Zero-Cost Commission Trading and the Power of Independence

This article is not designed to address the reasons behind zero-commission stocks trading, but instead to make the case for an advisor being independent from brokerage firms, insurance companies, and banks.

Recent news banners have heralded zero-cost stock trading from the likes of Fidelity, Schwab and TD Ameritrade.  When we saw that, we did not think it was going to be a windfall for our clients, since we were already trading most securities at zero cost. The typical client with $1,000,000 or more may save $50/year. The thing that encouraged and excited me was the importance of our firm being independent. We can work with most brokerage firms or insurance companies and that independence gives us the flexibility to work with firms that are cost-effective, security-focused, promote a high level of customer service, and demonstrate broad product diversity.

Currently, we hold most client securities with Schwab, Fidelity, and TD Ameritrade. Why did we choose them? Our analysis led us to these three based on cost, service, security, and products. If TD Ameritrade did not meet zero commission, we would do an analysis to determine the benefits of moving our client assets to Fidelity or Schwab, which did lower commissions to zero. I cannot imagine being a wirehouse broker and having to compete with zero commission trading knowing that I do not have the freedom to easily leave because wirehouse brokers sign non-compete agreements. We do not and will not sign exclusivity agreements with brokers or insurance companies. Independence is crucial to deliver fiduciary advice to clients.

In 2008 most brokerage firms accepted TARP money from the government to shore up these companies. Merrill Lynch, Morgan Stanley, Goldman Sachs, MetLife, M&T, JP Morgan and many more took TARP money as needed. Fortunately, Schwab, Fidelity, and TD Ameritrade did not require TARP assistance for survival. If there were any signs that they were in financial danger, we could very easily begin the transfer of client accounts from one brokerage firm to any one more financially secure. I could not imagine being held to a non-compete agreement as a Bear Stearns or Lehman Brothers broker as I watched my firm financially implode. Independence would have allowed me to begin transferring client assets out when I sensed problems.

The new tax law has introduced a new 20% tax-free deduction of a pass-through entity business’s net income. Therefore, if I make $100,000 only, $80,000 is taxable (the law is far more complicated, but for our purpose in this article, simplicity is best). Many of our clients have business pension plans, and if a Roth 401k option is not available to our clients, it will be detrimental to our small business owner clients in light of this new 20% income reduction law (usually referred to as 199A). Many of our small 401k plans are at Schwab and Fidelity, but neither are willing to offer the Roth 401k option. TD Ameritrade has always had the Roth option, so in 2018 and 2019 we are closing many of the Schwab and Fidelity plans and moving to the TD Ameritrade plan that offers the Roth option. Independence is critical to a professional financial advisor.

Every year, we negotiate fees with our three custodians. We always make sure each knows what fees are being paid by our clients and how each custodian can remain competitive. We do not just buy stock with our clients paying the fees that the broker requires for we can easily consider a better option among other custodians. We have no non-compete clauses. Independence matters, and it is one of the defining points of a professional personal financial advisor.

Zero commissions? Our clients are participating. Better 401k with a Roth option? Our clients are participating. Our independence keeps us on a relentless pursuit of having the best overall custodian for our clients. We are able to buy almost any security at almost any brokerage firm in the country and have that security delivered back to our client account at Schwab, TD, or Fidelity. We are not just looking for the cheapest, but for the firm that gives a great overall service for the right price.

Independence matters. Make sure you have a truly independent advisor.

Financial Consulate aims to help lessen the worry and burden of wealth management and enhance financial wellness so our clients can pursue relationships and true fulfillment. Choose the professionals at Financial Consulate as your Certified Financial Planners™ (CFP®) to take advantage of our educational, ethical approach to financial planning. Our services are comprehensive, including tax planning, investment planning, retirement planning, estate planning, and more. We operate completely independently and offer fee-only services to keep your vision in line with our recommendations at all times. While we have offices in Hunt Valley, Maryland, Fernandina Beach, Florida, and Gettysburg, Pennsylvania, we serve clients across the nation. To begin your partnership with a trustworthy wealth advisor, please contact Financial Consulate today.