On October 1, Charles Schwab & Co. surprised the world by announcing that it would eliminate commissions for online trading of U.S. stocks, exchange-traded funds, and options trading. Trading costs were previously $4.95 and went to zero on October 7th. Company Chairman and Founder, Charles Schwab announced on CNBC, "We have a great deal for investors. You can buy and sell stocks for no commission."
Interactive Brokers Group Inc. had launched its free product in September, and rivals TD Ameritrade Holding Corp., and E*Trade Financial Corp. have quickly followed. Fidelity Investments announced that as of this morning, it stopped charging individual investors commissions. For investment advisers, commissions will be cut to zero on November 4th.
Are commission-free stock trades really a great deal?
On the surface, eliminating transaction costs on buying and selling U.S. stocks and ETFs are a win for investors. Lowering overall costs benefits your account over time, even when eliminating costs as low as $5 per trade.
It's worth noting that unless there is a lot of trading in your investment account, the overall impact of commission-free trading in dollars will likely be less than the headline impact that seems to be shaking up the industry.
Simply FYI, here's a little perspective on how zero commission trades might impact service providers:
- Trading revenue at Schwab will go down from 7% of revenue to an estimated 3-4% (Source: Barron's)
- Trading revenue at TD Ameritrade makes up ~15% of revenue (Source: CNN)
- Trading revenue at E*Trade will go down from 17% of revenue to an estimated 10% (Source: Barron's)
Don't Change Your Investment Approach
While you should celebrate the cost savings of trading commission dropping from $5-$10 per trade to zero, it is important to stick to your approach. At Runnymede, we believe that investing in high-quality companies and low-cost ETFs is a prudent way to grow your account and accomplish your financial goals. When custodians offered commission-free ETFs, we took advantage. Similarly with zero-cost trades, we will take advantage, but we will maintain our investment philosophy and approach. I think that this tweet says it succinctly.
Free trading commissions might seem consumer friendly but if it entices you to trade more it's almost certainly not.— Morgan Housel (@morganhousel) October 1, 2019
No Free Lunch
Since none of us were born yesterday, we know that "free" is most often not truly free. These financial services companies are for-profit organizations, after all. It is important for investors to be aware of other places where companies might make up for their reduced profit.
Fidelity has the most 🔥🔥 press releases and the free trading one today was no exception. They go right at Schwab immediately in the ALL CAP headline, then a less overt shot at Vanguard re index MFs in the bullet points.. pic.twitter.com/2PYeRXuEuD— Eric Balchunas (@EricBalchunas) October 10, 2019
Jason Zweig recently wrote an article entitled, "Your Stock Trades Go Free but Your Cash Is in Chains." In it he writes, "You no longer will pay a few bucks in commissions to buy or sell a security at these firms. But Schwab and other brokerage firms are in business to make money, and one way they often do that is by milking clients’ cash. When you trade for free, you still pay—at a different tollbooth."
In its press release today, Fidelity made a clear point that it would automatically direct client money into higher-yielding money market accounts and is offering zero payment for order flow on where on where it sends its trades for execution.
More to Come
As a fee-only, fiduciary registered investment advisor, Runnymede's team will be monitoring the industry pricing changes to see how things play out. In our experience, "free" usually carries conditions so on behalf of our clients, we'll be keeping watch and tallying the pros and cons.
If we compare commission-free trades to retail, shoppers need to be careful not to be drawn in by a promotion and leave buying a shopping bag full of higher ticket items. Rather than focusing on trading costs, the key is to have a holistic view, stick to your own plan, and understand a brokerage's overall expense ratio. Generally, focusing on being patient and watching your investments grow serves you much better than frequent trading anyway.
What are your initial thoughts on commission-free trades? Will you be enticed to trade more?