Pros:
- Accessibility and value for smaller, newer investors: Brokerage firms had typically charged commission based on the number of trades placed, not number of shares. For example, if an investor purchased 3 shares of “stock A” and sold 3 shares of “stock B” they would be charged the brokerage firms’ traditional commission price, twice, one for the buy and one for the sale. A large investor who purchased or sold hundreds, or even thousands of shares of the same stock(s) would end up charged the same commission price. With smaller share amounts being common for smaller investors, these commissions often made up a large percentage of the overall transaction, decreasing the value, and thus likelihood that the investor would want to make the trades. Knowing that part of the opportunity of eliminating commissions was attracting new investors and assets, brokerage firms began leaning into the availability of research, market commentary and education. Information that was once much more difficult, and perhaps, expensive for the common person to access was enhanced in quality, increased in frequency and made available directly on public versions of brokerage company websites (Your financial journey starts here | Robinhood Learn. Insights & Education | Charles Schwab | Charles Schwab). This has been a driving force for increasing financial literacy and well-being and introducing different demographics of investors into the market.
- More active trading and diversification opportunity: As will be discussed in the “Cons” section below, we view active (frequent) trading as both a potential pro and as a potential con. Like many things in investing, it is unique to the individual investor and their situation. We see more frequent trading as a pro when it is used for purposes of diversification. For example, in the times of being charged $4.95 or $9.95 (or more) per trade, commission conscious investors had less motivation to make portfolio changes. Although there may have been different stocks or funds that they (or their investment management team) would rather have owned, their anticipated value of the change would have had to outweigh and include the commission charged to them. For one or two trades it may not have been much, but when making major changes, the commission certainly adds up, no matter the portfolio size. In many client cases, Howe & Rusling uses diversification as a tool within our portfolios. Our stock, exchange traded fund (ETF), and bond allocation models for our investment management clients all include multiple securities (Wealth Management CFA Rochester NY | Howe & Rusling | Rochester Investment Advisory RIA Firm). While performance and investment return are never guaranteed, or even predictable, from a purely commission-based standpoint, our clients whose assets are custodied and traded at brokerage firms (ex. Charles Schwab, Fidelity) that offer no commission trades allow us as investment managers to make decisions without the weight of commission charges. This allows our investment committee and wealth management teams to make decisions with more focus on company fundamentals, overall market/economic sentiment, and ultimately, unique client situations and overall appropriateness.
Cons:
- Payment for order flow / best execution concerns: Perhaps unsurprisingly, when Charles Schwab announced elimination of online commission trading in 2019, their stock (SCHW) price declined in value. Investors and analysts became apprehensive about their revenue, specifically, if and how the company (and companies like Schwab) would be able to make up the difference in lost commissions. As discussed earlier, these firms saw broad asset consolidation as a major opportunity and have since capitalized on it, however, another revenue stream came into focus with some skepticism and criticism: Payment for Order Flow. According to Charles Schwab (Order Routing | Charles Schwab): “Schwab routes (trade) orders for execution to unaffiliated broker-dealers, who may act as market maker or manage execution of the orders in other market venues and also routes orders directly to major exchanges… As part of a common industry practice known as Payment for Order Flow, Schwab receives rebates from liquidity providers and certain exchanges based upon the order flow executed at each destination. Some orders require us to pay associated transaction costs, but most orders result in rebates. Net rebates received by Schwab are used to offset transaction and order processing or handling costs and help us maintain very low commission rates for our clients.” In simpler terms, Charles Schwab receives payments from unaffiliated broker-dealers who are, in these cases, responsible for trade execution for the Schwab clients. The controversy arises from the transparency and fairness of this, specifically: is this routing ever negatively impacting (even if by a very small amount) an investor’s trade price and if so, is it ethical for Charles Schwab as a corporation to financially benefit from this? Should Schwab be more responsible for their own execution as it could be more transparent and easier controlled? In our view, the answer is one that does not have a simple yes or no answer. Concerns about lack of transparency and best execution prices for clients are important and valid. However, Charles Schwab consistently releases quarterly reports on order routing and maintains their commitment to their clients without any conflicts of interest: “At Schwab we put our clients’ interests first. Therefore, best execution for our clients always takes priority when determining where to route orders. Any eligible rebates from a particular market center are not a consideration in order routing decisions.” Clients and investors can take comfort in their policy and client first commitment, as well as financial regulatory agencies such as FINRA (Customer Order Handling: Best Execution and Order Routing Disclosures | FINRA.org) addressing this matter with the upmost significance.
