For decades, the brokerage industry has had to deal with the competitive battles Wall Street deregulation fostered. Along the way, investors have reaped the rewards as all sorts of costs of investing got cut. When exchange-traded funds started gaining popularity more quickly in the late 2000s, brokers fought to bring in new clients by offering free trading of ETFs without commissions.

It was only a few years ago, however, that brokers turned their attention to their most important fee: commissions on regular stock trades. Earlier this week, major players in the industry finally made the move that upstarts had offered for a long time, slashing their commissions all the way to zero. The obvious question that raises is whether there's any more room to compete on price or whether brokers will have to shift their focus to intangibles like quality and ease of use.

A brief history of the broker wars

It's interesting that Charles Schwab (SCHW 0.67%) was the first this time around to cut its overall stock and ETF trading commissions to $0. A decade ago, Schwab was the first to introduce the concept of commission-free ETF trading to investors. Rival brokers like TD Ameritrade (AMTD), Fidelity, Vanguard, and E*Trade Financial (ETFC) took steps to respond, with some coming out with their own proprietary lines of ETFs while others formed partnerships with established ETF providers. Nevertheless, investors can now find a wide range of commission-free ETFs at various brokers.

Three people standing in front of a wall of screens showing charts and quote information in an office.

Image source: Getty Images.

But in 2017, it was Fidelity that made the first cut to the golden calf of stock commissions. The company cut its per-trade commission for online trades from $7.95 to $4.95 as part of a broader package that also included lower-margin interest rates and reductions to options trading costs. Schwab quickly followed suit to match the $4.95-per-trade offer, and it didn't take long for TD Ameritrade and others to make their own reductions to their commission rates.

This time around, Schwab was first among big brokers to hit the $0 level, but TD Ameritrade and E*Trade quickly followed suit with their own moves to match Schwab. As of Thursday, Fidelity hadn't yet announced any further reduction to its $4.95 commission.

Are $0 commissions all good?

Zero commissions sound great, but they come with a possible downside. If being able to trade at no cost makes you more likely to trade frequently, then it could end up costing you more in lost investment gains than you save in commissions. A long-term approach generally does best for investors with a distant time horizon, and not having to pay a commission takes away one of the barriers that could otherwise keep you from trading too often.

In addition, focusing too much on broker commissions means you risk losing sight of other costs of investing:

  • There's typically a difference in the price at which you can buy a stock and the price at which you can sell it. This bid-ask spread is usually insignificant for a single trade, but if you trade repeatedly, it can add up to be a significant drag on your overall return. Some fear that bid-ask spreads will widen as a result of this move.
  • Most ETFs have fund expenses that appear in the ETF's expense ratio. Even if you pay no commission, some ETFs charge 1% or more of your investment each year for management and other costs. Focusing on ETFs with low expense ratios is crucial.
  • Some brokers charge other ancillary fees to investors for certain features. Pay more for them, and it could eat into your commission savings.

Are we done?

Zero might seem like the cheapest possible price, but some people believe that brokers could eventually pay customers to trade. The same sources of alternative revenue that can help brokers afford free commissions could arguably spur them to make rebates to customers -- just as credit cards offer cash back and other features.

For now, though, investors should expect the $0 price point to hold for the foreseeable future. For those who invest regularly and maintain a disciplined approach, the benefits of free commissions should outweigh the potential risks.