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The History of Zero Commissions

On October 2nd, 2019 Charles Schwab, Fidelity Investments, TD Ameritrade, Interactive Brokers and E*TRADE finally cast the last straw in the commission race and reached zero fees on trades of stocks and exchange traded funds (ETFs). While this most recent drop by the four largest "discount brokerages" is a milestone, it has been a long time coming. Newer investors often have no idea just how far we have come.

May Day

The first cuts to brokerage commissions began 44 years ago, in what investment professionals now refer to as "May Day", when President Gerald Ford signed the Securities Acts Amendments of 1975 into law. Prior to this, commissions on stock trades were fixed.



As hard as it might be for today's investors to believe, before May Day every brokerage firm charged the same commission for the same transaction, as the law forbade them from charging otherwise. The cost of buying 100 shares of General Electric was the same whether you went to Merrill Lynch or E.F. Hutton. The "unfixing" of commissions in 1975 also spawned a new kind of brokerage firm: the discount broker. By offering trade executions through salaried staff, Charles Schwab was among the first to charge individual investors less.

The Evolution

At first, traditional brokerage firms dismissed discount brokerage as nonsense. After all, stocks were sold, not bought, and only a few foolish investors would buy and sell stocks on their own without the advice of a Wall Street firm.

Well, over the years the number of "fools" kept growing, and while most investors continued to prefer to buy stocks and mutual funds from someone who would give them advice, the clear price difference between discounters and "full-service" firms eventually eroded what the big firms could charge.

Not only did it cost more to put together a portfolio back in the day, investors tended to have more concentrated portfolios than an investor today. Well-heeled investors were buying a handful of recommended stocks, most likely no more than 10 to 15. Therefore, investors held much riskier portfolios and paid a much higher cost to build them.



That realization, as well as the simple economics of recurrent fees being far more lucrative for securities firms than ever-declining commissions, resulted in brokerage firms embracing fee-based accounts. The advice-driven, fee-based account structure that evolved singlehandedly built the Registered Investment Advisor (RIA) industry into what it is today.

The Final Revolution

In some ways, the eventual race to zero commissions was inevitable, given open competition and more recent technology driven platforms like Betterment and Robinhood being introduced to a rather stale and traditional marketplace.

In actuality, the final leg of the zero fee race began in earnest not all that long ago – in February of 2017 – when Fidelity Investments and Charles Schwab made moves in quick succession to slash equity commissions for the first time in a decade. Fidelity cut equity commissions to $4.95 from $7.95 a trade, rival Charles Schwab swiftly followed by slicing its own fees on standard online trades to $4.95, from $6.95, and TD Ameritrade later followed and reduced its online equity trade commissions to $6.95, from $9.99.

The markets weighed in on October 2nd, 2019 when future commission income was removed from earnings expectations, sending brokerage stocks sharply lower. At the time, Bank of America estimated TD Ameritrade generated 28% of its revenue from commissions, E*TRADE generated about 17% and Schwab only 8%. Fidelity was not listed as it is privately held.




Fiduciary Focus

While "free" certainly catches people's attention and makes for a great headline, the move to no-cost commissions was more of an evolution than a revolution.

Today's RIAs, like WT Wealth Management, now focus on building deep and meaningful relationships with clients. The emergence of the Fiduciary Standard firmly places your advisor in your corner for the first time in modern investing history. With the industry-wide adoption of fee-based advisory services, your advisor has no reason to do anything other than what's in your best interest. Exactly the way it should be.



SOURCES:
Charles Schwab says broker's move to zero commissions was an ultimate goal for the firm
www.cnbc.com/2019/10/07/charles-schwab-says-brokers-move-to-zero-commissions-was-an-ultimate-goal-for-the-firm.html

May Day
www.investopedia.com/terms/m/mayday.asp

TD Ameritrade Jumps Into Price War With Fidelity and Schwab
www.bloomberg.com/news/articles/2017-02-28/fidelity-slashes-commissions-in-the-latest-salvo-in-the-fee-wars



Disclosure


WT Wealth Management is an SEC registered investment adviser, with in excess of $100 million in assets under management (AUM) with offices in Flagstaff, Scottsdale, Sedona and Tucson, AZ along with Jackson Hole, WY and Las Vegas, NV.

WT Wealth Management is a manager of Separately Managed Accounts (SMAs). With SMAs, performance can vary widely from investor to investor as each portfolio is individually constructed and managed. Asset allocation weightings are determined based on a wide array of economic and market conditions the day the funds are invested. In an SMA, each investor may own individual Exchange Traded Funds (ETFs), individual equities or mutual funds. As the manager we have the freedom and flexibility to tailor the portfolio to address an individual investor's personal risk tolerance and investment objectives - thus making the account "separate" and distinct from all others we manage.

An investment with WT Wealth Management is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency.

