E-Trade joins rivals in a race to zero commissions
E-Trade is the latest brokerage to cut trading commissions to zero, joining its major rivals in a fever-pitched race to attract more clients. The cost, however, could lead to consolidation or deeper job cuts for the industry, analysts say.
The move to eliminate commissions on all online U.S. listed stock, ETF and options trades comes after Schwab and TD Ameritrade made similar announcements in recent days. The commission-free rates for all firms will be available to clients using web and mobile channels.
E-Trade estimated losses in revenue would have been approximately $75 million in the second quarter due to the drop in commissions fees, according to a statement. Its largest competitors projected similar outlooks: Schwab expects an approximate $100 million loss in quarterly revenue, while TD Ameritrade anticipates a $240 million loss per quarter.
“The most likely outcome is that firms are going to cut jobs,” Jennifer Butler, director of research at Corporate Insight.
The change in commission structures created a credit negative for the retail brokerage industry, according to a Fitch Ratings report. Brokerages may be pressured to emphasize other sources of revenue and will likely face further industry consolidation, according to the report.
“Do they start looking for a suitor?” says Butler. “It’s much more likely for them to shed non-core business to focus on core competencies first.”
One way E-Trade could make up for lost revenue is by pushing clients into its managed portfolios. The firm also lowered several other investing barriers, including a new $500 minimum its core portfolios and mutual fund portfolios recently, according to a statement.
“The idea here is as prices are declining and fewer investors are trading, firms need to attract customers with this type of offering and then cross-sell them into fee-based products,” says Butler. “That is really going to make the difference — especially for the firms that rely on commissions.”
Schwab intensified the price war when it followed Interactive Brokers in cutting commissions. Vanguard last year announced it would offer almost 1,800 ETFs commission-free on its platform. In June, Fidelity Investments also expanded its lineup of commission-free ETFs.
"It’s a good thing for consumers that they have less in the way of [trading fees] and that more companies are trying to be transparent,” says Roger Young, a senior financial planner at T. Rowe Price. “Financial services companies are going to be paid one way or another.”
The average ETF charges $4.70 per $1,000 invested, but some products that track broad U.S. equity indexes now charge as little as 30 or 40 cents, according to Bloomberg. In fact, more than 97% of cash flowing into ETFs goes to those that charge 20 basis points or less.