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The Downside To Charles Schwab And TD Ameritrade Eliminating Trading Fees (Yes, Really)

Financial advisers discuss the real cost of free stock trades. The Downside To Charles Schwab And TD Ameritrade Eliminating Trading Fees (Yes, Really)

There might be no such thing as a free stock trade.

After the news that Charles Schwab Corp. and TD Ameritrade would soon be dropping trade commissions, some financial advisers and market experts say it’s possible mom and pop investors could still end up paying — just in a different way.

Inexperienced investors could overtrade or make risky stock bets, unimpeded by fees to make them stop and think a second, advisers told MarketWatch.

David Bize, an Oklahoma City-based financial planner, said that “do-it-yourself investors have had low-cost trades for years, which provided ample rope to hang themselves.” No costs would encourage even more trades, which, he said, “most people do poorly, rather than a ‘buy-and-hold’ approach, which would be better for them.”

Starting Monday, Schwab is dropping its $4.95 commission per stock trade, ETF and option trade.

TD Ameritrade is ending its $6.95 commission on Thursday. Late Wednesday, E-Trade ETFC, also said it was ending retail commissions beginning Monday.

The commission was $6.95 for the first 29 trades and $4.95 after up to 500 stock or options trades.

The fast-fading fees are another round in an ongoing race to shrink broker fees. But they also come during a time of stiff market headwinds: There’s the ongoing impeachment inquiry into President Trump, the tariff trade war with China and the drumbeat of a recession lurking somewhere around the corner — all things that could rattle retail investors.

“It has the potential to be a disruptive issue,” Kashif Ahmed, the president of American Private Wealth, a Bedford, Mass.-based firm, said of the slashed commissions. “The market is already delicate, so to speak. On top of that, you throw in people’s ability to trade without consequence.” He added, “Acting on no discipline and no cost, it’s a recipe for disaster.”

Others, speaking before the E-Trade announcement, said their big question now was how Schwab and TD Ameritrade would make up the revenue after erasing the commissions.

“A commission is the explicit spread or profit a broker dealer charges,” said Tyler Gellasch, the executive director of Healthy Markets, an investor trade group. “When that goes to zero, that naturally means there’s going to have be some other way for them to keep the lights on,” he said.

‘A commission is the explicit spread or profit a broker dealer charges.

When that goes to zero, that naturally means there’s going to have be some other way for them to keep the lights on.’

—Tyler Gellasch, executive director of Healthy Markets

Without the upfront commission, “it’s hard to assess service and value provided, and harder for market forces to work their ways to benefit investors,” said Micah Hauptman, financial services counsel at the Consumer Federation of America.

Both Charles Schwab and TD Ameritrade emphasized they were lowering investing barriers without sacrificing quality.

“This is our price. Not a promotion. No catches. Period,” Charles Schwab & Co. CEO Walt Bettinger said in a statement. “Price should never be a barrier to investing for anyone, whether an experienced investor or someone just starting on the investing path.”

A Schwab spokeswoman said the assets under management rose to $3.72 trillion from around $2.9 trillion in February 2017, the last time the company lowered commissions.

She pointed to commentary from Peter Crawford, Schwab’s CFO, saying the company has “a business model that doesn’t depend on commission revenue, a long-term orientation and a history of being willing to disrupt ourselves based on client needs and competitive dynamics.”

The scrapped commissions equaled $90 million to $100 million in quarterly revenue, which is about 3% to 4% of total net revenue, Crawford noted.

A TD Ameritrade spokeswoman said, “With $1.3 trillion in client assets, we have scale and a diverse business model with a range of different revenue streams.” She said the company was committed to the “best execution” of trades and “a consistent, quality and liquid trading experience for our clients.”

“We firmly believe that investing is a pathway to a better life and are fully committed to providing more people with the access, education, and help they need to confidently navigate and build a more sustainable financial future for themselves and their families,” she said.

The company has been building up its investor education offerings in the past year, she said, adding, “Relevant information, delivered when our clients could best use it, and in the formats they prefer, increases confidence and empowers rational decision-making.”

Behavioral economics suggests people don’t always make ‘rational’ money choices

While the trading platforms are changing, the people using them stay the same. This could be part of the challenge in avoiding any overtrading and bad bets.

Behavioral economics research says people have an “mental accounting” system where they internally label money for certain activities and won’t replace it with other earmarked money. If someone sets aside $500 a month for stock trading but doesn’t hit the limit, he or she might just keep on trading.

While the trading platforms are changing, the people using them stay the same. This could be part of the challenge in avoiding any overtrading and bad bets.

Of course, there’s another behavioral economics theory that could make the case that investors with zero commissions will be cautious. The concept of “loss aversion” means “losses hurt more than gains feel good,” writes Richard Thaler, a professor at the University of Chicago Booth School of Business and giant in the behavioral economics field.

