Two titans of the brokerage business climbed into the ring this week for another round of the investing industry's long-standing price fight — this time with the gloves off.
On Monday, Charles Schwab announced it would eliminate commissions for all U.S. stock and ETF trades. Just two years ago, Schwab was charging $8.95 per trade. The company then lowered its fee to $6.95, and then cut it again — to $4.95. As of next week, the stock/ETF trading cost for Schwab customers will go to zero.
Only a few hours after the Schwab announcement, TD Ameritrade matched the Schwab pricing policy exactly, cutting its commissions to zero (from $6.95) for all U.S. stock trades and ETFs. TDA's new pricing takes effect tomorrow.
Don't be surprised if this fee fracas becomes something of a free-for-all. "We expect Fidelity and E-Trade to...announce cuts to their own commission rates [soon], likely matching [Schwab and TDA's] zero rate," wrote Credit Suisse research analyst Craig Siegenthaler in a note to clients today titled "Finishing the Race to Zero."
[UPDATE: Late Wednesday, E-Trade announced it too would eliminate commisions on U.S. stock and ETF trades, effective next Monday, October 7.]
The back story
Many analysts trace the latest round of the price-cutting battle to 2013. That's when "fintech" start-up Robin Hood, focusing on millennial investors, began offering stock trading for free. Since then, the biggest brokerages — Vanguard, Fidelity, Schwab, and TD Ameritrade — have been ratcheting down commissions and expense ratios, trying to stay competitive with each other while also keeping a wary eye on newcomers. Last summer, Vanguard began offering almost all 1,800 ETFs on its platform commission-free.
JPMorgan Chase, attempting to make a splash in the brokerage business, unveiled You Invest in 2018, offering 100 free commission-free trades a year. Meanwhile, Merrill Edge (from Bank of America) began offering zero-commission trades to higher-dollar customers.
Apparently, the final straw for Schwab came last week, when Interactive Brokers, a company that has been focused on high-level traders, announced it would offer free stock and ETF trades on its new "IBKR Lite" platform.
What does it mean for you?
For Schwab and TDA customers following our Dynamic Asset Allocation strategy, the new pricing policies mean you'll be able to invest in our "official" ETF recommendations without incurring a trading cost. Until now, Schwab and TDA customers had to choose alternate funds in four of the six DAA categories to avoid commissions.
Schwab and TDA clients who are Fund Upgraders will now get commission-free trades on any ETFs we recommend, including the Vanguard bond funds. The same is true for any ETFs we recommend for Sector Rotation.
Finally, any Just-the-Basics folks using Schwab or TDA will be able to access the recommended Vanguard ETFs without paying a commission. Until now, Schwab investors have either had to pay a fee to use Vanguard funds or opt for Schwab-branded funds that weren't strictly comparable.
Although we're not yet ready to revise our 2018 Broker Review article in light of the latest changes (we'll wait to see how other brokerage firms react), it is worth noting that the new Charles Schwab pricing policy, combined with Schwab's low fund minimums (many funds at Schwab now require only a $100 minimum initial investment), make Schwab an increasingly attractive option, especially for SMI investors with smaller accounts.
Unfortunately, the Schwab/TDA pricing changes don't affect traditional mutual funds — the type of funds typically recommended in our Upgrading and Sector Rotation strategies. That's not a huge deal since most of the funds we recommend are no-transaction-free (NTF) funds anyway. That said, not all funds we recommend are NTF at every broker and, for now at least, Schwab and TDA have chosen to retain transaction fees for certain funds. (To the best of our knowledge, the only way to avoid commissions on all mutual funds trades is by using SMI Private Client.)
The Schwab/TD Ameritrade announcements this week could presage more upheaval in the brokerage business. That's because TD Ameritrade and E-Trade are much more reliant on revenue from commissions than either Schwab or Fidelity. Schwab, for example, derives only about 8% of its revenues from commissions, according to a Bank of America analysis. In contrast, commissions have accounted for more than 25% of TDA's revenues.
Some analysts speculate that the new zero-commission model may ultimately lead to another merger of brokerage firms — perhaps between TD Ameritrade and E-Trade. In 2017, you may recall, TDA took over former rival Scottrade.
From a CNBC report:
Analysts [say] consolidation may be the only way out for some players with E-Trade being the most likely acquisition candidate.
“We think [TD Ameritrade] is the likeliest acquirer of [E-Trade] given the large expense redundancies and [TDA's] desire to catch-up to Schwab and Fidelity in the race for scale,” said Credit Suisse’s Siegenthaler.
Of course, that's just speculation at this point. What we know for sure is that the latest pricing developments are more good news for investors. Indeed, it would seem that no matter how this price fight turns out, investors will be the winners.