Earlier this week, Charles Schwab announced that starting Oct. 7, clients can buy and sell stocks and ETFs listed in the U.S. or Canada online for free instead of the 4.95/$6.95 per trade fee. Next day, TD Ameritrade and ETrade reluctantly followed. Fidelity and the rest have no choice but to follow on their footsteps. Of course, the new zero commissions do not apply to transactions in foreign stocks, large block transactions requiring special handling, restricted stock transactions, transaction-fee mutual funds, futures, or fixed income investments. Also trades placed by phone will continue to cost $5 each and through a broker $25.
This is a significant benefit to all investors, especially those who have financial advisors at these big banks. Most advisors, who also get a cut of the trading commissions in addition to advisory fees, engage in frequent trading or churn their client portfolios for no reason, other than to generate commissions, to the detriment of the client’s net worth. This practice should have been made illegal by the SEC but, will now finally stop.
The banks, who generate a good chunk of change from these commissions, have to now figure out another way to make up the difference. And financial advisors at these firms have to now make money the old fashioned way – create wealth for their clients. What a novel idea!
Future Wealth View
The financial advisory business is littered with stories of advisors churning client portfolios to benefit the advisor and going against all rules of fiduciary duty. It is good to see this practice will end. However, the onus on the banks will now be to create “float” and make money by taking clients cash position and lending them at a higher rate to institutions and enterprises. It is no secret that money market rates are a joke but that same money will get banks who lend them, rates of 2% or higher. And so, banks will be looking for clients to pour more money into these money market accounts so that they can benefit from the float. It is a tough way to make money and in general, the companies in the financial sector are going to struggle for awhile following the elimination of the trading commissions.
At Future Wealth, the elimination while being a positive for our clients, is not a very big deal. That’s because we take positions in appropriate investments and leave it alone for a long time, unless the client’s risk profile or market conditions change dramatically. As such, our clients experience very little churn and barely incur major expenses from these commissions. This is also true with our own advisory fees and the investments we choose. Keeping fees low has a big impact on clients net worth. A difference of just 1% in fees and expenses on a portfolio of $1 million, could save the client $322,605 over 20 years. Our website has an interactive calculator that shows how you could be saving on lower fees and expenses. Link is https://futurewealthllc.com/pricing/.
Overall, we believe that given the elimination of the trading commissions, the next shoe to drop will be financial advisor fees. Clients who are being charged >1% of assets under management on a $1 million portfolio are paying way too much and the pressure from companies like Future Wealth LLC, which charge just 0.7% of assets on a $1 million portfolio, will force these advisors to follow suit. In the end, the clients benefit – Another novel idea!