On October 1, Charles Schwab was the first major brokerage to cut commission fees by dropping its $4.95 per trade commission entirely beginning on October 7. Shortly after Charles Schwab’s announcement, E*Trade followed suit with $0 trades also starting on October 7. Then, TD Ameritrade (which merged with Scottrade) joined its competitors with a rollout date of October 3.
This is great news for investors, especially small investors. On a portfolio of $3 stocks, commission fees to buy 12 positions would’ve cost between $59 and $84, depending on the brokerage. That represents 1.5% to 2.3% of a $3,600 portfolio. Now every dollar can go to work instead of draining 1.5% or more of your capital in fees.
A few years ago, we analyzed the various brokerages and how to pick one based off of your investment objectives. One key consideration was the brokerage’s fee structure. However, with commissions as a thing of the past at most major brokerages, the focus has shifted to other factors. Given the changes, we sorted through the fine print to help you choose the right brokerage in a $0 commission environment.
Most firms only generate a small portion of their sales from trade commissions, equating to less than 5% of their profits generally. In its announcement, E*Trade quantified cutting trade commissions as having a $75 million impact on its top line in the second quarter. E*Trade grosses about $700 million in revenue per quarter.
Zero dollar commissions contain quite a bit of fine print, detailing other costs, of which an investor needs to be aware. Charles Schwab will charge commissions for foreign stocks and fixed-income securities. Interactive Brokers and TD Ameritrade will charge commissions for over-the-counter (OTC) stocks, of which we recommend a number each year. For most, option trades will still include contract fees.
The good news is that there are no inactivity fees for the aforementioned brokerages. This means that you don’t have to execute a certain number of trades to not be charged.
When it comes to cost alone, E*Trade offers the best option for the lowest fees across the board. Although commission-free Robinhood technically has no trading fees whatsoever, but it signficantly restricts what stocks you can trade taking it out of consideration for investors in small stocks. E*Trade does have an account minimum of $500, so if your account balance is below the cutoff then TD Ameritrade is your best option as it has the lowest commission of $6.95 per trade for OTC stocks.
Customer support is a hugely important factor in investing. At some point, a technical issue will crop up or a general question will need to be answered. Whether the platform is crashing or an order is not being filled, something can happen. The problem is not every brokerage is easy to get in contact with and some might not make your needs a top priority.
On that note, E*Trade and TD Ameritrade have the best track records for customer support. Both companies even have a strong social media presence and are willing to answer any questions on Twitter, Facebook, etc.
As we’ve mentioned in the past, Robinhood has virtually nonexistent customer service and can take days to get back to you. For that reason alone, we don’t even keep them in our top five online brokerages. Meanwhile, TD Ameritrade or E*Trade have agents available to give you walkthroughs of their platforms and help you customize them to cater to your investment needs.
***Keep in mind that most brokerages charge fees to place trades over the phone.
Another factor that may mean more to some is the trading platform, and Schwab, TD Ameritrade and E*Trade all have outstanding platforms. Schwab’s is the best for researching stocks and ETFs, allowing for multi-leg orders and almost all the order types you might need while managing your portfolio. Additionally, you can research stocks extensively and it is very customizable if you want to keep your investment analysis as simple as possible.
For those managing their portfolios on-the-go, TD Ameritrade is best suited. While the Schwab desktop platform is great, the mobile platforms for TD Ameritrade are unbelievably intuitive. They are easy to use and allow you to have price alerts and notifications texted or emailed to you to stay up to date on your holdings. Robinhood’s mobile application is popular due to its design, but it lacks features and experiences numerous technical glitches.
If a solid investment platform is important to you, we recommend Schwab’s StreetSmart Edge platform if you invest from home or the TD Ameritrade thinkorswim mobile application if you’re on the go. However, if you already have an account with E*Trade, Schwab or TD Ameritrade, switching accounts over the platform is not necessary as they’re all quite similar in the end.
Transferring an Account
If your current brokerage has good customer service and easy to use platforms, then don’t jump the gun and switch because other companies are removing commissions. Since the industry is quickly moving in this direction, investing is only going to get cheaper. Almost all brokerages will be forced to remove commissions to compete, which means that yours might as well. This will allow all investors to size in and out of positions without paying commissions, saving valuable percentage points.
Almost all brokerages have transfer fees if you want to switch, which generally range between $50-$75. That may not sound like much, but it can really slow down the growth of a small portfolio. A costing analysis is simple to see if the transfer fee is worthwhile based on your average number of trades. If it is and there is no end or cut to commissions in sight for your broker, transferring an account is an easy process that can take less than a week depending on your holdings.
Now that the costs of managing a portfolio are dropping, you have the ability to pick your brokerage based more on personal preference. If low fees are your top priority and you have $500 in your account, E*Trade is the way to go. If you like to do your own research to complement our analysis, then Schwab has an outstanding platform for you to use. However, TD Ameritrade is our top pick for on-the-go investors with great customer service, top of the line research platforms and low fees overall.
Whether you’re looking to set up a new brokerage account or transfer out of a high fee brokerage, determine what’s most important to you, take into account the important factors above, read the fine and don’t hesitate to reach out to a brokerage and ask questions.
**This article was originally published in the October 2019 edition of The Bowser Report under the title: Major brokerages cut commissions to $0.