When it comes to investment, some people have a knack for the best strategies whereas others may feel lost when they think of trading stocks or investing in mutual funds. But that’s why the people who have the knack for it run brokerage companies – to help the less investment savvy people see returns on their investment choices.
Over the years there was a rise of no trade commission brokers that offered Exchange-Traded Funds (EFTs) free of charge. In October of 2019, Charles Schwab Corp announced that it will eliminate online trading commissions for stocks and ETFs under US or Canadian exchange. This monumental change started a catalyst that had other brokerages following suit and removing their commission fees.
Making Millennial Money
Without any commission fees, the revenue of a brokerage will drop significantly, experts say. But it’s a price worth paying to get more first-time investors who are usually of the millennial generation. As a generation that grew up with many free online services, brokerages understood that millennials hung onto what money they have tighter than their parent’s generation. Although brokerages will be dealing with a massive loss, attracting new customers will mean that most will likely stick around providing brokerages their future with a new generation of customers.
Moving to Free Trade
While the words “no commission” sound enticing, it’s always important to read the fine print of anything you sign. But with more brokerages competing for new business, there are more options to choose from and attractive investment plans where brokerages subsidize fees for new investors in order to keep their business.
And it works. Robo-advisor Robinhood, launched in 2013, has offered free equity trades and ran advertisements on popular podcasts to reach even more new customers. This trend saw similar services appearing in the app store and the inevitable change for large brokerage firms.
Too Good to Be True?
Now that brokerages know the secret to build new revenue streams with commission-free ETFs, the next step is to strategize how to raise revenue without commissions. Professional money managers warn that when investment companies cut fees, prices may rise elsewhere inconspicuously. But as long as every person starting a new investment portfolio reads the terms and conditions, they will be aware of any hidden fees or other ways the company can get their money.
Lose Some, Win Some
No commission on trades causes an uptick of new accounts for brokerages and sparks trade activity in the stock market. Senior equity research analyst, Brennan Hawken, agrees that cutting commission will work, but argues that it was an unnecessary step that lost the industry hundreds of millions of dollars. Hawken thinks it was bad judgment from leaders that smaller companies like Robinhood were a big enough threat to make such drastic changes.
Nonetheless, brokerages are still businesses looking to make more money at the end of the day. No commission ETFs can be a good opportunity for new investors to enter the market and is made easier through apps. Plus being transparent with their customers will help retain them for years to come.