever transfer bonus they’re offering. This could either limit bonus escalation or encourage it but it seems to limit it among the competitive brokers with the big ones having roughly similar offers while keeping the minnows out.

Since a comparatively small number of brokerages have competitive bonus schemes, even if you churn them you’ll always be with one of them and not a small competitor. This means that at some point they’ll have you back as a customer. So if you churn two of them, each will profit from you half the time, etc.

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