- For some investors, and in some cases, less active trading proves to be more: Finally, we swing back around to frequent trading. Investors who do their own trading and make their own decisions (like professional investors and analysts do as well) often see a wide range of success. It is easy to let human emotion drive decision making, as well as incomplete, or simply, false information. With zero commission trading, traders are more likely to act on a whim, act on an undeveloped feeling, or act on something they read on social media without fully researching it. It is human nature to seek fast and easy positive returns in the stock market, but in reality, the market does not always go up and quick, meaningful losses in stock prices can happen as well. Frequent trading can also create tax ramifications (often ones that come as an unwelcome surprise), especially if the investor does not understand the specific tax rules of account and investment types. Because of these oversights discussed above, it is prudent to speak with a wealth management professional and a tax professional to determine if your trading strategy is efficient and effective. You may discover that working with a wealth management firm like Howe & Rusling could benefit your unique situation. Investors who focus solely on active trading run the risk of overlooking other important aspects of financial well-being, such as comprehensive financial, tax and estate planning.
Zero commission online trading fits the current and evolving landscape of the world, economy, and financial industry. Additionally, fair, quick and affordable access to data, information, and opportunity to participate in markets will continue to be asked for and expected by investors. Although caution is warned, (and certainly warranted in cases) the democratization of trading through decreased commission and fees has made trading and investing more accessible to people from different demographics and economic statuses.
Sources:
Investing costs fall again: Fidelity, Schwab cut commissions | AP News
Charles Schwab is eliminating online commissions for trading in US stocks and ETFs
Fidelity cuts fees to $0 as it jumps on zero-commission bandwagon | The WealthAdvisor
Trading fees on Robinhood | Robinhood
About Us | Robinhood
Pricing | Account Fees | Charles Schwab
Customer Order Handling: Best Execution and Order Routing Disclosures | FINRA.org The Charles Schwab Corporation (SCHW) Stock Price, News, Quote & History – Yahoo Finance
Order Routing | Charles Schwab
Schwab CEO Defends PFOF, Claims It Nets Investors Better Pricing – AdvisorHub
How to Make Rational Buy and Sell Decisions | Charles Schwab
Meme Stocks Ride Again, But Caution Is the Word | Charles Schwab
This material is provided for informational and educational purposes only and should not be construed as investment, tax, or legal advice. The views and opinions expressed are those of the author(s) and do not necessarily reflect the views of Howe & Rusling, Inc. References to third-party firms, services, or websites (including Charles Schwab, Fidelity, E*TRADE, Robinhood, and FINRA) are provided solely for illustrative or informational purposes and do not constitute an endorsement, recommendation, or affiliation with Howe & Rusling. The accuracy and completeness of information from third-party sources cannot be guaranteed. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. No investment strategy, including diversification or asset allocation, can ensure a profit or protect against loss in declining markets. Investment decisions should be based on an individual’s specific financial circumstances, objectives, and risk tolerance. Discussions of specific securities, trading practices, or market events are included for general educational context and should not be interpreted as personalized investment advice or as a solicitation to buy or sell any security. Examples used are hypothetical and are not intended to represent actual client experiences. Clients should consult their financial, tax, and legal professionals before making any investment decisions. Howe & Rusling, Inc. is an SEC-registered investment adviser located in Rochester, New York. Registration as an investment adviser does not imply a certain level of skill or training.
