In its latest efforts to compete with other brokerage firms and to attract Millennials, a younger group of investors, online broker Charles Schwab recently opted to slash its commissions on trades from $4.95 to zero, and allow its clients to trade fractions of stocks, the founder and chairman told the Wall Street Journal in an interview.
“I think this is setting the new standard for brokerages in the space. It’s commission-free and fractional shares,” said Dave Nadig, managing director of ETF.com, on CNBC.
Many ETFs have now been offered commission-free as well, as brokerage platforms are working more closely with ETF providers in offering commission-free trades to help build tactical asset allocation strategies without extra costs. Now investors looking to use ETFs are wondering if it will help them diversify portfolios as well.
“Schwab has been quite focused on younger customers for some time, but we’re sure it’s also been watching the success some of the other free trading platforms have experienced and moving in line on fractional share trading makes sense,” Devin Ryan, managing director at JMP Securities, said in an email.
Other companies have tried offering partial stock trades in the past. Smaller companies like Stockpile, which was founded in 2010, have offered this type of service for 99 cents per trade. However, the considerably larger Schwab, which holds about $3.72 trillion in client assets, is the first major online broker to offer fractional trading. Other companies that offer partial trade include M1 Finance, Betterment and Stash, and Robinhood.
Robinhood is one of the companies that targets much younger investors, as the average age of Robinhood clients is just 32, compared with the 60-65 average age demographic that Charles Schwab currently services. Now Schwab is seeking to grab some of this market and lower their average investor age.
Getting more traders in the door with zero dollar commission incentives doesn’t mean brokerages will necessarily lose money, however. A firm can still increase revenues through interest-bearing accounts, margin lending, and by cross-selling wealth management tools. What this also means is that free doesn’t usually truly mean free, and so investors need to be wary of how funds are being managed and use proper due diligence when making investment decisions.