Disclosure: Accretive utilizes the custodial services of Charles Schwab and TD Ameritrade Institutional
Yesterday Charles Schwab announced that it would be reducing commissions on all ETF and stock trades to $0, effective October 7th, 2019. In classic tit-for-tat fashion, TD Ameritrade quickly followed suit by cutting commissions to $0 for all ETFs and stock trades, effective October 3rd, 2019.
In the financial services world this qualifies as a big deal. In business school they taught that in a price war nobody wins. That’s true from the business's perspective in most instances, but not true for all stakeholders and not necessarily true for all businesses in all instances.
Winners of the Price War
Clients/Investors- The biggest beneficiaries, by far, are clients and investors. This is disproportionately true for those with smaller accounts. This should make sense, as transaction costs, even those as low as $4.95, consume a higher percentage of the account value.
Vanguard ETF Investors- Vanguard offers some of the lowest cost ETFs around, but they were frequently excluded from “No Transaction Fee” lists at the brokers. This will remove a friction that detracts from Vanguard ETF inflows, which should only help increase the size and scale of their ETF products. Vanguard, as a business practice, passes the benefits of scale on to investors through regular expense ratio reductions. As a result, investors in Vanguard ETF products may actually reap both a direct and an indirect benefit.
The Largest Incumbent Brokers Themselves- While this may seem counter-intuitive, and may require a little bit of an asterisk because brokerage stocks got crushed on the news, reducing transaction costs to $0 actually strengthens the position of the biggest players over time, as this entrenches them deeper and makes it difficult for smaller providers to compete. They are trading short term profitability in exchange for what they believe to be firmer long term enterprise value. The good news for top custodians is that they have the scale to absorb the hit. They also have a number of other revenue streams that we believe they are positioning to grow faster over time and could make up for lost transaction revenue as they continue to take market share from higher cost and sub-scale providers.
Losers of the Price War
Smaller ETF providers- A prominent way that small ETF providers have historically promoted their funds and attempted to gather assets was by being on a No Transaction Fee list at brokerage firms. If these lists no longer exist, then fewer ETFs may reach the size necessary to be viable.
Upstart Discount Brokers & Sub-Scale Competitors- There have been a few high-profile, venture capital funded start-ups that had been successful in taking share among mostly younger investors. Free trading is commonplace among these upstarts and a key point of differentiation for them thus far.
What does it all mean for clients of Accretive?
As mentioned in the disclosure, Accretive has a custodial relationship with both Schwab and TD Ameritrade, so this is welcome news to us. Our portfolios are managed with a long-term objective, and a desire to own positions for years (if possible). Consistent with that philosophy, we would describe our activity level as fairly modest, but we do rebalance accounts periodically and make portfolio changes from time to time. We view this as a win for our clients as it now costs less to manage portfolios and we are happy some incremental value is accreting to them here.