Schwab Introduces $0 Commissions on Stock and ETF Trades, and is Rolling Out Fractional Share Ownership
By Brian Aberle, CFP®
During October, Charles Schwab made a few significant announcements that, given the other headlines of the day, perhaps didn't garner a lot of attention. Yet the decisions prove to be quite valuable for advisors and clients who utilize Schwab as their custodian. In this communication, I walk through the changes and benefits from our perspective.
Announcement #1 - No Trading Costs on Equity and ETF Transactions
The first announcement was made in early October that Schwab will eliminate trading costs for a host of investment vehicles. The most important one from our vantage point is the elimination of trading costs for all ETFs, regardless of the offering company. When I first read this, I thought for sure that I was in a late April Fools time joke, but upon my confirming with my service team at Schwab, it was deemed accurate.
This is important news for our clients because ETFs are often a preferred investment vehicle that we utilize within our portfolio models. Though trading costs weren't overly penal at $4.95 per trade before this announcement, this change will allow us enhanced uniformity for all clients regardless of portfolio size. This should be good not only for our but the industry and investor population as a whole.
Another positive, though non-formal add on from this news, was that Schwab will no longer require that clients enroll in Schwab.com to benefit from lower trading costs. We see this is as a positive for our clients who still opt to receive paper mail over electronic mail.
What's the Catch?
Yeah, this was what we asked as well. After all, there tend to be no free lunches in life. With this, I only know enough to be dangerous. My primary thoughts are below.
Over the years, Schwab had seen transaction costs representing a smaller and smaller slice of the revenue pie, from the results of the decades-long commission war within the industry. Instead, firms are finding higher margins in managing cash (or other investments) for clients or getting paid for where they route order flows. I'll spare you the boredom on the details of how these potential revenue centers might work, but if you are interested in learning more, just call me.
Mutual Funds Still have Transaction Costs, For Now?
Given the proliferation of ETFs over the years, the role of mutual funds within our client portfolios has been reduced. We have nothing against mutual funds. In fact, we believe that there are some segments within the markets where mutual funds often just make more sense, or that they are the only option, at least for now. However, from a regulatory and operational perspective, it has been argued (not by us) that mutual funds can be more complicated to manage than ETFs and thus often have higher internal costs and for the custodians. As a result, those instruments will continue to see a charge for the institutional share classes, which are often the share classes with the lowest internal cost.
As an advisor, we have long been agnostic to the vehicles we choose to utilize for clients but have always been quite cost-conscious as part of our process. We see value in what mutual funds can bring to the table but recognize that they have some hurdles to climb on the costs side of the equation.
Announcement #2 – Fractional Share Ownership to be Available – Planned for 2020
Schwab also announced that it soon (2020 is the plan) will begin supporting fractional share ownership of ETFs and stocks for clients. Perhaps this didn't make the front pages of the financial news outlets either, as it's kind of tricky if not boring to explain. However, it is still quite relevant for our clients and investors as a whole.
Why Does This Matter?
With stocks and ETFs, investors could traditionally own shares of companies in whole share quantities only, except in situations where investors had set up dividend reinvestment plans. This would mean that when investors wanted to add more money or take money out, they had had to round up or round down the investments. For example, let's say you wanted to buy a company with a share price of $1000. If you preferred to add $100 to the stock each month, you would essentially have to wait 10 months until you can buy a full share. Now, you can potentially buy 1/10th of a share every month. This again may not seem like a big deal for larger investors, but for good people that are putting away money each month, better options will exist for them. If the same structure works on the side of liquidating holdings, then retirees may be able to more efficiently tap their investments in a systematic way.
A retooling of systems should help financial advisors out as well. This is because prior to these changes if we wanted to sell a security for a client position that had fractional shares, we would first have to sell the whole position and then put in a second trade for the fraction position. Multiply this times hundreds of accounts, and you can see the challenges. This was one of the key reasons we opted not to embrace dividend reinvestment for clients, but this change should open the door for more options on that front going forward.
Schwab has informed us that they anticipate rolling out this feature sometime in 2020. I suspect there will need to be a fair bit of reprogramming of systems to make this all work. The tool that we use to trade client portfolios is already built out for this, so we hope sooner than later. We can't wait.
Summary
We view these changes as a net positive for our clients. Since Schwab's announcement, several of their largest competitors have matched the $0 trades, though it will remain to be seen how other prominent players in the more traditional "wirehouse" side of the industry will compete if they choose.
Having observed and greatly respected the culture of Schwab from an outsider's perspective for two decades before my partnering up with them in 2017, I have high confidence that they will continue doing what is in the best interest of our mutual clients going forward. We are happy to have them as a partner.
Thank you for reading,
Brian Aberle, CFP®
President, Aberle Investment Management
Aberle Investment Management LLC, is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.