Free trades are good, yes?
Yesterday, Schwab announced they were eliminating commissions on most stock and ETF trades. Within 24 hours, TD Ameritrade announced similar measures.
For Schwab, trading commissions on these vehicles represents approximately 7% of their revenue. For TD Ameritrade, this represents approximately 15% of revenues.
In real dollar terms, TD Ameritrade CFO Steve Boyle detailed, “…we expect this decision to have a revenue impact of approximately $220-240 million per quarter (not a one-time event!), or approximately 15-16 percent of net revenues, based on June Quarter fiscal 2019 revenue,”
Commission rates have been on the decline since “May Day” (May 1, 1975). And these rates (especially in the last twenty years) have been enduring a race to zero.
Brokerage firms know this and have found other methods of bringing in revenue. And (for advisors and investors), gaining a better understanding of the mechanics of how exchange-traded funds (ETF’s) are structured (and how ETF’s actually work), is necessary for success in this business. Even in 2019, it’s surprising to see the number of industry “professionals” without a grasp on the construction (and process) behind ETF’s.
But thinking about that kind of drop in revenue got my attention. Business owners should always keep one eye on profitability. After hearing a company announce NET revenue will be down 15-16%, business owners should consider where would a company potentially cut, to improve profitability?
What would you do if 15% of your net revenues vanished overnight? What source would you consider cutting?
One possible place: service.
And with that, the very next thought in my head was:
This may be a great time to be an advisor.
While it’s fairly certain we will hear “we expect there will no disruption in service,” the business owner-brain thinks, “Hmmm, better be ready, just in case.” You understand, just in case offering free trades morphs into:
- longer hold times,
- more time leaving voice mail messages,
- less staffing
- an overall drop in service.
Not saying this *will* happen, simply understand this could happen.
So, be prepared for a possible erosion in service. It’s time to “up your game” in service terms. This may be a great opportunity for advisors who offer excellent service to their clients. Free trades may mean individuals can (continue) to shave costs of investing. But it may also provide a fantastic opportunity to advisors who serve individual investors.