On Wednesday, some financial advisers said the erased commissions wouldn’t unlock the floodgates on ill-advised trades. They noted low-cost trades have been around for years.

“If the investor is scared due to current headline risk, their innate behavioral biases will likely lead to poor trades anyway,” said Risley Sams, founder and president of RHS Financial in San Francisco. “The fact that it won’t cost them any commissions is probably not the primary driver.”

Others welcomed the news on the scrapped commissions.

Mike Alves, the managing director and founder of Vida Private Wealth in Pasadena, Calif., said the news would lure more investors. By investing in the market, winning on some bets and losing on others, more consumers could actually become savvy investors — and better appreciate the services of financial planners like Alves.

“Sometimes our job is helping our clients avoid financial mistakes,” he said. “If I can save you from making a million-dollar mistake, how much is that worth?”

Charles Schwab Corp. shares are down 12% from the start of the year, E-Trade shares are down almost 20% and TD Ameritrade shares are down more than 30%.

Updated: 4-23-2021

Schwab Waiting For Regulatory Clarity Before Deciding On Crypto Services

Schwab’s CEO says the firm will be “highly competitive” and “disruptive” should it decide to participate.

Charles Schwab is looking “closely” and “cautiously” at the crypto market, CEO Walt Bettinger said Thursday, according to a report.

* “If Charles Schwab, the company, decides to participate in the crypto market, we will be highly competitive, we will be disruptive, and we will be client-oriented,” Bettinger said on a call with analysts, according to Reuters.

* Schwab provides banking and brokerage services to 31.9 million active accounts worldwide.

* The company is waiting for greater regulatory clarity, according to Bettinger, something that could be forthcoming with the appointment of Gary Gensler as new chair of the U.S. Securities and Exchange Commission (SEC).

* Prior to his appointment, Gensler told a Senate Banking Committee on March 3 that he would “work with fellow commissioners to both promote the new innovation, but also at the core to ensure investor protection.

* “We would like to see more regulatory clarity,” Bettinger said. “And if that comes, you should expect Schwab to be a player in that space as it has been a player in other investment opportunities across the spectrum.”

Updated: 7-14-2021

Citi Debuts No-Fee Stock Trading To Compete With JPMorgan, Robinhood

Citigroup Inc. will let U.S. retail customers bet on stocks without paying fees as the bank tries to expand its wealth business in the face of fierce competition from Silicon Valley ventures, discount brokerages and big-banking peers.

The Wall Street giant will initially make the new offering — Citi Self Invest — available to checking account holders before later marketing it to more people, said David Poole, who heads the U.S. consumer wealth management business. The zero-fee deal applies to individual stocks and exchange-traded funds but will later add other types of investments, such as mutual funds or options, he said.

Chief Executive Officer Jane Fraser, who took over this year, has been retooling the bank’s businesses tending wealth for a variety of customers — from investing novices to the ultra rich. In January, the firm merged its wealth management arm and private bank into a new unit called Citi Global Wealth to be led by Jim O’Donnell.

With this latest offering, which won’t require a minimum account size, it’s shoring up operations that cater to cost-conscious speculators, whose numbers have been multiplying during the pandemic.

“We feel like the Self Invest offering will really round us out,” Poole said. “Citi Self Invest is another key step to delivering that robust and intuitive full investment continuum.”

The move may add to pressure on the likes of Robinhood Markets, the wildly popular trading app that soaked up customers last year and became their venue of choice for meme-driven buying sprees in the months since. Robinhood, which is preparing for a public stock listing of its own, and discount brokerages TD Ameritrade and Charles Schwab have all reported record volumes on their platforms as newcomers rushed in.

While those firms and self-directed investing platforms at larger peers JPMorgan Chase & Co. and Bank of America Corp. are ahead of Citigroup in offering no-fee options, the firm’s operations are already formidable. Businesses now bundled into Citi Global Wealth would have collectively produced about $6.6 billion in revenue in 2020, with roughly half of that coming from retail clients, Citigroup said in a presentation in April.

To help newcomers, the bank is launching a learning center in tandem with Self Invest.

“You have quite sophisticated and experienced self-directed clients,” Poole said. “But for those clients that are novice and just starting out with investing, we want to make sure we have that investor learning center.”

Last year, Citigroup also debuted a robo-advisory arm, a digital platform that connects customers to professionally managed portfolios for an advisory fee of 0.55%.

Even with the digital push, Citigroup is focused on building out its workforce of financial advisers, said Poole, who joined in 2020 from Bank of America Corp. There’s demand for both digital and adviser wealth management, he said.

“That’s one of the advantages of Citi,” Poole said. “A client can come to us and have both. It’s not one or the other.”

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