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Commission Free Trading!

In case you missed it, Schwab eliminated most trading commissions yesterday morning and TD Ameritrade followed suit in the afternoon. Most of our clients' assets are held at TD and Schwab, so we are thrilled for our clients. As two of the largest custodians, this also represents a win for the larger investor community. The commission price war has now brought $0 commissions to TD, Schwab, Interactive Brokers (eliminated commissions last week), eTrade (eliminated commissions today), Vanguard (no trade commissions on ETFs) and we assume Fidelity will capitulate soon as well. Unless brokers start paying investors to trade, we have reached the final destination in a journey that began when trading commissions were de-regulated in 1975. We have a couple thoughts in light of the recent announcements.

Democratization of Investing

Investing has never been cheaper. Many index mutual funds and exchange-traded funds (ETFs) have expense rations of just a few basis points (read: close to free). Several of these funds are able to more than offset their expenses with securities lending, so even index investors are able to actually outperform the index they are tracking (albeit by just a few basis points, if at all). Regardless of the specific metrics for any given fund, most investors can own a globally-diversified portfolio for free or close to free. Stock investing has been democratized to a large extent.

Direct Indexing

Once the exclusive domain of large institutions, direct indexing has become increasingly available to smaller accounts. Several weeks ago, we wrote about how the minimums for direct indexing have fallen from $10M a few years ago to just a few hundred thousand dollars today. With commission-free trades, the barriers to direct indexing have been lowered even further. Of course, the tax benefits of direct indexing are most valuable to investors in higher tax brackets, so we do not expect direct indexing to be adopted by the masses like index funds. Nonetheless, direct indexing is now available to an even wider audience who may find it beneficial.