Does Free = Good?

Charles Schwab recently announced that as of October 7, all stocks and exchange-traded-funds (ETFs) will trade for free on their platform. Other large players in the space quickly followed suit.

Prior to this, investors paid a fee for buying or selling one of these investments, usually $4.95 at Schwab. If you trade stocks for a living, that could be really annoying. However, this fee wasn’t a huge deal for diversified, long-term investors in funds (which, quite frankly, most people should be).

Plus, even before this news, Schwab had a short list of ETFs that traded for free already. By trading infrequently or using funds from that list, you were already avoiding this cost.

Other competitors have been poking around free trading as well, like start-up company Robinhood. They released a “free stock trading” app that’s gotten a lot of attention the past couple years. This move to zero wasn’t a complete surprise; it’s been in the works for a while.

You might wonder, what’s the catch? How can they suddenly make something free that used cost money…isn’t that bad for their business? Consider a few things:

  • First, the money Schwab made from these trade fees was only about 4% of their overall revenue. There are plenty of other ways these companies make money, primarily on your cash.
    • They’ll pay you a low interest rate, then invest the cash in another instrument that pays a bit more and pocket the difference. This accounted for 57% of Schwab’s revenue in 2018.
    • A good reminder to always consider how companies get paid, and to watch how much un-invested cash you have.
  • Second, it’s provided a lot of good publicity that could lead to more people and more money on their platform, which is good for other parts of their business.
  • Finally, this has been a trend decades in the making. Before computers and the internet, getting access to the stock market was difficult and you needed a broker. Because you had to pay this person for their time and their access, commissions could be in the hundreds of dollars. In historical terms, going from $4.95 to $0 barely moves the needle.

Now that you know what’s happening, let’s answer the real question: What does it mean for you?

Truthfully, the effect won’t very noticeable for most. As long-term investors, we keep trading to a minimum and use ETFs that were already commission-free. However, if you make recurring deposits or withdrawals to/from your portfolio without using those funds, you may now save hundreds in fees each year.

One key here is the overall trend of declining investment costs for the diligent investor, and news like this will continue to re-write the narrative about investing. A lot of people still view investing as too expensive, too complicated, and not nearly transparent enough. That’s not the case anymore. Today, investors of all types can participate in the markets with little to no cost and straightforward investment choices.

Thanks for reading!

About the Author: Josh Bentz

Josh Bentz, CFP®, Wealth Advisor, helps clients organize and simplify their financial lives by providing comprehensive, personal financial planning. As a Wealth Advisor, Josh provides comprehensive financial planning for clients. He enjoys getting to know individuals and families so he can give specific, meaningful advice. He believes in being a fiduciary and doing what is in the best interest of clients.