Why Are the Online Brokers Going Commission-free?

Daniel Penzing
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Why Are Online Brokers Going Commission-free?

Recent trends in the brokerage industry indicate that a number of online brokers are getting rid of commissions on the commodity and forex trades.

Some are even eliminating them for stocks and ETFs.

What is Really Going On?

While taxes are getting higher every year, commodity prices are falling. Thus, if you want to find a broker that charges a reasonable fee and generates revenue on the flat rate instead, go for an online broker.

And the change has just begun. Some of the brokers are already advertising their fee-free approach. This is a move that makes sense.

There is no doubt that the online brokers, unlike the traditional ones, are here to stay. These online companies are rebranding what is now known as retail brokers.

It is estimated that the online brokers are on the verge of stealing around 10% of the traditional brokers’ business.

Most people are not aware that the online brokers are the ones who will ultimately win the war for your investment money.

The online brokerage firms entered the scene with a very different strategy. They started by lowering the trading fees and then included additional services at no additional fees.

These additional services included their own research, news, analysis, and to-list services.

What Is the Robinhood Effect?

The Robinhood Effect refers to how the point of entry for consumers and traders has changed. In the old days, you typically had to make an investment to participate in a market. For example, on the stock market you had to buy a minimum number of shares to be able to get a seat and trade, and you had to be a certain net worth level to be allowed to have your own seat. This enabled the brokerage houses to collect commissions on the trades determined by their relative net worth.

Robinhood came along and realized that a lot of people who were interested in trading were not yet interested in investing. If it did not make any money on the trades, potential customers would be able to avail of this service for free. It also helped people explore the market, learn their trade, and then go out and make their own investment. Some of these people even became repeat customers. By keeping customers, they make more money over time.

There was a little backlash from the brokerage houses who were already making money on the customers. As a result, they started changing their policies to make it more palatable to the investor.

Should You Switch to a Commission-free Broker?

It was not so long ago when people paid fees to stockbrokers and financial advisors for various services and types of advice. But the stock market has leveled the playing field, and now anyone can have access to investment guidance and information. This has caused a shift in the advisory industry and has made it possible for investors and traders to review information and conduct transactions online at little or no cost.

Many online stock brokers have responded to this shift by dropping commissions and fees, and others are offering fee-free trades for certain products. We think that these commission-free online brokerages represent a very good opportunity for investors to save money when making investment decisions. In this post, we’ll explain a bit more about why online brokerages are dropping commissions and fees. We’ll talk about some of the more prevalent fee-free online brokers and give some insight into what to look for when determining which online broker to use.

Which Brokers Are Commission-free?

Though there are still some commission-based brokerage firms out there, most of the financial firms have converted to a fee-only, Commission-free model. Most companies charge fees for a number of services on top of the regular transaction costs. For example, a stock transfer and a fee for transferring funds from your bank account to your account at the brokerage are a regular occurrence. But the ability to avoid the stock transfer fees is a huge bonus for some brokers.

In the traditional model of commissions, brokers get paid for each customer trade that they execute. It’s split between the company’s back office, the front office, and the broker. As a result of this system, there were some cases of companies pushing traders to buy and sell stocks and to do so frequently in order to get a higher commission.

The Commission-free model is placing more pressure on brokers to generate higher revenues through fees. This is why many companies are getting rid of stock transaction fees. The fee-only model is less complex and is more profitable for investment firms.

While some of the newer companies offer both models, here’s a look at some of the institutions that will pay your stock transfer fees.

Vanguard.

Schwab.

E*Trade.

Robinhood.

TD Ameritrade

One of the big benefits of an IRA is that you can pay no taxes on any appreciations within the account, capital gains taxes unless distributions are made. The real power of an IRA is in its tax-deferred growth.

But with the recent economic downturn, the industry is hoping to encourage more IRA accounts through commission-free IRA trades. The brokerage firm TD Ameritrade has announced that is will eliminate 10-finder fees on all IRA withdrawals from June 7th onwards.

With the market fluctuations and the cost of investing going in one direction, it is all the more important to ensure that your savings are working for you. Pouring money in your retirement accounts will help you save for the long run. Be it IRAs, 401k retirement plans, or 529 plans, investing with a hands-off approach might mean making tidy profits on the smaller trades.

Both 401k and IRA are tax-advantaged accounts wherein investments can be kept for a longer period of time. The early withdrawals are taxed at higher rates. You might incur exit penalties from your employers (governmental and educational institutions) if you want to use them for other purposes.

E*TRADE

Came out of nowhere and declared they will be commission-free for the next six months. What’s next? Free ETFs?

