What price outshines free when you want to retain and attract customers? Both TD Ameritrade and Charles Schwab will slash to zero commissions for online trades of U.S. and Canadian stock, ETFs and options, the companies announced yesterday. The giant custodians’ price drops, RIAs say, require them to underline the importance of financial planning and will pressure brokers that charge transaction fees.
Schwab announced first that it would no longer charge a fee for online trades, which have been set at $4.95 per trade.
“Every Schwab client using our web and mobile channels automatically qualifies for the new pricing, without opening a new account, making a new deposit or maintaining a minimum balance of any type,” the company said in its press release about the change, which notes that trading options will continue to require a fee of 65 cents per contract.
Effective October 7, Schwab says it is “removing the final barrier to making investing accessible to everyone.”
Schwab has some 12.1 million active brokerage accounts.
Only hours later, TD Ameritrade reported its plan to also drop to zero from the $6.95 it currently charges per transaction for online trading of U.S. and Canadian stock, ETFs and options in its customers’ existing 11 million client accounts — and for future customers — effective Oct.3.
Like Schwab, TD Ameritrade also noted trading options will continue to require a fee of 65 cents per contract.
“We are committed to giving our clients the best possible investing experience, with cutting-edge technology and award-winning investor education and service teams. And now, that experience just got better,” Tim Hockey, TD Ameritrade CEO, was quoted as saying in a press release issued after 6pm ET.
But what does the news mean for advisory firms?
John Tate sees savings for his clients and a positive impact for his own financial planning business.
Tate is an advisor with RIA Patriot Investment Management Group in Knoxville, Tenn, which has about $1 billion in assets under management.
“I believe this is another victory for the consumer and Patriot’s clients since these savings will increase their overall portfolio return with the elimination of the trading costs. I believe another positive of this change is that this will help young investors and clients that add money each month to their investment portfolios to have more choice when investing in U.S. stocks and ETFs,” Tate writes in an email.
Tate does not expect changes to the cost structure for fees for his own clients.
In the long term, some industry observers think the notion of “free” trades could infect investors with the idea that the value of advisory services should also be declining. Schwab noted in its announcement that the company has “more than 7,800 client-facing professionals available either in person or via the phone or online chat.”
The company’s lowest-cost advisory service is offered to clients with a $25,000 minimum of invested assets as a $300 one-time planning fee and then $30 a month. Its robo-advisor requires a minimum investment of $5,000 with no advisory fee.
Patriot Investment Management Group
But Tate is not worried that the “free” trades and low fees - will create questions about the value proposition of his own services.
“In my opinion, this announcement in no way diminishes the value of my services, since my clients rely on my expertise to help them achieve their financial goals, assist them with making choices that help them increase their financial contentment, minimize their taxes, increase their ability to give to causes they believe in, and increase their total return on life," he writes.
"I don’t believe that any reduction in trading costs will impact the value that I provide to my clients. But this change is another way for me to differentiate my practice from brokerage firms that charge commissions and may not be putting the needs of their clients first,” Tate adds.
For some of his commission-charging advisory competitors, Tate expects the news of free online trades will cause some economic rethinking.
“Firms that earn a significant portion of their revenues from trading costs will be impacted the most. This change may require others to change their business model in response to the news from Schwab, but I believe that fee-only advisory practices will only see this news as another positive for their clients,” he says.
Yet Tate admits to some concerns about an unwanted influence the Schwab announcement could have on his own clients.
A rebalancing act for transaction fees
“One thing that does worry me about this change is that it may increase the frequency in which my clients want me execute trades in their account. With the elimination of the trading fees, one thing I will be discussing with my clients is the frequency of rebalancing their portfolio,” Tate writes. But he adds: “Overall, I am excited about this change and I am expecting some great conversations with my clients, prospects, and young investors over the next several months.”
Other advisors agree the free online trading represents good news on balance.
"These cost savings are also applied to Schwab’s institutional accounts, including Brightworth’s clients, and these savings will be passed on to our clients as they have in the past," says Ray V. Padrón, CEO and advisor at Atlanta’s Brightworth, which has $3.3 billion in assets under management.
Padrón also is not worried about the change influencing how much his clients value his services.
"While the value we bring includes watching the overall costs of a client’s portfolio, trading costs are a very small portion of that and their trends across all the custodians has been moving down. The value we bring and what our clients are looking for predominantly comes from the ongoing wealth planning including portfolio design. The portfolio portion of their wealth planning includes asset allocation, manager, stock, and index selection, their related costs and the tax efficiency of the returns," he writes.
"We have always ensured that our clients are getting what is called ’best execution’ with regard to their trading and trading costs and we use three custodians. The real question to this story is will the other custodians follow suit in order to ensure their advisory firm clients can ensure best execution for their clients. It’s not entirely about costs but it’s a big part of it," Padrón adds.
For the larger financial services industry, including other custodial firms, the consequences, even in the short term, could be significant almost immediately.
Schwab and TD Ameritrade’s rivals — including E*Trade, Pershing and Fidelity — "will have to respond,” predicts Devin Ryan, an industry analyst with JMP Securities. “[T]herefore, the question is more whether they do so in a way that impacts their entire platform or they look to distinguish between their various customer bases, which also have varying sensitivity to trade price as a primary focus, in our view,” Ryan added.
Yet some advisors foresee little impact from Schwab’s move.
“We see it as a complete and total non-event. Our clients pay the custodian directly for whatever minimal trading costs are associated with the management of their portfolio. We believe in total transparency and alignment of interest with our clients,” contends David Bahnsen, chief investment officer and managing partner of the Bahnsen Group in Newport Beach, Calif., part of HighTower Advisors.
“We have always worked to negotiate the lowest possible fees around their custodial services. We do not have a single client that would view execution of trades as even on the list of our value proposition – it is purely incidental to the value of our portfolio management, broad financial planning, content creation, risk management, and additive services. We don’t have any clients who will care about this news, and we won’t be doing any proactive messaging around it,” Bahnsen adds in an emailed answer to FA-IQ’s questions.