railroad switchback cost of trading

Cost of Trading Changes

The cost of trading changes at Charles Schwab and what it means for you and your financial advisor’s business.

The Shifting Ground Under Our Feet

The cost of trading has hit its lower limit: $0. In the last several weeks, after Charles Schwab announced that stock trades would be free, many major custodians and banks have followed suit and dropped their trading costs to $0.  This is a natural extension of declining costs that began decades ago, but the implications for investors, especially those using a financial advisor, run much deeper than cost alone.

Shortly after the $0 trading cost news, Schwab also announced that it would be acquiring rival custodian TD Ameritrade, creating a $5 billion behemoth.  So, Schwab eliminated a source of revenue and then gobbled up another custodian who also dropped its commissions to $0? What does this mean? It means that Schwab is working to solidify its position in one of the few facets of personal finance where there is value added: Advice.

The three factors you should know about your advisory relationship are:

  1. The advisor
  2. The investment product (stock, bond, fund, etc.)
  3. The institution that maintains custody of your money.

Clients often evaluate their advisory relationship based on the first two factors.  They might ask, is my advisor effectively providing me counsel? Or, is my fund’s performance up to par?  We don’t often think of the role of the custodian, but the recent Schwab news is a sign that the ground is shifting under the feet of your financial advisor.  Your advisor may be forced to change his or her business model, change the way they invest, and even change the way they get paid.

First, some history.

On May 1, 1975, the federal regulation that required brokers to charge high commissions on stock trades was removed, opening the doors for competition on trading costs.  Charles Schwab seized the opportunity and, over the next four decades, his company, along with other low-cost brokers, led us to where we are today: Stock trades cost $0 at an increasing number of institutions.

You may think of Schwab as a discount brokerage, but Schwab Institutional also serves as the custodian for over 7,500 Registered Investment Advisor (RIA) firms, Morton Brown Family Wealth being one of them. These firms are fiduciaries, obligated to act in the best interests of their clients at all times; setting them apart from other Wall Street firms that are held to a lower standard. Schwab offers a trading platform, administrative support, banking, and trust services so that these advisors can focus on providing advice, not products and commissions.

This is a sign of where the profession of financial advice is headed, and the evidence is everywhere. Entrepreneurial RIAs are competing toe-to-toe with the Wall Street advisors in talent, access to the markets, and more adaptable business models.  Teams and advisors from Wall Street firms are also leaving their brokers to run their own firms where they can place client interests first and not answer to the parent bank.

When you compare the RIA advisors to their Wall Street counterparts, on the surface they can look similar.  The investment options can be similar, the credentials after the advisors’ names can be similar, but it is not a level playing field.  In fact, there are two different playing fields and Schwab’s recent actions are its attempt to be the dominant player, supporting RIAs that are professionalizing financial advice, attracting the best talent, and innovating around the needs of their clients.

As a client, here is what you need to know:

  • Our commitment at Morton Brown is to the “human-ness of advice” as industry expert Steve Sanduski has called it. Technology plays a role in managing your money, but our ability to understand, communicate, and interpret the world around you is paramount.
  • We perceived that the ground is shifting. We are staying informed and engaged about how that shift can benefit you. The way we plan and invest is changing as options and opportunities emerge, so we cannot assume that the way we have always done things will stay the same.  It is our commitment as entrepreneurs to staying in front of trends for your benefit.
  • If it was easy, everyone would do it. Our commitment to a fee-based model and the accountability of managing an independent firm are not decisions to be taken lightly.  Change is inevitable for us and for our clients, but our purpose is to create a firm that answers to you through all of the complexity to come.  It is heartening to see more advisors come to play on this field, but we recognize that not everyone is going to, and that sets us apart.

Schwab’s actions in the last several months have both lowered the costs for investors and raised the bar for advisors. Investors are not going to pay for access to the markets. They will pay for professionals to help them navigate an increasingly complex world. All other costs are in a race to zero.

Years ago, your only option was to pay a broker commissions to buy a stock or a mutual fund, but not anymore.  If you still are paying those commissions, we should talk.  You may have also been paying high fees inside of your mutual funds, but that has changed as index funds have pressured costs to drop over the last two decades. If trading has no value and fund management has little value, then what is valuable? Advice.

Schwab knows this, as do their Wall Street competitors.