Thanks in part to the media coverage surrounding the recent announcement that the online broker E*TRADE was going commission-free for six months, many investors have breathed a sigh of relief about the impact of commissions.

Brokers slashing the cost for trading shares is certainly good news for investors, but it doesn’t change the fact that as much as 70% of the gross income of an online or discount broker is accrued via commissions.

What’s the takeaway here?

While going commission-free is a good thing for those bothering with trading, it’s a trend that’s gaining momentum. The question is, will it last?

The answer is, yes, it definitely will.

Ally Invest

It’s not just Ally Invest anymore! Actually, it hasn’t been just Ally Invest for a while. Back in 2015, the brokerage decided to drop the commission on stock trades. But it wasn’t until 2017 that it became a point of consideration. And 2018 announced a fee-free-future.

So, in 2017, 3 leading stock trading companies announced their commission-free trades platform for 2019.

You can sign up for it at both TD Ameritrade and Fidelity. Ally Invest follows suit in April.

All three companies will make it very easy for you to sign up. They won’t make any of those awful hurdles, which force you to believe that you’re getting a discount when you’re really getting ripped off.

Service will be a fee-free-future, which is likely to be a boon for the small and midsize companies.

All three companies will maintain that they’re a fee-free platform for the long term. However, the fact that they are starting with offering 100 free trades and will later introduce some fee for new customers, probably means that it’s not even the long term.

Fidelity

Brokerages latest move shows that online brokerage fees are going to become even less. Stung by falling trading volumes, online brokers are trimming fees.

E*Trade Financial (Nasdaq: ETFC) announced a fee reduction last month for online stock and options trades. Charles Schwab (NYSE: SGH) lowered prices in January and has since reported record growth in new accounts and assets. Other online brokers are also cutting fees.

The industry decline in trading volumes prompted the drop, as the online brokers try to coax more people from large full-service brokerages and spending on their own trading services. The operating margins are about half as large as the retail investment banking units at big banks, which rely on trading and underwriting fees for much of their profits.

Investors should pay attention to the fees online brokers charge so they can weigh the cost of placing orders with an online broker against other options. Here’s a primer on online brokerage fees.

Robinhood

(free stock trading platform)

Robinhood has started a revolution in the trading world by doing away with its traditional commission model and instead offering a commission-free trading experience. It has so far managed to attract millions of traders who have until now been restricted to trading with all the online brokers, thanks to their hefty trading fees.

Initially available only to U.S. resident, this zero-commission trading revolution has been a hit among traders who have discovered that they can easily make a profit trading stocks with Robinhood. Low-cost stocks, ETFs, options, and a strong portfolio tracking app together with an intuitive design are making Robinhood very popular among those new to investing and those who are trading for the first time.

A mobile app and an online platform, Robinhood brings you the option to trade from your mobile phone and make informed decisions on the go. Robinhood has managed to attract more than two million traders who wanted to get in on this new investment opportunity. It has captured the market with its simple design and an easy-to-use interface. With the tagline “take back your money,” Robinhood is helping you invest for free and improve your financial future.

Charles Schwab

Fears That Its Customers Will “Go Naked” Because of its New Pricing Policies.

From what I can see, it’s true…it’s you(and every other customer) who is going to “Go Naked”. There are no free work clothes, except for the free to dry wash service.

The reason why I say that, is that there are many people who consider the stock broker as their personal stock broker, and that is a major mistake.

Check out Wikipedia for the definition of a stock broker. It is very limited.

And I will add one more point…broker is a horrible word for a stock broker.

There are basically no stock brokers at Schwab and E*Trade, none at TD Ameritrade and you’ll never meet one at Vanguard or TradeKing or Interactive Brokers. Why? Because nobody will pay a stock broker to trade for them.

The financial industry will never give you a broker, and it is all by design. A stock broker is an advisor. Yet most people have no understanding of what an advisor is and what they can provide you.

I think it is a perfect opportunity for you to learn and to become an expert at it.

Vanguard

Offers commission-free trades on nearly all ETFs and mutual funds. Schwab made headlines in December 2016 when they scrapped all transaction fees on Schwab ETFs. TD Ameritrade has also expanded their lineup of commission-free ETFs.

When the Big Online Brokers’ Fees Disappeared

So, why are they offering free trades? And why did Schwab make such a splash? To understand, let’s look back at when online brokers started offering commission-free trades.

IBKR Lite

A tool for beginners that are not ready to commit to a full brokerage account. It does not require a minimum cash deposit and is free, period. You can get your feet wet with nearly every stock brokerage firm and see if online trading might be right for you.