Brokers Lose Commissions

Brokers Lose Commissions

over 4 years ago3 mins

Mentioned in story

Formerly hard-boiled stock brokerages have been scrambling to keep up with twenty-first century investor expectations, hoping to poach millennial customers from one another – and avoid getting fried by upstart “fintech” rivals.

🕰️ Recap

  • In 2017, investment manager Fidelity announced significant cuts to its online trading fees. > Read our story
  • Last summer, JPMorgan Chase announced it would give its customers 100 free online trades. > Read our story
  • And on Tuesday, Charles Schwab announced it’d cut online trading commissions to zero, prompting rivals to follow suit. > Read our story

🔗 Connecting The Dots

Specialist brokerages like Charles Schwab, along with those services offered by the likes of JPMorgan Chase and Fidelity (to name but a few), make their money in several ways. These include generating interest from investing their customer cash deposits; offering premium investment advisory services; and, of course, charging commissions on the trades customers make.

While commissions – a.k.a. the fees you pay each time you buy and sell investments via a brokerage – make up only a small part of most firms’ revenues, they’re typically the most visible (and painful) cost to you. So it’s perhaps no surprise that “free” brokerages – which offer users the ability to trade, say, stocks, without paying commissions – have won over millennial customers in particular, who may have been put off in the past by high trading costs. Nevertheless, that appears to have set alarm bells ringing for the old guard. $30 trillion is expected to fall into the hands of Gen Xers and millennials over the next 30 years – an important group whose trading business they won’t want to miss out on.

Falling fees for financial services aren’t new: the emergence of robo-advisors in recent years has helped force some traditional investment managers to accept lower fees. So perhaps it was just a matter of time until brokerages’ commission party came to an end. Last week, however, the race to the bottom began in earnest: hours after Schwab’s announcement, rival TD Ameritrade also cut its online commissions. And by the end of the week, so too had* ETRADE**.

🥡 Takeaways

Technology has democratized trading.Reduced trading fees may lower the barriers to trading and investing for many. But access without acumen is risky. Brokerages no longer able to tempt users in with low (or zero) commissions may instead offer additional services such as financial education and specialist tools to help their users become more confident in their trading decisions (although you’ve already got Finimize, of course 😉). But the new normal may pose a headache for firms like Robinhood and Freetrade, which built their businesses on the promise of zero commissions. Not only might more competition mean their private valuations fall, but they could find themselves outgunned by the more sophisticated services offered by traditional brokerages.

Good for you, trader.This tit for tat is good news for consumers, but it’s not yet clear what it means for the brokers themselves. 7% of Schwab’s revenue comes from trading commissions, compared to about a third of Ameritrade’s. Going commission-free should therefore have a bigger impact on Ameritrade (although that also depends on the proportion of trading it handles online). But the biggest loser stands to be Interactive Brokers: commissions make up half its revenue. It hasn’t yet announced commission cuts of its own; if it does, its profit will likely take a huge hit.

🎯 Also On Our Radar

Investors have been busy buying up shares of “defensive” companies this year – where earnings tend to be relatively predictable no matter the state of the economy. And those who bought PepsiCo’s stock were vindicated on Thursday: the company reported better-than-expected quarterly earnings and an increased forecast for the rest of 2019, showing that while consumers have stopped spending on big-ticket items like cars, they’re still (predictably) buying up Pepsi’s sodas and snacks.

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