Take it to the bank — investors who use discount brokers grasp the impact of costs on their portfolios. And investors showed they value low costs by ranking Low Commission & Fees as the most important of 14 key traits they weigh in assessing which brokerage to use.
The preferences come from IBD's sixth Best Online Brokers report in which investors were asked to rate the importance of 23 brokerage traits.
So, what are the online brokers that scored best in the Low Commission & Fees category of IBD's annual Best Online Brokers survey doing to distinguish themselves, to earn those votes from investors? And are fees about to sink lower?
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Low cost is a key weapon for winning and holding on to customers. You can even get free trades from some brokers, depending on the size of your transaction, how often you trade and the size of your account balance.
But commissions vary a lot. Among the five highest ranked brokers in this category, Interactive Brokers (IBKR) has a regular commission of a low $1 minimum on trades of at least 1,000 shares of a U.S. stock. Two rivals — Fidelity Investments and Charles Schwab (SCHW) — battle for customers with their $4.95 commissions. TradeStation parries with a $5-per-trade levy. And Merrill Edge's standard levy is $6.95 per trade.
There's a similar range in prices for options trades.
And some Best Online Brokers offer even bigger discounts to customers who qualify.
At Interactive Brokers, if your monthly volume is more than 100 million stock shares, Interactive's commission plummets to 0.05 cent per share, with a minimum fee per order of 35 cents.
Merrill Edge customers can get 100 free stock and ETF trades per month if they're in Merrill's Preferred Rewards Platinum program. That requires having a Bank of America (BAC) checking account. You've also got to maintain a three-month average combined balance of $100,000 in a Bank of America savings account and/or a Merrill investment account.
TradeStation offers special deals too. You can choose between its $5 per trade levy and tiered pricing as low as 0.6 cent per share for each share in excess of 500. Investors who trade 5 million or more shares a month pay just 0.2 cent per share, with a minimum commission of 50 cents per trade. Depending on which exchange an investor like that uses, TradeStation will relay additional exchange execution fees or rebates, if any, on to the investor.
Still, to get the best prices you might have to jump through hoops.
TradeStation customers using tiered pricing risk triggering a $99.95 per month service fee unless their account balance is large enough or their trading volume high enough.
And check out no-load mutual funds. Each of the top brokers in the Low Commissions & Fees category offers them. But some brokers charge a transaction fee on some of their no-load funds.
Then there is research. It's mostly provided without additional fees by the top-ranked online brokers. Interactive Brokers, whose focus is low-cost, high-volume trading, offers freebies including blogs, newsletters and Fox Business News and other news sites. Investors can buy additional a la carte information including research like Thomson Reuters Stockreports+ for $2 a month up to Slingshot Insights for $725 per month after a free 30-day trial.
The Value Of Service
Yet as fierce as competition is in this arena of commissions and fees, all customers do not gravitate solely to the lowest prices. Why not? In a word: Service.
"As far as competing at zero commission, I don't feel we have to match brokers that do that," said Gregg Murphy, senior vice president of brokerage products at Fidelity. "The breadth and overall value of our overall operation is significantly greater than what some other firms with lower costs offer."
Free research, a user-friendly platform and detailed information about a customer's price improvement on trades are just some of Fidelity's services.
Price improvement reflects the difference between the maximum price a buyer says he will pay and the actual asked price that the broker obtains. For sellers of securities, it means they got more than the bid price on average.
Merrill Edge voices a similar theme based on being part of Bank of America. David Poole, head of Merrill Edge advisory, client services and digital capabilities, said, "We look at the full suite of our combined offerings — money market funds, low mortgage refinancing rates, bank accounts. It's tough for smaller players to compete with us on price and the whole gamut of offerings, which are a significant benefit."
Future Price Cuts?
And what about the future? Six of the seven top-ranked brokers in the Low Commissions & Fees category lowered some key fee during 2017. Are more fee cuts coming soon?
Interactive Brokers, which touts its low prices, says more fee cuts aren't imminent. "It's unlikely," said chief market analyst Andrew Wilkinson, whose firm's break point for its lowest stock trading commission is 100 million shares. "We're for professional traders, not people who are relatively docile. And our customers value our services other than raw pricing too, such as price improvement and order routing."
In contrast, Fidelity touts its price improvement, which averaged $13.09 per 1,000-share market order between Jan. 1, 2017 and Nov. 30. Industrywide, the average is $2.02, Fidelity says.
Merrill's Poole says robo-advisors cause more price pressure than cost-lowering mobile apps do. Yet robo-advice's impact is mainly restricted to investors who are super focused on low-cost products like ETFs, he says.
And Fidelity's Murphy says lower fees from small rivals won't prompt new cuts from big shops. "The majority of brokers offering zero commissions just have a trading app," he said. "That limits trading functionality. Not even close to our level of overall offerings."
Murphy's colleague Scott Ignall, senior vice president of brokerage customer experience, adds, "Our scale also gives us cost savings that we can pass through to our customers."
Ignall's advice to cost-conscious investors is simple: Don't look just for the lowest commission. Keep your eyes peeled for hidden costs as well.
"There's a small set of competitors that have very low commissions and margin rates," he said. "But look behind the covers. They charge you for market data, for adjusting orders when you want to cancel an order. Some require large account balances. Look at the details in fees. Look for a quality overall experience."