Is there such a thing as a “Free Lunch”? Developments this week tested the concept.
News broke this past Tuesday that Charles Schwab, followed by TD Ameritrade and E-Trade, would drop their stock, ETF and options trading commission charges. That means free, $0 trades.
There is A LOT that can be said on this topic, and this Saturday Edition of TGIF 2 Minutes will present several basic points (with more to come).
- Trade commissions have been declining for decades, especially in the past 20 years. Stock, ETF and option trading is now a commodity with advancements in technology and HFT (high frequency trading). Think, E-Trade: Even a baby can do it!
- Stock trading does not equal financial planning with a fiduciary. The difference between the two will continue to become clearer and more important.
- Stock trading is an entry-point for firms to gather assets. The number of firms offering financial services – a wide range of services – has multiplied in the past 20 years. When competition gets tough, tough measures are taken to “win” clients.
- The younger generation, namely Millennials defined as being between the ages of 24 and 39 (depending on the source of the definition), have been demanding cheaper prices and “value” for their purchases since they could pick up a cell phone or iPad. Thank you, Millennials!
- Vanguard and its legendary founder, John Bogle, literally changed the world of investing with the introduction of the first index mutual fund back in 1975. Fees on the index fund became much more transparent and were a fraction of high-fee actively managed mutual funds.
Transparency of fees (for anything) is critical. OF COURSE, paying a lower price for most products or services is a “plus”. But typically, upon closer inspection of the flip side of “free” there is a catch, or at least another cost that was not as readily apparent. Stay tuned for clarity as to what “free trades” means overall. And please do not hesitate to call or email me with any questions about the developments of “free trading”. Rarely is there a “free lunch”.