Schwab announced on Tuesday the elimination of commission fees. Customers can now trade stocks and exchange-traded funds for free.
This development marks a significant day in Wall Street history. With the elimination of trading commission fees, it seems the retirement investor has finally prevailed against Wall Street, 11 years after Lehman Brothers filed for bankruptcy.
In this piece for The New York Times, journalist Tara Siegel Bernard reports on this development.
Low-Cost Investing Can’t Get Any Lower Than Free
by Tara Siegel Bernard, October 1st, 2019
Charles Schwab said Tuesday that it would allow customers to trade stocks and exchange-traded funds for free, ramping up the intensity of brokers’ fight for the average investor’s dollars.
The cost of investing has been steadily falling, and Peter Crawford, Schwab’s chief financial officer, acknowledged in a statement that the elimination of trading commissions had been pretty much inevitable.
“We are seeing new firms trying to enter our market — using zero- or low-equity commissions as a lever,” Mr. Crawford said. “We’re not feeling competitive pressure from these firms … yet. But we don’t want to fall into the trap that a myriad of other firms in a variety of industries have fallen into and wait too long to respond to new entrants.”
The commission-free trading structure will go into effect Mondayfor accounts of all sizes, wiping out Schwab’s $4.95-per-trade charge. (Option investors will continue to pay 65 cents per contract, though commissions were eliminated.)
It’s a noteworthy move coming from Schwab, which, once upon a time, was the new entrant paving the way for retail investors. And it’s a mark of how drastically the investment industry has changed over the past decade: Access to the stock and bond markets has never been easier or cheaper.
In recent years, small investors have become able to trade a wide collection of exchange-traded funds without charge — and they could build entire portfolios on their own with little effort and for little money. They also have more options to outsource the job entirely to mostly automated services, which will build and monitor your nest egg for a tiny fraction of the cost of your grandfather’s financial adviser.
But that doesn’t mean all inexpensive products are created equal, or that investors should blindly assume that such products are always the right fit.
Lower fees are almost always better for customers, said Alex Bryan, director of passive strategies research at Morningstar, but free trades don’t mean there are no underlying costs.
Firms that forgo fees can make money in other ways, Mr. Bryan said. For example, the cash in your brokerage account — money you haven’t yet invested — may be pushed into the firm’s money market account during hours when the market is closed. While you do earn interest as a result, it’s below the market rate, and the firm pockets the difference.
“Keep in mind that these firms aren’t charities,” Mr. Bryan said.
The new plan will cost Schwab roughly 3 to 4 percent of its total net revenue — perhaps $100 million each quarter. But the firm noted that its “commissions per revenue trade” have been falling for several years, which may have given Schwab the confidence to become the first major firm to eliminate commissions across the board.
Schwab’s fee elimination follows Interactive Brokers Group’s announcement last week of IBKR Lite, a service that will offer unlimited commission-free trading on domestic stocks and exchange-traded funds. (E.T.F.s are similar to index funds but trade like stocks on an exchange, meaning investors must pay commissions whenever they buy or sell shares, which also carry underlying investment fees.)
Investment firms have long been moving in this direction, with no-fee E.T.F. offerings expanding steadily since they first appeared about a decade ago.
A sampling: TD Ameritrade, which began offering no-fee trades on 100 E.T.F.s in 2010, now charges no commission on 500. Last year, Vanguard announced that it would offer more than 1,800 exchange-traded funds on a commission-free basis, which it said translated into 90 percent of all E.T.F.s trading on the major exchanges. Fidelity and Schwab announced on Feb. 12 that they would double the number of commission-free E.T.F.s in their lineups to more than 500.
Costs of stock trades have fallen as well. Robinhood, a Silicon Valley start-up, made a splash when its app was released in late 2014, offering commission-free trading on exchange-trade funds as well as stocks. At the end of 2018, it had more than six million brokerage accounts. And last year, JPMorgan Chase started offering 100 free stock and E.T.F. trades within You Invest, a digital investing platform.
While transaction costs have moved lower, so have the expenses embedded in mutual funds: Fidelity introduced two free mutual funds last year, capping a trend toward lower fund expenses.
But Schwab’s announcement pushes another new boundary.
Its shares fell almost 10 percent on Tuesday, but competitors that may feel pressure to match its offer were hit even harder. E-Trade was down more than 16 percent, and TD Ameritrade was down more than 25 percent.
“This clearly has negative implications for TD Ameritrade and E-Trade,” said Chris Allen, an analyst at Compass Point Research & Trading, in a research note. He said commission revenues accounted for larger chunks of revenue at those companies: 25 percent at TD Ameritrade and 17 percent at E-Trade.
“We would not be surprised to see other players such as Fidelity follow suit,” Mr. Allen said, “which would likely lead to cuts at TD Ameritrade and E-Trade.”
Meaningful change for retail investors was afoot even before the no-fee race, thanks to technical advances that helped reduce firms’ overhead.
Roboadvisers, largely automated services that build and manage investment portfolios, have been around for nearly a decade. Start-ups including Betterment and Wealthfront, both with $20 billion in assets, offer investment management for about half the cost of a typical adviser, which often charges a fee equal to 1 percent of the assets managed.
Several more established players — including Vanguard, Schwab and Fidelity — now offer roboadviser services, which they continue to expand. Vanguard said in a regulatory filing last month that it would introduce a digital-only investment adviser that cost just 0.15 percent of assets managed.
It’s all part of a broad trend driven by upstart companies and established firms alike, as clients increasingly gravitate toward low-cost options like E.T.F.s and index funds.
When Schwab was a new entrant to the market, it helped drive the discount trading trend. Now its new policy is a sign the discount movement has reached its natural conclusion.
This article was originally published in The New York Times on October 1st, 2019.
