Race to the Bottom: How Fees (or a Lack Thereof) are Changing The Investment Landscape

This week Schwab announced their decision to remove the $4.95 trade commissions for all US/Canadian stocks, ETFs, and options. This is great news, both for our clients and for the average retail investor.

Investors love lower fees, which is why Schwab is hardly alone in this endeavor. This time last year, we saw Fidelity become the first company to launch a line of zero-fee index funds, which brought in $1 Billion in assets in their first month.

Fidelity continued the price war in 2019 by introducing another line of low-cost funds with expense ratios ranging from 0.05% to 0.07% and no minimums. These funds directly rival Vanguard’s fund lineup by undercutting costs by 1-3 basis points and removing Vanguard’s initial investment minimum of $3,000.

Following Schwab’s announcement this week, TD Ameritrade and E-Trade also announced plans to do away with trade commissions. The biggest players are starting to offer funds, fees, and deals that seem almost too good to be true. So what’s the catch? How do these companies continue to make money by lowering fees?

In most of these cases, the catch is the cross-sale. Low fees are the sale that gets you in the door, only to have you walking out with a shiny new pair of active funds and a new advisory contact. Vanguard has been using this model for decades: take a financial risk by providing value up front, and hope for investor loyalty over the long-term. It certainly seems to be working for them.

As we head towards a lower and lower cost marketplace, we will continue to see creative ways in which asset managers obtain new assets. Salt Financial recently became the first company to launch a fund that actually pays you to invest.

It’s a great time to be an investor, but remember that cost should not be the main driver of your investment strategy. While index funds serve a valuable purpose in a portfolio, we believe that certain industries and sectors warrant the price paid for active management.