Home Bankrate.com In The Race To Zero-Fee Broker Commissions, Here’s Who The Big Winner...

In The Race To Zero-Fee Broker Commissions, Here’s Who The Big Winner Is…

While this trend has generally benefited investors — allowing them to keep more of their money — it’s really long-term investors who win big from this type of fee war. Here’s why these types of investors should cheer the changes, and why short-term investors may want to be somewhat cautious.

Brokers zero out commissions

Charles Schwab acted as the catalyst for this latest wave of price cuts across the industry. As one of the largest and most respected brokers, Schwab announced on Tuesday that they would be ending commissions for trades on stocks and ETFs, slashing fees from $4.95 to zero for these securities. On options trades, it also cut its base commission from $4.95 to zero, but traders will still pay $0.65 per contract.

TD Ameritrade followed suit later in the day, ending its $6.95 commissions for stock and ETF trades. It followed Schwab’s move on options, too, cutting its base commission to zero and lowering its per-contract fee on options trades to $0.65.

Rival E*Trade joined the fray the next day, slashing its $6.95 commission on stocks and ETFs to zero. It also trimmed its base commission on options trades to zero and slashed its per-contract fee on options trades to $0.65, matching its other big competitors.

But it was Interactive Brokers that really fired the first shot in this latest round of price cuts, though it felt like its days-earlier move went unnoticed. A leader in low-cost trading, Interactive Brokers introduced IBKR Lite, a service that allows unlimited free trades on stocks and ETFs. Another perk for investors: the account pays attractive interest rates on cash balances.

This has been the first round of major price cuts since 2017, after which the industry called an uneasy truce. But at least a couple other brokers already offered free trades.

Merrill Edge gifted clients up to 100 free stock and ETF trades per month as part of parent company Bank of America’s preferred client program, which required $20,000 to get started.

And of course, Robinhood has gone one better, and has always offered free stock and ETF trades, but recently added free options trades, too – not even a per-contract commission.

And just like that, most major online players have moved commissions on stocks and ETFs to zero, or at least given you the ability to access free trades.

How can brokers afford to do this?

So a reasonable question at this point is how exactly can brokers afford to do this and still make a profit. In actuality, given the competition, the question really is how can they afford not to do it. Commissions have ratcheted down in fits and starts for years, with one broker lowering them and then others following shortly thereafter. No one is willing to maintain higher prices and risk losing clients to rivals.

And that goes triple when the industry hit the magic number of zero.

But for some brokers commissions are not the largest part of their business, and while they’d prefer not to cut commissions, they have other ways to make up the revenue.

Take Schwab, for example. In 2018, trading revenue comprised just 8 percent of its overall revenue, having fallen from 15 percent in 2014. About 32 percent of its revenue came from asset management, while 57 percent was interest income on client funds that it holds.

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