Now that it's free, what's the differentiator?

For the last few weeks, we've been hearing of one brokerage dropping their commissions to buy and sell securities after another. This reminds me of the "Amazon" or "Walmart" effect - let's drop our prices so we can compete with the big boys and get some sales. While in the short-term, this may be a great way to find clients that are tired of paying for a computer to process a trade, it puts the companies at a disadvantage. Whether it's Schwab, E*Trade, TD Ameritrade or any of the other players that have moved to $0 for trades, they no longer have the price as the differentiator (and that's a terrible one unless you're Amazon or Walmart!) 

In the wake of these changes, there are many issues that are going to be present - first, how will John and Jane Q Public feel about the move? Are they going to be thinking "what's the catch?" now that these houses changed their fee structure? After all, the brokerages are in business to make money - perhaps people will be steered into higher fee portfolios or other ways for the houses to make money, but it's going to have to be something that people can understand easily. The problem is most people don't understand investing to begin with and so they "play" with the market. 

In any business, we need to find our market-dominating position (MDP). A lot of people have heard about a USP or unique selling proposition, but this goes a step farther. Let me give you an example - a USP can be a periodontal disease specialist that is the only one of its kind for 100 miles in any direction. That sounds great, but if someone doesn't have gum disease or lives closer to the other doctor, they don't need the first one. And there's a statistic that says that 50% of Americans may develop gum (periodontal) disease at some point in their life, but for anyone that doesn't have it now, they are thinking they're one of the people that WILL NOT get it, so again, no benefit to the 100-mile radius specialist. Now let's look at an MDP - that same dentist can say he is the leader in pain-free dentistry and works with your wallet to make it easy on you. If there aren't any other pain-free dentists in the area that also make it easy on my wallet, that becomes a market-dominating position and a reason I will choose him over anyone else, even if I have to drive 30-minutes longer to get to him than the guy around the corner!

Let's look at the brokerages again. What is it that will separate them from the competition now that the pricing issue is no longer relevant? Is it the research that one gets from being part of their family? Is it the speed of the transaction? If it isn't clear and I don't have any understanding of the difference, the market became a commodity and can be played with any player and no longer providing any value.

Where do we go from here? Time will tell and some of the players may go back to charging to avoid SEC and NASD scrutiny, but the long-term picture is unclear.

The takeaway though is to always think about what it is that you do that differentiates you from your competition in a way that makes YOU stand out and the clear choice for someone to want to work with, and not just a commodity because you're the cheapest player in the market. With that said, what's your MDP?