Breaking down why everyone is going to $0 commissions- Spoiler, it’s all about interest rates.

by Xayde26

 

So, some background, I’ve worked at Fido, TDA, JPM, and Schwab in leadership. First, JPM came out w/ a zero commission stock trading platform like four months ago so this isn’t news.

Second, Fido, TDA, and Schwab make very little from trading relative to interest rate spreads. You have to remember, these firms are in the asset gathering business, NOT the trading business. Even TDA, which is supposed to be THE trading firm, derives 73% (as of 2018 #’s handed down by upper mgmt) from money market and interest rate spreads. Fido and Schwab are no different. Schwab has literally had the plan in place for zero commissions for FIVE years. However, there was no reason to pull the trigger on it.

No, these firms operate off of a fiscal year. Meaning each year they build a budget and revenue projections and those become effective October 1. Schwab built its 2019 budget based on a hawkish Fed that suddenly, in Dec of 2018, went from saying they are raising rates to cutting. Thus DESTROYED Schwab’s 2019 budget. First they slashed the expense accts of managers and they laid off 3% of their work force.

THIS IS AN ASSET GATHERING PLAY pure and simple. They need more assets to make up from the shortfall in their budget caused by the sudden interest rate cuts.

It also doesn’t hurt that advisors around the country are suddenly getting hundreds of new leads to call which could result in converting someone into a managed acct. My wife works for Schwab and she had this convo five times in her first hour:

Rando moron: I HEARD ABOUT THE ZERO COMMISSIONS! I’M TRANSFERRING OVER!

My wife: Great, what kinds of stock do you trade?

Rando moron: I don’t. I just buy and hold mutual fund.

So, don’t go thinking that this is some sudden revolution in the industry, it’s not. The ad e firms have known for a long time that zero commissions were coming. They judt needed a catalyst and that catalyst? The Fed. Thank you for attending my Ted talk.

 

 

Disclaimer: This content does not necessarily represent the views of IWB.

388 views