Call it the “Great Broker War of 2019″… the “Robinhood Effect”… or the “Race to Zero.” No matter how you slice it, one of the biggest fintech stories of the year is that online brokers are going commission-free.
Why is this happening? Should you switch your accounts? And what online brokers are now commission-free?
We'll dive in and answer your most pressing questions about this pricing shakeup.
Why Are Online Brokers Going Commission-free?
Interactive Brokers has always had a particularly progressive pricing model. Its “classic” service featured fixed-rate pricing on standard stock trades of $0.005 per share. There's a minimum of $1 per order and a maximum of 1% of the trade value.
How the heck does that work? If you trade 100 shares of a stock priced at $25 per share, your fee would be just $1. If you traded 1,000 shares of the same stock, your fee would be only $5. And the pricing model includes all exchange and regulatory fees.
However, the new IBKR Lite service eliminates all commissions on exchange-listed U.S. stocks and exchange-traded funds (ETFs).
Of course, IBKR Lite is a relatively watered-down version of Interactive Brokers' regular service, which has more complex trading features, tools and options. The “full” version of Interactive Brokers — which is a better fit for experienced traders — has been rebranded as “IBKR Pro.”
Shortly after Interactive Brokers announced its new commission-free product on October 1, broker-behemoth Charles Schwab announced that it would eliminate commissions on online U.S. stock, ETF and options trades.
This was big. Schwab is the largest brokerage firm in the U.S., with more than $3 trillion in assets under management.
All bets were off. The race to zero began.
But let's back up a bit and mention the elephant that has been lingering in the room.
What Is the Robinhood Effect?
Since its founding in 2013, Robinhood has been the fly in the online broker's ointment.
With a brash, young attitude and millennial-driven marketing, Robinhood offered what we thought wouldn't be possible: completely free trades. From the start, there were no commissions on stocks, options or ETFs. And when Robinhood rolled out cryptocurrency trading, there were no fees on that, either.
At the time, many of us in the fintech space had to laugh. How the heck could a stock broker maintain that ridiculous business model? Exactly how could Robinhood support itself? Robinhood's fee-free pricing couldn't possibly last.
But it would appear the joke was on the whole industry.
Should You Switch to a Commission-free Broker?
If you're still using a broker that hasn't made the move to free, such as Fidelity, should you swap over your account?
Not so fast. There are other considerations to make when choosing a stock broker.
While commissions can eat into your investing profits, they shouldn't be the sole reason for choosing a broker. You should also take into consideration the trading platforms, educational features and investing tools that each brokerage offers.
In addition, the commission-free trades don't apply to everything. If you're looking to invest beyond U.S. listed stocks, ETFs or options — say, with mutual funds — you'll still need to pay fees.
In addition, with the exception of Robinhood, most online brokers still charge per-contract fees for options trades. While the online brokers have been reducing these costs, they're still there. If you're a frequent options trader, you may want to compare these fees.
It's also worthwhile to keep an eye on the interest rates paid for the cash in your portfolio. Brokerages make some money by “borrowing” cash from their account holders and lending it to others at higher rates. So they could start paying out less to make more profit to recoup losses. On the flip side, if you're a frequent margin trader, you may want to stay with a broker that offers lower rates.
In the long run, if you're happy with the broker you're using, it makes sense to stay there… even if it's not on the commission-free list. The odds are, sooner or later, that broker will slash commissions too.
Which Brokers Are Commission-free?
Here's a rundown of the brokers that have gone commission-free.
TD AmeritradeTD Ameritrade is one of our top-rated online brokers. It's become particularly appealing now that it offers commission-free stock, ETF and options trades. However, note that there's still a $0.65-per-contract fee for options trading.
The broker already offered hundreds of commission fee-free mutual funds. However, there are some no-load funds that require a $49.99 commission. .
E*TRADE also offers low commissions on mutual funds: only $19.95.
Ally InvestAlly Invest is part of the larger Ally Financial family, which includes a great online banking service.
In October, Ally Invest eliminated commissions on stock, ETF and options trades. In addition, the service lowered options fees to $0.50 per contract. Ally also offers very low commissions on mutual funds: just $9.95.
Fidelity is one of the longest-standing and best-known stock brokers. It has also been one of the most competitively priced. So it's no surprise that this broker kicked commissions to the curb. There are no fees for trading stocks, options and ETFs. However, note that options carry a $0.65-per-contract fee.
Fidelity offers a suite of expense ratio index mutual funds.
FINRA.) There are a few fees here and there: for returned checks and stop payments ($9), outgoing account transfers ($75), wire transfers ($25–50), paper statements ($5), etc.
Robinhood does not offer mutual funds.
We've made a comprehensive comparison among E*TRADE, TD Ameritrade and Robinhood right here.
It's now free to trade U.S. exchange-listed stocks and ETFs, as well as Schwab Funds and other mutual funds using OneSource. While there are no commissions on options, each contract carries a fee of $0.65.
It was a little late to the party, but in January 2020, Vanguard announced it would eliminate commissions on online stock, options and ETF trades.
However, options traders take note: Vanguard still charges a whopping $1 per contract. If you're a frequent options trader, you'd be better off with Ally Invest (which charges 50 cents per contract).
Spawned from old favorite Interactive Brokers, IBKR presents no commissions on U.S. exchange-listed stocks and ETFs. There are also no account minimums or inactivity fees. If you wish to trade options, you'll need to sign up for IBKR Pro, which does charge commission fees.
The online stock broker space has been hotly competitive. And you just can't beat free.