My business partner Mitch Tuchman, Rebalance Managing Director and Chief Investment Officer, tells Reuters how our clients save on annual portfolio rebalancing fees and how zero commissions ends an outdated and conflicted business model.
How to make the most of a zero-commission world
by Beth Pinsker, November 14 2019
How interested are people in trading stocks for free?
In early October, after TD Ameritrade announced it was switching to zero commissions from $6.95 on most trades, client call volume increased 20% and new client call volume shot up 40%, the company said.
But that does not mean that there is a whole new cadre of day traders swapping exchange-traded funds every hour, even as the likes of E-Trade, Fidelity and Schwab joined the fray to offer zero commissions.
At Schwab, trading volume actually decreased in October, according to the company.
“We see zero commissions as a way to provide access and lower friction to people who want to buy in a brokerage account or elsewhere. We don’t think people will trade actively,” said Rob Williams, vice president of financial planning at Charles Schwab and a certified financial planner.
As investors wade cautiously into this new world of free trading, here is how to make the most of it as well as what to avoid:
Zero commissions will not make much difference in workplace 401(k) plans (or your college savings 529 account), which heavily favor target-date mutual funds that you typically set once and do not trade again until you cash out.
But you could change the way you deal with the existing balance in your rollover individual retirement account (IRA) or Roth IRA, and any new contributions you make, where clients lean more toward low-cost index ETFs.
If you are a once-a-year contributor, you might want to think about stretching that out – known as dollar-cost averaging – so you are not dependent on how the market is doing on any one particular day.
“I think this is a great opportunity for those folks to dollar-cost-average and invest in smaller increments and get involved in stocks that you might not have gotten involved in before,” said Josh Rowe-Heupler, general manager of investing for LendingTree.
You can also save money rebalancing, which you need to do if market forces sway your portfolio away from your long-term goals.
At the investment management firm Rebalance, clients are saving about $35 a pop for twice yearly rebalancing, said Mitch Tuchman, Managing Director and Chief Investment Officer.
“The end of commission marks the end of a conflicted way of doing business that has been in place since the beginning of the stock market. We can now put a stake in the ground and say it’s dead,” Tuchman said.
Investing small amounts
Before October, if you had $100 to save, your options were not good for investing because even a $4.95 transaction fee would eat significantly into your potential returns. You might be discouraged from doing positive things, like saving in your triple-tax-free Health Savings Account or putting just a little bit of money into a Roth IRA.
“Many times customers don’t realize that they leave their money in cash for a long time – longer than they think,” said Ram Subramaniam, president of Fidelity Brokerage Services, where cash in brokerage accounts earns 1.33% at the moment. “One of the first do’s is to make sure whatever cash you have works for you.”
Not all cash is meant to be invested, however.
“It’s very prudent to have emergency funds,” said Steve Quirk, vice president of trading and education at TD Ameritrade. But, that said, investors know how little interest they earn on cash. When they see the S&P 500 up more than 20% for the year, they want to participate in that.
“Now you can, at least in a portion,” Quirk said, because with ETFs you can get in and out in milliseconds for no cost.
As for those who worry about investors hooked on trading, Quirk draws the analogy with exercising: “If health clubs were suddenly free, are we nervous that people will overexercise? You just have to do it in a prudent manner.”
This article was originally published in Reuters on November 14 2019