Easy, free, mobile-friendly. Those aren’t words typically associated with investing in the stock market – something big brokers have been recently trying to change. On Oct. 1, Peter Crawford, CFO of Charles Schwab, announced the company would reduce online trade commission fees to $0. In the days after the Charles Schwab announcement (and mere hours afterward for TD Ameritrade) , Fidelity and E-Trade, followed suit and ditched commission fees, too.
As if that wasn’t enough, Charles Schwab announced in late October it would soon allow investors to buy and sell fractional shares, which allow investors to trade portions of shares. For stocks like Apple, Netflix or Facebook, with single share prices in the hundreds, buying a fraction of a share has an appeal for younger and more beginner traders and investors.
Though commission-free trading is a paradigm shift in the investment industry, these legacy institutions aren’t exactly paving the way. Disruptors such as Robinhood have found success offering online investing platforms built around fee-free philosophies. A recent survey found Robinhood, which has been around since 2013, is already the most popular brokerage among millennial investors.
Another disruptor in the investment industry, Acorns, also attracts younger traders, with an average investor age around 32 according to a recent CNBC report. It encourages micro investing by rounding up purchases and investing the difference in partial shares.
Despite pressure from successful disruptors like Acorns and Robinhood, legacy institutions seem confident that combining commission-free trading with their large platforms will give them the competitive edge. When asked about the company dropping commision fees, Fidelity president Ram Subramaniam said it “made an already exceptional offering even better.”
TD Ameritrade president and CEO Tim Hockey expressed similar confidence in a recent press release: “With a $0 price point and a level playing field, we are even more confident in our competitive position, and the value we offer our clients.”
These announcements have generated a lot of buzz recently, but it’s important to consider what they actually mean for their target demographic – millennials.
The Good News
With commission-free trading and fractional share purchases, anyone with some pocket change can be an investor. However, a Concreit survey found the percentage of people under the age of 35 invested in the stock market continues to decline (currently 35%), and nearly half of millennials (46%) aren’t investing in any way.
According to Sean Hseigh, founder & CEO of Concreit, a real estate investment startup, these trends “can be partly attributed to the Great Recession of 2008,” when “millennials saw firsthand how a downturn can impact more traditional investments.” Perhaps the recent changes from brokers will be the encouragement millennials need to start investing.
With commission-free trading, investors can get a head start on their returns without fees cutting into their potential earnings. For example, Fidelity previously charged a $4.95 commission. This means if you bought a share of Microsoft for $130, the fee is 3.81%. Which may not sound like much, but Fidelity’s annual yield for Microsoft (expressed as an annual percentage rate) is 1.46%, or less than half of the fee you paid to buy the share in the first place.
In addition to lowering barriers that might discourage millennials from investing, commission-free trading also adds value for existing customers. “Perhaps more important than saving on costs, investors can benefit from the fact that trade recommendations are not being made to generate commissions by churning the account,” said Ali Hashemian, president of Kinetic Financial.
Schwab’s new option to purchase fractional shares is also a seemingly millennial-focused benefit. Millennials favor investing in tech, but many of those companies have a high price per share that may be unaffordable to younger investors who “may not have as much capital to initially invest,” Hashemian said.
The Bad News
Even if brokers won’t recommend trades to churn your account and generate commissions, quick trades may become more popular, anyways. However, frequent trading is a risky game. Investors are commonly advised to keep the long view in mind, and not reacting wildly to daily swings (positive or negative). Much as people are advised not to cash out their 401(k) just because the stock market had a rough day, it can pay off not to make short sighted moves buying and selling stocks. Even if they aren’t paying fees, investors should be mindful about how often they’re buying and selling.
Keep in mind if a broker seems too good to be true, it probably is. Just because you aren’t paying commissions, you could still end up paying fees elsewhere.
“Commissions on trades are some of the most apparent fees, but they are not always the largest fees that investors are paying. That is why it is not surprising that large institutions have dropped these fees and used that as a marketing message. However, many people might be paying a lot more in internal fees, portfolio management fees, advisory fees, etc., which are much more difficult to see” Hashemian said.
The Future of Online Investing
These brokers aren’t just lowering commissions – they’re ditching them altogether. But where do you go when you’re already at $0?
Despite Robinhood’s success, legacy institutions’ decision to drop commissions sparked panic in some investors. Shares of Charles Schwab dropped following the commission-free announcement amid fears the company would suffer a profit loss without commissions. When asked about this concern, Alison Wertheim, VP of public relations at Charles Schwab, told Reviews.com “trading revenue has fallen to a very small portion of our revenue. We are able to earn revenue in other ways, including advice fees, asset management fees, and spread on client cash.”
But as more disruptors enter the investing industry, legacy companies will have to continue improving their services to attract and retain young investors.
Looking ahead, companies will have to focus on other benefits besides commission-free trading. According to Hashemian, “brokers and advisers will have to focus on adding value through holistic advice to stay relevant with millenials.” An Investopedia survey found 65% of affluent millennials trust financial advisers, and another survey found 70% of millennials prefer advice from a human than a robot. Online brokers provide speed and convenience, but face-to-face advice seems irreplaceable.
When asked about how she sees the future of the online investing, Wertheim said she expects it to go far beyond just trading. “It will be a future that is enhanced by digital technology, supported by the best of human relationships, aided by automated investing and packaged products that help investors diversify and reduce risk for long-term benefit.”