Considering last week’s news of “free trading” (Fidelity jumped on board this week) here are two things that are NOT – and unlikely to become – free:
- Financial Planning advice & guidance
- Non-proprietary mutual funds trading transactions
Two very different things… but both are consistent with successful long-term financial planning and strategy. There are still far more moving parts to “free trading” so stay tuned.
Financial Planning Advice & Guidance
This aspect of financial services is perhaps the “holy grail” where the free-trading firms are seeking to gain revenue. Over the past 50 years – especially the past 20 years – the need for personal financial advice and guidance has grown immensely. There are more college graduates, more diversity of jobs available in the economy – and more money is being made by more people. (The subject of wealth equality is a separate matter and mostly beyond the scope of TGIF 2 Minutes.)
By moving to “free trading” firms such as Charles Schwab, TD Ameritrade, E-trade and Fidelity (among others) are looking to gain footing beyond executing stock, ETF and options trades. Any ground gained could be far more profitable – for many reasons – than simple order execution. These firms have been looking, justifiably so, to blur the line between being an “order execution house” and an adviser delivering – and charging a fee for – valuable advice. The adviser delivering the advice is the “value piece” both to the firms and to the clients receiving the advice. Not as easy to implement as it may seem.
Non-Proprietary Mutual Funds Trading Transactions
Mutual funds were not part of the “$0 trades” package. This aspect is under-rated and under-reported. As custodians, both Charles Schwab and Fidelity have a great deal to gain, as they also offer their own branded mutual funds for which they earn management fees. In the “free trading” world where their own proprietary mutual funds will be transaction fee-free and non-proprietary funds will NOT be free, there is the potential for increased revenue to the extent the free-trade (proprietary) funds are chosen over the not-free (non-proprietary) funds. E-Trade and TD Ameritrade have agreements with certain fund families for which they are likely paid to offer “NTF” (no transaction fee) mutual funds. Again, to the extent the NTF funds are chosen over the not-free funds there is potential revenue to be gained by the custodian.
Then there is the rest of the world of non-proprietary mutual funds – most notably passive, index and index-related mutual funds – that are offered by firms who manage money and investments without a custodian or brokerage attached. An independent Registered Investment Advisor (RIA) like Main Street Financial Solutions LLC* can choose from ANY fund in the universe – regardless of transaction fee or NTF – to invest client monies. This ability to choose a fund or investment, regardless of transaction fee is part of the definition of fiduciary. Important to note, a true fiduciary MUST disclose the fee arrangement for ALL investments in a client’s portfolio.
Finally, transactions can be kept to such a minimum that transaction fees are truly a non-event. Think about 10-20 mutual fund trades per year at $15 per trade on a $500,000 or $1,000,000+ portfolio. That is $150-300 in transaction fees, or 0.03%- 0.06% or less.
Does your head hurt yet? The flip side of “free” is not as simple as it looks. And as one smart client responded last week, “There are no free lunches and pigs can’t fly.”
*At Main Street Financial Solutions, there is no proprietary fund and the use of funds includes both NTF and transaction fee funds and investments.