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Rising Rates Will Boost These Online Brokerages

Wide-moat Charles Schwab and narrow-moat TD Ameritrade are poised to benefit from tax reform and rising rates.

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2018 should be an interesting year for online brokerage firms wide-moat Charles Schwab and narrow-moat TD Ameritrade. We forecast both of them having double-digit percentage point growth in earnings from the dual effect of U.S. tax reform and a rising interest-rate environment.

It’s important to remember that asset-based fees, like net interest income and fees related to assets under management, are the main drivers of online brokerage revenue going forward. In the fourth quarter, less than 10% of Charles Schwab’s revenue was from trading while less than 40% of TD Ameritrade’s was transaction-based.

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Michael Wong does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.