Attrition of the Commission
In a matter of a few days, the brokerage industry went from charging customers for making trades to giving them away like tchotchkes at a trade show.
The app-based brokerage firm Robinhood was “a pioneer” of free trading when it launched to the public in 2014, but things have significantly changed within the past month, and they are no longer alone. Major shockwaves reverberated throughout the brokerage industry as five of the most well-known online brokers also jumped on the zero-commission bandwagon: Interactive Brokers (announced 9/26), Charles Schwab and T.D. Ameritrade (both announced 10/1), E-Trade (10/2), and Fidelity (10/10).
However, we all should recognize that on Wall Street, there is oftentimes more to the story than meets the eye, and if revenue disappears in one area, it tends to show up somewhere else. While trading may now be “democratized” as commission-free transactions become the norm, ‘free‘ does not always mean ‘free‘ – especially on Wall Street. Remembering that brokerage firms are for-profit businesses, and aside from trading commissions, which appear now have gone the way of the dodo, revenue is still being generated in a variety of other ways, including:
- Rebates collected for directing client orders, or the payment for order flow, which can be used by other market participants to arbitrage activity around short-term trades
Clients leverage their accounts and borrow money (paying interest to do so) to trade on margin
- Most importantly and most profitably for brokerages, interest income they earn on uninvested cash held in client accounts:
At Towerpoint Wealth, we believe that none of these less-transparent revenue streams are as potentially problematic for investors as the possibility of bad investor behavior that free trading can elicit. Commission-free short-term trading based on investor overconfidence is not a successful recipe for longer-term net worth protection and growth, and creates a much higher likelihood that the “behavior gap” occurs – the difference between investment return and investor return:
Put differently, as only the venerable Warren Buffett can put it:
New Additions to the Towerpoint Wealth Family
* Welcome aboard, James! *
We are extremely pleased to announce the hiring of our new Director of Client Experience, James H. Keefe. James brings more than seven years of wealth management experience to the Towerpoint Wealth family, is a graduate of Providence College, and prior to entering the world of finance spent three years teaching and coaching at St. Sebastian’s School in Needham, MA.
Click HERE to read more about James and his new role at TPW, and be sure to ask him about being the middle child in a family of eleven!
* It’s a boy! *
A HUGE congratulations to our Director of Research and Analytics, Nathan Billigmeier, and his beautiful wife, Jessica Billigmeier!!!
Grayson Brady Billigmeier was born October 9, weighing in at 7lbs, 8oz, and both Mom and Dad couldn’t be happier and, neither could big brother Ethan!
TPW CLIENT UPDATE – Saving Money with New Zero Commission Policy
As discussed above, our custodian, Charles Schwab, recently transitioned to a commission-free policy for all online equity, exchanged-traded fund, and option trades. Previously, clients of Towerpoint Wealth paid $4.95 per transaction.
While these small commissions were never part of our professional compensation at Towerpoint Wealth, they instead were simply a cost of our decision to partner with “Chuck” to custody our clients’ accounts and investments. Cost Consciousness will always be one of our six Core Investment Principles, and we are excited that Schwab has eliminated this small but pesky layer of expense for the benefit of our clients.
Napkin Finance: Inflation
In addition to our Towerpoint Wealth family expansion and the industry-wide rethinking of commissions, a number of trending and notable events occurred over the past two weeks:
- U.S. astronauts embark on the first all-female spacewalk
- President Trump abandons plan to host 2020 G7 meeting at his Florida golf resort
- Chicago’s big teachers’ strike heads into another week, with no end in sight
- Canadian Prime Minister Justin Trudeau wins reelection, loses seats in Parliament
- The Washington Nationals jump out to a surprising 2-0 lead in the 2019 MLB World Series
- Facebook discloses operations by Russia and Iran to meddle in the U.S. 2020 presidential elections
- Wildfires threaten California, again
As always, we encourage you to reach out to us (firstname.lastname@example.org) with any questions, concerns, or needs you may have. The world continues to be an extremely complicated place. We are here for you, and look forward to connecting with, helping, and being a direct, fully independent, and objective expert financial resource for you.
– Joseph, Jonathan, and the entire Towerpoint Wealth team