"I planned each charted course, each careful step along the byway; And more, much more than this ... I did it my way." — from "My Way" as performed by Frank Sinatra
Much publicity has accompanied the zero cost equity trading now being offered by various custodial platforms like Charles Schwab, TD Ameritrade, E*Trade and others. The competition for investment dollars is keen, and this is a way to attract ever more investors to a company’s platform.
A fascinating knock-on effect, one that has occurred with relatively small fanfare, is Schwab's announcement that investors will soon be able to buy partial shares of stock with no trade fees as well.
Say you have $100,000 to invest, and you want to buy, oh, Alphabet (parent company of Google), a stock that is trading (at this writing) at about $1,285. (Obviously, we are not specifically recommending the purchase of this security. Instead, we are simply using it as an example of the possibilities created by free and partial share trading.) And let's say you want Alphabet to represent 1% of your portfolio.
Prior to this new fractional share offering, you either had to live with an out-of-balance weighting (having it represent 1.285% of your portfolio and not the intended 1%) or simply not purchase the stock. Soon, you’ll be able to buy $1,000 worth of Alphabet, regardless of its price.
So now, investors can create just about any equity-based strategy they want, using any amount of money they want, at no charge. If the offering sticks, and we see no reason why it won't, this change will become an even bigger nail in the coffin of the mutual fund industry, which is already in substantial decline.
Let's say you own a mutual fund that tracks a certain market and charges you 10 basis points (10% of 1%). Soon, you’ll be able to re-create this fund yourself, at no charge. And you’ll be able to completely control your tax-loss harvesting.
Free trading is a big deal, at least to certain parts of the financial industry. Custodians like Schwab, seeing eroding trade fees, are increasingly and effectively stepping in front of the mutual fund companies they used to partner with.
An investor may like a certain mutual fund company and feel a strong connection with their investment products. But what if that fund company’s technology offering is outdated and doesn’t provide any of the other services large custodians like Schwab do? In my experience, most investors are trying to close out their accounts directly held with mutual fund companies or transfer the funds (or fund proceeds) to their full-service custodian of choice.
In most situations, it is the custodian and the investment advisor (if the investor works with one) who "own" the relationship, not the mutual fund companies. And if a client’s advisor, through their relationship with a free-trading custodian, can get a client what the mutual fund was offering but at a far lower price, investors will benefit.
Margaret R. McDowell, ChFC, AIF, author of the syndicated economic column "Arbor Outlook," is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a "fee-only" registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.