The days when investors were paying huge trading commissions are long gone, but now even $9.99 to trade a stock seems too expensive compared to some new disruptive platforms. Also, robo-advisors are slashing wealth management costs for an increasing number of investors. In this segment from Industry Focus: Financials, analyst Michael Douglass and Motley Fool contributor Matt Frankel discuss what this could mean for the banking industry, as well as for everyday investors.
A full transcript follows the video.
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Michael Douglass: Let's also turn to one of the other big areas that banks have made a lot of money historically, and that is things regarding investments and wealth. There's really two areas here, but we'll start with the first one, which is stock trades. This one's very visible, I think, to probably most people listening to this. If you're an investor, you have dealt with paying for a stock trade, whether it's $9.99 or $7.99 or $4.95, most of us has paid some fees. And what you've seen is, because of all of the competition among the online brokers, those fees have continued to come down. You also have folks stepping in and offering free stock trades, Robinhood being a great example.
Matt Frankel: Yeah, definitely. It's interesting to note, the $9.99 online brokers were themselves a disruptor not too long ago.
Douglass: Right, a big one.
Frankel: Yeah, up until about 20 years ago, people would have to physically call a broker, pay a commission of about 1% of the sales price. If you're buying $100,000 worth of stock, that's a big commission. So, these were themselves disruptors not long ago. But yet, now you have companies like Robinhood who are doing it for free. The drawback is, they don't have quite as many features as the ones that charge.
But, what they've done is, like you said, they put a downward pressure on prices. I used TD Ameritrade personally, and they were one of the last holdouts of the $9.99 price point, and they just went down to $6.99. You also have, overstock.com is another one that's about to offer $2.99 stock trades and $1.99 if you're a member of their loyalty club, and with some actual brokerage features, like research reports and investing tools. So, this is a big disruption, and it could force companies like TD Ameritrade and E*Trade to lower their prices even more over the years. And like you said, eventually gravitating toward virtually free stock trades, where you're just going to be paying a small premium for the other features of the platform.
Douglass: And the other piece that I'll throw out there as well is, you're seeing a lot of use of free stock trades to try to get people to join your platform. I've seen plenty of platforms offer, you get 60 days of free trading, or, you get 60 free stock trades in your first year, things like that. I personally use Merrill Edge, which is owned by Bank of America, and because I have a certain amount of assets with Bank of America and things like that, I'm able to get some free trades.
So, all of that combined is a sign, again, that the very traditional side of the industry, the big banks, and the less traditional but at this point incumbent part of industry, which are the online brokerages that are divorced from the big banks, are all finding ways to respond, and try to retain that market share in the face of what is, frankly, a really compelling value proposition. It's hard to beat free. You can, and of course, what you need and what makes the most sense for you is going to depend based on what your research needs are and how you invest and a lot of other things. But the fact of the matter is, this is going to continue that downward pressure.
Speaking of downward pressure, let's talk about wealth management. Again, as we highlighted earlier, this is something you see from the investment banks and also the universals. And of course, the commercial banks, in some cases, do some of this, too. But, it's more on the investment bank side. And that's wealth management fees. Wealth management fees have been in a downward trend for a long time, and a lot of that is because of the advent of robo advisors. We've done an episode on robo advisors. That was our November 12th, 2017 Industry Focus. Give it a listen if you want to learn more about them, but we'll give a quick overview here.
Frankel: Robo advisor pretty much puts the investment process on autopilot. It makes decisions with your portfolio, how to allocate assets, how much risk to take on, things like that. But it pretty much does it automatically, so you're not paying a person to do it for you. The industry standard for a wealth manager is still about 1% of assets. It's gotten a little bit lower over the years, it used to be closer to the 2% range. But, 1% of assets. For comparison, Wealthfront and Betterment are two of the big robo advisory firms, and they each charge 0.25% of assets on an ongoing basis. And some of the bigger names, TD Ameritrade, for example, my broker, they just rolled out what's called their Essential Portfolios that charges 0.3% of assets and offer some very low-cost mutual funds to invest in. Schwab has a robo advisory service that's been very successful so far.
These are particularly resonating among the Millennials that are very anti-fee. Fees weren't very transparent until not that long ago, and Millennials, more than anybody else, they're getting very aware of the fees they pay, and are trying to avoid them, realizing that someone's making a ton of money from their investments, whereas there's a better option where they could be making all that money. And over time, that little difference in fees can really add up. I did an article not too long ago about the difference between even a 0.5% and 1% fee in an IRA long-term, it can add up to about $10,000 of difference in gains. So, this is a big deal for value-conscious investors.
Douglass: Absolutely. Fees are one of the great killers of investment returns, along with, of course, poor investments.