Zero Commission Revolution

October 24, 2019

Sending shockwaves across the investment world, Charles Schwab announced zero commissions for stock and exchange-traded fund (ETF) trading effective October 7 (mutual funds will still have a small cost to buy and sell). Rival brokers, TD Ameritrade, E*TRADE, and later, Fidelity, followed suit. The move to zero commission trading is aimed at both keeping clients and gathering more assets and comes at a time when low interest rates and low trading costs have forced brokerage firms to seek other means of boosting their revenues.

What does this mean for you?

As we often say at BDF, two things we can control are costs and taxes. And even though transaction costs amount to very little over the course of a year, having zero commission trading on stocks and ETFs reduces your costs and therefore increases your returns. That’s a good thing. On top of that, BDF does many things to be tax-efficient in your portfolio such as:

  • Utilizing asset placement
  • Regular rebalancing
  • Tax-loss harvesting
  • Year-end distribution avoidance.

Remember – it’s not what you earn but what you keep after trading costs and taxes.

Maximizing Your Return on Cash

Another important thing that BDF does is to maximize your return on any cash in your portfolio. How do we do that? In this age of low interest rates, brokerage firms like Schwab and TD Ameritrade pay very little interest on their regular sweep money market funds. That’s one way they were able to move to zero on trading costs. As a rule, we typically hold very little cash in your portfolio because of this.

However, despite cash representing a small allocation, we actively manage your cash to move it from the low-interest sweep money market fund to a higher-interest purchased money market fund at both Schwab and TD Ameritrade. And even though it is necessary to buy and sell that money market fund, there is no cost or tax consequences to do so. What does this mean for you? It’s the difference between earning mere basis points on your cash versus pushing towards 2%. While that may not seem like a lot, just through smart cash management by BDF, your returns are enhanced each year.

In the end, the move to zero commission trading is another step in the evolution of the brokerage industry to focus on ways to reduce friction, increase transparency, and lower costs for investors. Those are all things that BDF wholeheartedly supports and worked for on your behalf from the very beginning.