Discount brokers have brought a whole new world to ordinary investors. With a price war now raging in the brokerage industry, major brokers are making big moves that could change the way you invest. With no-cost trades on certain ETFs, and falling commission levels overall, you could save you a bundle.
That's why I asked several of our top experts in personal finance to weigh in with their thoughts on how you can best take advantage of these changes. I posed them the following question:
What impact will brokers' recent moves to cut commissions and offer commission-free ETFs have on ordinary investors saving for long-term goals like retirement?
Robert Brokamp, Rule Your Retirement lead advisor: One of the greatest enemies investors face is costs, so the announcements from Charles Schwab (Nasdaq: SCHW ) and Fidelity that they're lowering commissions and offering some free trading on ETFs are very welcome news.
That said, other discount brokers have been offering $8 trades or less for years. As for commission-free ETFs, similar investments have long been available through Vanguard's low-cost, no-load mutual funds.
So what's the big deal? Well, Fidelity and Schwab are both putting low-cost commissions for stocks (and options), a wide selection of mutual funds, and commission-free index-based investments (i.e., ETFs) together in a single package. That appeals to the active trader, the buy-and-hold asset allocator, and all of those in between (and most investors are somewhere in between).
Is this good for you as a long-term investor? Sure. Anything that lowers costs keeps more money in your account. Should you move all your money to Fidelity or Schwab? Not necessarily. If your broker offers competitive commissions, and you're not an active ETF trader, then fee-free ETFs won't do much for you.
When it comes to choosing the right account provider, start with the kind of investor you are, and what kinds of investments you're looking for. Then, find the provider that offers what you're looking for at the lowest cost and the best customer service. For you, that might be Fidelity or Schwab … or it might not.
Amanda Kish, CFA, Rule Your Retirement mutual fund expert: Is Fidelity crazy? Crazy like a fox, perhaps. The fund company's recent decision to cut trading commissions and offer iShares ETFs from BlackRock (NYSE: BLK ) for nothing seems like a clear profit-reducer. But Fidelity is likely only reacting to what it sees lying ahead in the future -- reduced trading commissions across the board for investors.
Ultimately, this is a good thing for investors. Reducing the administrative cost of owning stocks and ETFs means less of a bite taken out of our long-term investment accounts. Saving $10 on a trade here and there may not seem like much, but those little savings can really add up over the years.
The only potential downside I can see to this trend is that some investors may make up in volume what brokerages are eliminating in cost. In other words, folks may figure that since their trades cost half as much, they can now trade twice as often! Hopefully that won't happen, and investors can funnel the cash they're saving on commissions into their retirement savings. Americans as a whole are woefully unprepared for retirement, so every little bit will help in the long run.
John Rosevear, Motley Fool contributor: Here's why I think these price cuts -- and the cuts that will probably come from Fidelity's competitors in response -- are important: They make it cheaper and easier to invest more often.
No-brainer, right? Sure, but one of my personal pet peeves is the way so many people -- even those who are otherwise pretty astute about their finances -- totally neglect their IRAs. I say it all the time -- I love IRAs because they're fantastic wealth-building tools.
But a lot of people don't even think about IRAs until tax season, and then… well, maybe they have $5,000 lying around to invest, and maybe they don't. Either way, it can seem like a big financial hit, and often that investment just never gets made. But if you set up an automatic contribution and have the brokerage take a little out of your bank account every month or quarter, an IRA becomes more like a 401(k) -- the investments just happen, and you don't really think much about them.
And then it becomes a great way to dollar-cost average into a position -- at $7.95 a trade, it's pretty cheap to invest several hundred bucks at a time to build up positions in individual stocks. I've been doing something like this with BP (NYSE: BP ) in one of my IRAs, and at this point I've built up a position at an average price that looks pretty good right now.
Long story short, lower commissions take away an excuse for not contributing to your IRA. And if we can get more people contributing to more IRAs, we'll have more wealthy retirees in a couple of decades. I don't know about you, but I plan to be one of them.
Dan Caplinger, Motley Fool contributor: Adding to John's point, the biggest benefit from this move is the fact that no-commission ETFs make it easy to invest over time. The iShares ETFs Fidelity is offering includes an S&P fund that invests in well-known names like ExxonMobil (NYSE: XOM ) and AT&T (NYSE: T ) . Schwab's ETFs include a foreign stock fund that invests in stocks like Novartis (NYSE: NVS ) and BHP Billiton (NYSE: BHP ) . There's a wide range of available ETFs that span nearly the entire investing universe -- and you can buy as little as a single share at a time.
So yeah, I think it's great, and I expect other brokers to make similar moves in the future. I'm not sure how healthy it is for the brokers' businesses, but investors are the clear winners here.
What do you think? Sound off in the comment box below.