Any opinions expressed are the opinions of WT Wealth Management and its associates only. Information offered is neither an offer to buy or sell securities nor should it be interpreted as personal financial advice. Always seek out the advice of a qualified investment professional before deciding to invest. Investing in stocks, bonds, mutual funds and ETFs carries certain specific risks and part or all of an account's value can be lost.

In addition to the normal risks associated with investing, narrowly focused investments, investments in smaller companies, sector and/or thematic ETFs and investments in single countries typically exhibit higher volatility. International, Emerging Market and Frontier Market ETFs, mutual funds and individual securities may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability that other nations experience. Individual bonds, bond mutual funds and bond ETFs will typically decrease in value as interest rates rise. A portion of a municipal bond fund's income may be subject to federal or state income taxes or the alternative minimum tax. Capital gains (short and long-term), if any, are subject to capital gains tax.

Diversification and asset allocation may not protect against market risk or investment losses. At WT Wealth Management, we strongly suggest having a personal financial plan in place before making any investment decisions including understanding personal risk tolerance, having clearly outlined investment objectives and a clearly defined investment time horizon.

WT Wealth Management may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Individualized responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption. WT Wealth Management's website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links.

Accordingly, the publication of WT Wealth Management's website should not be construed by any consumer and/or prospective client as WT Wealth Management's solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the internet. Any subsequent, direct communication by WT Wealth Management with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

A copy of WT Wealth Management's current written disclosure statement discussing WT Wealth Management's registrations, business operations, services, and fees is available at the SEC's investment adviser public information website (www. adviserinfo.sec.gov) or from WT Wealth Management directly.

WT Wealth Management does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to WT Wealth Management's web site or incorporated therein, and takes no responsibility therefor. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

WARRANTIES & DISCLAIMERS

There are no warranties implied.
Any opinions expressed on this website are the opinions of WT Wealth Management and its associates only. Material listed on this website is neither an offer to buy or sell securities nor should it be interpreted as personal financial advice. You should always seek out the advice of a qualified investment professional before deciding to invest. Investing in stocks, bonds, mutual funds and ETF’s carry certain specific risks and part or all of your account value can be lost.

At WT Wealth Management we strongly suggest having a personal financial plan in place before making any investment decisions including understanding your personal risk tolerance and having clearly outlined investment objectives.

View Disclosure
WT Wealth Management is an SEC registered investment adviser, with in excess of $100 million in assets under management (AUM) with offices in Flagstaff, Scottsdale, Sedona and Tucson, AZ along with Jackson Hole, WY and Las Vegas, NV. WT Wealth Management is a manager of Separately Managed Accounts (SMAs). With SMAs, performance can vary widely from investor to investor as each portfolio is individually constructed and managed. Asset allocation weightings are determined based on a wide array of economic and market conditions the day the funds are invested. In an SMA, each investor may own individual Exchange Traded Funds (ETFs), individual equities or mutual funds. As the manager we have the freedom and flexibility to tailor the portfolio to address an individual investor's personal risk tolerance and investment objectives – thus making the account “separate” and distinct from all others we manage. An investment with WT Wealth Management is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Any opinions expressed are the opinions of WT Wealth Management and its associates only. Information offered is neither an offer to buy or sell securities nor should it be interpreted as personal financial advice. Always seek out the advice of a qualified investment professional before deciding to invest. Investing in stocks, bonds, mutual funds and ETFs carries certain specific risks and part or all of an account's value can be lost. In addition to the normal risks associated with investing, narrowly focused investments, investments in smaller companies, sector and/or thematic ETFs and investments in single countries typically exhibit higher volatility. International, Emerging Market and Frontier Market ETFs, mutual funds and individual securities may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability that other nations experience. Individual bonds, bond mutual funds and bond ETFs will typically decrease in value as interest rates rise. A portion of a municipal bond fund's income may be subject to federal or state income taxes or the alternative minimum tax. Capital gains (short and long-term), if any, are subject to capital gains tax. Diversification and asset allocation may not protect against market risk or investment losses. At WT Wealth Management, we strongly suggest having a personal financial plan in place before making any investment decisions including understanding personal risk tolerance, having clearly outlined investment objectives and a clearly defined investment time horizon. WT Wealth Management may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Individualized responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption. WT Wealth Management's website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of WT Wealth Management's website should not be construed by any consumer and/or prospective client as WT Wealth Management's solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the internet. Any subsequent, direct communication by WT Wealth Management with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A copy of WT Wealth Management's current written disclosure statement discussing WT Wealth Management's registrations, business operations, services, and fees is available at the SEC's investment adviser public information website (www. adviserinfo.sec.gov) or from WT Wealth Management directly. WT Wealth Management does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to WT Wealth Management's web site or incorporated therein, and takes no responsibility therefor. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

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