Stock Trading ... for Free

It turns out that there may be at least one thing in life that is free: stock trades.

In the last month, brokerage firms Charles Schwab, TD Ameritrade, E-Trade, and Fidelity Investments all announced plans to eliminate the fees they charge clients to execute stock trades. Bank of America on Monday joined those firms in the race to free, saying customers in its loyalty program will now be able to trade equities and options commission-free.

While the move to no-fee trading appears to have happened overnight, Chad Astmann, senior client partner at Korn Ferry and global cohead of the organization’s Asset and Wealth Management practice, says leaders have effectively been planning for this shift for years. “As fees have been compressing over time, firms have been managing in step to try and minimize costs via scale and find new and creative ways to make money,” says Astmann, noting that Charles Schwab was a disruptor in its own right when it established discount brokering in the mid-1970s.

To be sure, trading fees were once a significant revenue source. But consumer expectations changed when they turned to smartphones to execute trades and manage portfolios seamlessly. That opened the door to a host of low- or no-fee start-ups that drew droves of customers away from the big names.

Another factor: the popularity of mutual funds, exchange-traded funds, and other index-based funds that allow investors to trade baskets of stocks, bonds, and other assets. The ability to buy and sell groups of stocks with one trade instead of having to trade each stock individually has been eating into the profits firms were able to generate through commissions.

Astmann says that brokerage firms see the shift to free as the best way to help lure back customers they lost and keep more from leaving. “The holy grail in this space is to attract and keep client money with the notion of a free service, all the while upselling and cross-selling those clients into other money-making services,” he says.

Indeed, many of the large firms have greatly diversified their business in ways that have reduced the importance of trading commissions in favor of additional products and services with higher profit margins, such as wealth management to clients. Charles Schwab, for example, estimates it will take a roughly 4% quarterly net revenue hit from eliminating trading fees. Similarly, analysts estimate that nearly 90% of the trades executed under Bank of America’s loyalty program were already free.

“The really smart platforms have the increasing ability to analyze customer behavior and push out other higher-margin products—so engagement is key and ‘free’ entry for customers is key to getting that process started,” says Astmann.