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VOL. 41 | NO. 8 | Friday, February 24, 2017
Investing costs fall again: Fidelity, Schwab cut commissions
NEW YORK (AP) — It keeps getting cheaper to invest.
Fidelity on Tuesday became the latest company to cut its fees in an ongoing industry battle that's helped mom-and-pop investors keep more of their own dollars. Rival Charles Schwab matched the price cut in a matter of hours.
Fidelity said it will cut its commission for retail brokerage investors trading U.S. stocks and exchange-traded funds online by more than a third to $4.95 from $7.95, among other fee cuts. Fidelity is the country's largest online brokerage firm with 17.9 million accounts and $1.7 trillion in client assets.
It was only earlier this month that Schwab cut its base commission for online stock and ETF trades to $6.95 from $8.95, a move that many investors anticipated would lead to a pricing war. Just hours after Fidelity made its announcement, Schwab said on Tuesday it will drop the commission to $4.95, which matches Fidelity's cost.
"We feel that this is going to put more money in the pockets of retail investors," said Ram Subramaniam, president of Fidelity's retail brokerage business.
He pointed to younger investors, who typically have less to invest. That means trading costs can be a bigger burden on them, proportional to their investment. "They're in their first job, second job, and for them every penny counts," Subramaniam said.
Active traders, who make 120 trades a year or more, make up less than 10 percent of Fidelity's total customer base, but they account for a significant chunk of trading.
Besides trading commissions, the financial industry has also been cutting the fees they charge for investments in mutual funds and exchange-traded funds. Last Friday, for example, Vanguard cut expense ratios for 68 mutual fund and ETF shares, which it says should save clients more than $105 million overall.
Schwab is cutting the expenses for its index fund that tracks the Standard & Poor's 500 index, so that fees will eat up $3 of every $10,000 invested annually, down from $9. Other rivals have made similar moves in recent months.
The financial industry is making these big moves because that's what customers are demanding. Investors have overwhelmingly put their dollars in mutual funds and ETFs that charge low fees. In 2015, 74 cents of every $1 in funds were concentrated in ones that were among the cheapest 25 percent, according to the Investment Company Institute.
Lower fees are particularly helpful when strategists are forecasting returns to be lower in upcoming years than they have been in the recent past. That's because the huge run for stocks and bonds since the worst of the Great Recession mean they no longer look cheap. If returns are smaller in future years, investors will need to save more to make up for it and to cover retirement, college tuition funds and other goals. Keeping expenses low helps alleviate that a bit.
The fee war has raised worries about diminished profits for the industry. Schwab's stock fell 4.3 percent in midday trading Tuesday. TD Ameritrade dropped 9.7 percent, and E-Trade Financial fell 8.1 percent. Fidelity is privately held.
Of course, while price is one of the most important factors in investing, it isn't the only one. For mutual funds and ETFs, investors should make sure they're comfortable with the investments the fund managers are making. For brokerages, investors also care about the company behind the price.
"For most investors today, trading technology, customer service and access to other financial products tend to trump commissions per trade when it comes to deciding where to open their account," Raymond James analysts wrote in a recent research report.