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3 Things to Know About Zero Commissions
In August, Fidelity rocked the financial services industry by introducing zero expense ratio index mutual funds. Later that month, JPMorgan Chase & Co. (ticker: JPM) followed suit, offering 100 commission-free online stock and exchange-traded fund trades for one year, while the bank’s top clients gained access to unlimited commission-free trades.
Now, all the behemoths, including TD Ameritrade Holding Corp. (AMTD), Charles Schwab Corp. (SCHW) and Bank of America Corp. (BAC), offer $0 commissions on online stock, ETF and options trades on some accounts. All this came after lesser-known firms SoFi and Salt Financial launched similar pricing packages last spring.
This so-called race to zero is primarily due to advancements in technology that have lowered costs and commoditized business lines that were once wildly profitable for banks such as asset management.
While no-fee trading is mostly a good thing for investors, there are some misperceptions (as well as some risks) worth thinking about before you make any moves in your portfolio.
With that in mind, here are the top three things to understand about so-called zero-commission trading and no-fee funds as you build out your investment strategy for 2020 and beyond:
- Zero-commission does not mean you should trade more frequently.
- No-fee ETFs and mutual funds don’t necessarily mean you can trade for free.
- Sophisticated and much-needed investment strategies will require paying full price.
Zero-Commission Does Not Mean You Should Trade More Frequently
With firms dropping commissions, you could view that as an invitation to ramp up your trading activity. After all, if it doesn’t cost anything, why not execute more trades and increase your chances of capturing gains?
The reason is that prudent investing is about time in the market, not timing the market. Otherwise, emotion starts to influence decision-making. Let’s consider the tail end of 2018 as an example. At the time, markets were in a free fall, a sign to some pundits that the global economy was on the verge of a collapse.
That, of course, didn’t happen, and 2019 turned out to be a great year for equities. But panicky investors who listened to those earlier doomsday forecasts likely have lighter portfolios today as a result. The lesson is that zero-commission trading could make weak hands even weaker, increasing impulsivity and making it more likely that gains will go unrealized.
No Fee Doesn’t Necessarily Mean You Can Trade Them for Free
Read the fine print. According to Fidelity, a “fund may charge a short-term trading or redemption fee to protect the interests of long-term shareholders of the fund” and “other concessions or commissions may apply if traded with a Fidelity representative.” So, be prepared to pay fees if you try to sell them online too soon, purchase certain mutual fund share classes that carry front- or back-end sales charges, or buy them over the phone through a human.
SoFi’s website for its Select 500 ETF says investors “pay no management fees for at least the first year of the ETF’s launch” and that “the fund’s investment adviser has agreed to waive its management fees for the fund until at least June 30, 2020.” Meanwhile, per Salt Financial’s website, its management fee for the Salt Low truBeta US Market Fund is waived “on the first $100 million in net assets until at least May 31, 2020.”
This wording suggests that you will pay fees when these ETFs eclipse those asset thresholds or after those dates pass. Although it might be possible to profit from the short-term purchase and sale of these ETFs before then, there is no guarantee of that, and depending on your overall portfolio, other investments could be a better fit.
Some Strategies Will Require Paying Full Price
Hypothetically, with enough research and skill, you could create sophisticated investment strategies on your own by using zero-commission trades on individual stocks. In practice, though, that’s not something most could pull off without the help of an experienced financial advisor, to say nothing of how time-consuming such a task would be.
Furthermore, nearly every investor at some point will need access to products that require them to pay a commission, including bonds that trade on the secondary market, annuities and insurance, unit investment trusts, and real estate investment trusts. Often, vehicles like this will be an indispensable complement to your overall financial plan.
Separate from paying commissions, many actively managed ETFs, mutual funds and UITs with strong performance records do have management, supervisory or administrative fees. And anyone looking into alternative investments, such as hedge or private equity funds, should be prepared to pay even higher oversight fees.
In general, paying less for the same or better service is a good thing. While that also is the case for investments, it pays to remember that “free” comes with significant caveats. At the end of the day, one of the most important things a financial advisor can do is save clients from themselves. Remember that even a “free” wrong decision can turn out to be very expensive.
