Charles Schwab and TD Ameritrade are eliminating trading fees: is there a downside?

Could it be true that nothing’s free, even in trading?

Charles Schwab Corp. and TD Ameritrade will soon be dropping their trade fees and some financial advisors say that ‘mom-and-pop’ investors could still end up paying, but in a different way.  That’s because low-cost trades or trades with no fees tends to encourage more trading, but most people do poorly in such scenarios rather than what would be best and that would be to ‘buy-and-hold.’

Schwab will be dropping its fees of $4.95 per stock trade, exchange-traded fund (ETF) and option trades, beginning on Monday. While TD Ameritrade will drop its 

$6.95 fees on the following Thursday and E-Trade will end its retail commission on Monday as well.

The lowering of fees or zero fees is a continuance of a race to shrink broker fees. But it comes at a precarious time because of the ongoing threat to Trump’s impeachment, the ongoing trade war with China and the threat of a recession happening.  All things that could rattle the ‘do-it-yourself’ investors mettle.

Some analysts believe that when broker fees go down to zero there will be other ways for brokers to recoup their commission in order to pay their bills and mom-and-pop/do-it-yourself (DIY) investors will pay one way or another. Some, like, Micah Hauptman, financial services counsel at the Consumer Federation of America, say that its hard to assess the service and value that will be provided by a broker when they have no fees and that its also more difficult for market forces to work in such a way to benefit investors.

However, Both Schwab and Ameritrade say they are not sacrificing any quality to their services by lowering their fees to investors. Walt Bettinger, CEO of Schwab says their zero fees is not a promotion. There are no catches. Period. He says that investors, whether seasoned or just starting out on the investment path, should have no barriers to investing.

Some financial advisors suggest that low-cost trade leads to bad choices or may make DIY investors cautious.

If DIY investors are influenced by current headline risks, their innate biases in choices would lead to poor trading anyway, says the founder and president of RHS Financial in San Francisco, Risley Sams. And not having to pay any fees to trade is not the primary reason to drive them to trade poorly.

Other brokerage and investment companies are happy about the scrapped trading fees.

Mike Alves, who is the managing director and founder of Vida Private Wealth in Pasadena, CA, says that no-cost trading fees is a good opportunity for new investors to try the waters of investing and eventually appreciate the services of financial planners like his company.