“How did you go bankrupt? Two ways. Gradually, then suddenly.” – Ernest Hemingway in The Sun Also Rises
Back in 2012 (and 2014) I wrote about how there has never been a better time to be an individual investor. You could write a very similar post today. One of the reasons I noted was the steady decrease in commission costs facing individual investors. Ben Carlson at A Wealth of Common Sense noted in a 2016 post how this was a truly secular trend.
Yesterday, Charles Schwab & Co. announced they were eliminating commission for online stock, ETF and options trades. The stocks in space were uniformly punished. Ameritrade quickly followed suit. It is expected that other major online brokers would eventually cave and eliminate commissions as well. This all came on the heels of Interactive Brokers announcing a zero-commission ‘Lite’ version of this service.
$0 commissions are not new. Pre-GFC a company tried the model out, unsuccessfully.* It now seems that $0 commissions are here to stay. The challenge, as Howard Lindzon notes, is how these firms make money going forward:
“Today was not just technical damage to the sector…but a secular hammer. The brokerages will have to show that they can build growth revenue models in a low interest rate and lower commission revenue world.”
There is speculation in this FT article that this will revive the possibility of consolidation in the industry. There is some risk of a backlash. In this Bloomberg piece, Dan Ariely notes that companies may be in a bind asking consumers to pay for additional services once they get used to free.
The zero commission story is a symptom of what is happening more broadly in financial services. In 2014, I noted, in a homage to Marc Andreessen, how software was eating investment management. (And again.) In that light none of this should be all that surprising.
Last year, Fidelity made a splash with zero-fee index funds. Many ETFs have traded commission-free for some time now. Just this week, the news came out that Vanguard was launching a digital-only investment platform to compete in the robo-advisor space. They are expected to charge some 20 basis points which is less than the independent incumbents.
Even outside of solely digitally traded assets, like stocks and ETFs, were are seeing moves to streamline and lower the cost of transactions. A huge area for that is home sales. The traditional broker-centric model of 6% commissions and copious amounts of paperwork has stubbornly resisted the digitization trend. This post at The Non-Consensus does a nice job showing how various players, including mostly notably Zillow, are coming to take over these transactions.
The point of all this isn’t to take a victory lap. This week’s news was just the culmination of a longer-term trend. It could have occurred in 2018 or 2020. It was just a matter of time that $4.95 turned into $0.00. As Josh Brown at The Reformed Broker notes, this is a win for individual investors. Just don’t turn it into a self-own by ramping up your portfolio turnover.
*Thank you to a very kind reader that corrected my memory about this history of Zecco.
**In case you have forgotten how discount brokers make money, re-visit this excellent post from Patrick McKenzie at Kalzumeus.