Commission-Free Trades and What It All Means

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. 

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.

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.

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Photo by Austin Distel on Unsplash

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About the Author: Andrew Wang

Andrew Wang


Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Runnymede Capital Management, Inc.-"Runnymede"), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Runnymede.  Please remember that if you are a Runnymede client, it remains your responsibility to advise Runnymede, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Runnymede is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Runnymede's current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Runnymede does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Runnymede's web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

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