posted on December 11, 2019 16:50
With numerous major brokerage/custody firms (including TD Ameritrade, Charles Schwab, and Fidelity) recently eliminating commissions for trading stocks and exchange-traded funds (ETFs), now is a great time to be an investor.
While explicit trading costs seem to be going away across the industry (via commission-free trading), it’s still important for investors to understand the implicit trading costs associated with placing trades and how brokerage/custody firms can stay in business in a new commission-free trading environment.
When Trading on an Exchange, Nothing is “Free”
Although you may not be paying fees per trade to your custodian any longer, there are still costs associated with trading stocks and ETFs. Investors are still “paying” for their trades in the form of a bid-ask spread. The bid-ask spread is the difference between the price you would receive for selling a stock or ETF (bid) compared to the price you would be charged for buying a stock or ETF (ask). The ask price will always exceed the bid price. It’s important for investors to be cognizant of the implicit trading costs associated with the bid-ask spread, especially when trading securities with relatively low trading volume.
How Will My Custodian Stay in Business?
Although trading commissions have gone away, the following revenue-driving business segments remain in place to support costs associated with custodial and regulatory responsibilities:
- Investment advisory services
- Mutual fund and ETF management fees
- Interest on account cash balances and margin loans
- Payment for order flow from market makers
Charles Schwab, TD Ameritrade Merger
On Nov. 25, Charles Schwab said it had reached an agreement to acquire competitor TD Ameritrade. While many details surrounding the deal remain unknown, it’s likely that there will continue to be major changes in the world of custody. Savant is continuously conducting due diligence on its custody providers for the safekeeping of our clients’ investment assets.
This is intended for informational purposes only and should not be construed as legal, investment or financial advice. Please consult your legal, investment and financial professionals regarding your specific circumstances.