Ever since the brokerage industry was deregulated, brokers have had to fight hard in order to win customers' business. In 2009, the exchange traded fund revolution prompted a series of broker wars in which various companies offered commission-free ETF trading to their customers. More recently, though, brokers have fought against each other based on something with a much more direct impact on their bottom lines: commission revenue. Even as brokerage companies trip over each other to try to come up with the right price cuts for their trading commissions, the clearest outcome of these new broker wars is that investors stand to be the biggest winners.
How the latest broker wars started
Back in 2009, Charles Schwab (SCHW -1.05%) fired the first shot in the battle of the brokerage companies when it introduced commission-free ETFs to investors. The move ignited a movement among brokers to come up with ETF partnerships, some offering their own funds, while others made deals with existing ETF providers to offer their funds at no commission.
This time around, Fidelity instigated the new war among brokers. On Feb. 28, the Boston-based mutual fund giant said it would cut its commissions for online stock trades from $7.95 to $4.95 per trade. In addition, the company cut its options trading commission from $0.75 to $0.65 per contract, and it reduced margin rates for investors to as low as 4% for investors with a debt balance of $500,000 or more.
By doing so, Fidelity intended to undercut its primary competitors in an effort to appeal to its best customers. As Fidelity retail brokerage president Ram Subramaniam said:
Our active trader clients who make hundreds of trades each year will particularly benefit from our dramatic price reductions, and all clients who trade will be able to keep more money in their pockets.
Competitors quickly responded. Schwab followed later the same day, matching Fidelity with a drop from $6.95 to $4.95 on its stock commissions. Schwab CEO Walt Bettinger noted, "We never want commission costs to be a barrier for investors deciding which firm can best serve their needs," and the brokerage giant also pointed to low expenses on various index mutual funds and the company's satisfaction guarantee as reasons to choose it over Fidelity and other competitors.
Yet not all brokers decided to match Fidelity. TD Ameritrade (AMTD) made a reduction in its commission, but by moving from $9.99 to $6.95, the company didn't close the competitive gap entirely. In justifying that, CEO Tim Hockey said that TD Ameritrade's clients "have told us time and again that value is delivered via rich experiences that prioritize flexibility and client choice, coupled with a simple, straightforward price." The company pointed to its trading platforms, tools, product selection, and customer support as marks of distinction for TD Ameritrade over its peers.
Meanwhile, E*Trade (ETFC) decided to split the difference. Effective March 13, E*Trade's commission structure will get split in two. Base rate customers will see their commissions fall from $9.99 to $6.95 per trade, matching TD Ameritrade. However, E*Trade created a new structure for active traders, defined as those who execute 30 or more trades every three months. For those customers, E*Trade will have $4.95 per trade commissions, and options charges will fall by a third, to $0.50 per contract. CEO Karl Roessner said that although "an exceptional customer experience is far more important to traders and investors than price, with our new commission structure, we are able to reward our most active equity and derivative traders and investors."
What the broker wars mean to you
Obviously, the importance of trade commissions depends on how frequently you trade. For instance, if you make just one stock trade each month, then Fidelity's decline will save you $36 per year -- a nice savings to get, but still a relatively small amount in many investors' eyes. By contrast, frequent traders who make multiple trades daily can save hundreds or even thousands of dollars in a single year with modest $2 to $3 commission cuts.
Yet the more important thing to remember is that the latest breakout of broker wars shows that when it comes to opening brokerage accounts, you are in control. Brokers want you, and they're willing to compete hard to get your business. That gives you leverage to wait for deals that are best for you, and you can also expect the best service possible that fits with your particular investing needs.
The broker wars are likely to continue, and it will be interesting to see if further commission cuts come, or if brokers choose to compete on different grounds. Regardless, the big winner in the broker wars is you, and you should take full advantage.