Race to zero: Schwab, TD Ameritrade drop commissions on RIA client trades

This article has been updated to include TD Ameritrade's announcement that it will also cut its commissions on stock, ETFs and options trading to zero.

In the latest sign of the feverish race to win clients by offering products at the lowest-possible cost, Charles Schwab said it would cut commissions to zero on stock, ETFs and options online trades — a move that TD Ameritrade matched just hours later.

The firms said they will extend that pricing to clients of independent investment advisors that trade through their platforms.

The commission-free rates will be available to clients using the firm’s web and mobile channels. They won’t have to open a new account, make a new deposit or maintain a minimum balance.

“We are seeing the playing out of a winner-take-all struggle between Fidelity, Schwab and Vanguard," says Will Trout, senior analyst for Celent. "Free trading has become table stakes.”

Clients who are trading options will continue to pay 65 cents per contract, however, at both firms. The new price is slated to drop to zero from $4.95 beginning Oct. 7 at Schwab and from $6.95 effective Oct. 3 at TD Ameritrade.

“In support of the valued independent investment advisors we serve, the same pricing will apply to their clients when trading at Schwab,” says the firm's CEO Walt Bettinger in a statement.

Christopher Lee/Bloomberg News

TD Ameritrade CEO Tim Hockey says the move will make his firm more competitive.

“We’ve been taking market share with a premium price point, and with a $0 price point and a level playing field, we are even more confident in our competitive position, and the value we offer our clients,” Hockey says in a statement.

Schwab, which made the announcement first, intensified the price war with competitors as investors flock to the cheapest products. 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.

In May, TD Ameritrade boosted its commission-free ETF offerings to 569 funds spanning approximately 90 Morningstar fund categories. The brokerage is one of the industry’s top providers of passive funds, with more than $380 billion in ETF assets under administration.

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.

Incumbents aren’t the only ones tackling fee compression. Digital-first firms have launched similar products in recent months. For example, Ally Invest launched 90 days of commission-free, self-directed trading and began to offer over 500 commission-free ETFs in September.

There are some potential challenges for clients looking to access capital markets without paying a fee, experts say. For one, the no-fee investment products may encourage more active investing — especially by inexperienced investors — leading to imbalanced portfolios.

However, in the competitive marketplace of index funds even free might not cheap enough. Salt Financial, which currently runs a $10 million ETF, plans to actually pay clients to invest in its funds. During the first year, holders will receive 50 cents for every $1,000 invested in its newest ETF.

—With additional reporting by Jessica Mathews