As someone who has worked in financial services for 20 years, I know the history of markets. I have seen many changes during my years in the industry. This week, Chuck Schwab completed a final step since the inception of Charles Schwab in 1971 to democratize investing: we are now at $0 trading commissions.
For those of us in the industry, we knew this day has been on the horizon for years. Now that it is finally here, what does this mean for investors?
First, I applaud Chuck Schwab and his drive over the past 50 years to build a tremendous company that has achieved his goal of building a platform for the trading needs of consumers. This is a legacy accomplishment.
For individual investors: the reduction of trading costs can be positive however, follows the law of diminishing returns. There is a substantial difference between paying $250 and $4.95 to trade a stock, but is there really a “freeing” feeling by lowering that cost from $4.95 down to $0?
For us advisors: the reduction of trading costs should mostly impact us in two areas:
- Trading becomes operationally easier: we no longer need to worry about fractional costs. For example, if our model rebalancer dictates that we purchase 3 shares of an ETF for your portfolio totaling a $100 transaction, in the past we would have to go in and remove that trade because the economics do not make sense. Now, we will be able to be much truer to our models.
- Expenses: And of course, to keep overarching costs lower for our clients.
The cautionary note: for either side (individual investor or advisor) of the equation, it is important to remember that Charles Schwab and its competitors that all followed suit with a move to $0 are all still for-profit companies. At a high level, by removing trading costs it drives us away from transparent pricing (the cost of doing a trade), to trying to figure out where these companies will be making their profits. Now, instead of knowing that your 100 trades cost $495 to the revenue stream of Charles Schwab, accounts will be making profit by activities such as:
- Payment for order flow: Conducting trading market operations that can create revenue just for trading activity
- Cash sweep bank accounts: This is the holding point for all cash in your account and leads to a steady income stream for custodians.
- Managed product: Obviously, we believe in this model but we run the risk of investors being pushed into managed product not on a holistic basis, but just to generate fee revenue.
There are pros & cons to everything especially as more and more things change within the financial services industry. Overall, Chuck Schwab has toiled a lifetime to democratize investing. Congratulations to him and his company for achieving that massive goal!
If you have any additional questions in regards to how AOG Wealth Management is navigating these changes, please feel free to contact your advisor.
Securities offered through TD Ameritrade Institutional Services located at 7801 Mesquite Bend Drive, Suite 112 Irving, TX 75063-6043. Investment advisory services offered through AOG Wealth Management, Inc. AOG Wealth Management, Inc. is neither an affiliate nor subsidiary of TD Ameritrade Institutional Services.