Interactive Brokers Group was founded 40 years ago by its chairman and CEO, Thomas Peterffy, as an options market maker. Today the brokerage is in the process of phasing out its options market making operations, which have not been profitable for the company. The firm, instead, is shifting its focus toward its electronic brokerage and fast-growing advisor custody businesses.
“Today retail order flow is purchased by large order internalizers and joining them would represent a conflict we do not wish to have,” Peterffy said in a statement. “On the other hand, providing liquidity to sophisticated, professional synthesizers of short-term fundamental, technical and big data is not a profitable activity.”
The firm’s registered investment advisor custody business, on the other hand, is more promising. In the past year, professional advisor assets on the platform have grown 32 percent. The number of advisors on the platform is now at 3,600, up 13 percent from a year ago.
Steve Sanders, executive vice president at Interactive Brokers, said RIAs are attracted to the firm’s low costs and availability of product around the world. Many of the firm’s advisors, in fact, are based outside of the U.S.
While other custodians have minimums and setup fees, Interactive Brokers doesn’t charge to custody assets. The firm makes money off the transaction fees (a flat fee or tiered structure) and the spread on margin loans. Its interest rates on margin loans range from 2.41 percent for smaller loans to 1.16 percent for larger loans. The average cost per trade is $2.26 for equities.
The firm has recently added offerings to make its custody platform more attractive for advisors.
Earlier this year, the firm launched Greenwich Compliance, which provides hands-on registration and start-up compliance support for RIAs as well as ongoing consulting. The offering is specifically aimed at frequent traders or large investors who use Interactive Brokers.
“There was demand for that kind of service for former investors and traders who said, ‘I want to get into this business, but I have no idea how to do it,’” Sanders said. “We’re not doing this as a profit center; we’re doing this because we’d like to get people up and running as advisors.”
Covestor, Interactive Brokers’ robo advisor, recently made its new Smart Beta Portfolios available to the custodian’s advisors. The portfolios are managed in-house by Covestor’s investment management team led by Chief Investment Officer Sanjoy Ghosh. They cost 8 basis points.
Sanders said the firm currently has no plans to offer a white-label version of the robo.
The firm also offers a portfolio management system which Sanders calls “a free alternative to Advent.” It gives advisors the ability to consolidate financial performance across banks and other brokerages.
Other offerings include a free CRM built into its system and free website building.
Advisors can also advertise their services for free on Interactive Brokers’ Investors’ Marketplace which includes some 350 advisors. Investors can sort advisors by products, registrations, strategy types and assets under management. It will include an advisor’s firm name, location, contact information, a description of their firm and other stats, such as years in the business, fee structure and products traded.
“An individual coming to our site that doesn’t want to do self-directed investing can instead go to our marketplace and look for advisors,” said Sanders.