Allan S. Roth, CFP, CPA
Allan S. Roth, CFP, CPA, president of Wealth Logic, LLC, a financial advisory firm in Colorado Springs. He is author of How a Second Grader Beats Wall Street: Golden Rules Any Investor Can Learn. DareToBeDull.com
Bottom Line: Don’t ignore other fees when comparing investment firms.
It sounds great. One after another, major discount brokers have slashed commissions to zero for online buying and selling of stocks. As of December 2019, Fidelity Investments, Charles Schwab, TD Ameritrade and E*Trade all had eliminated the fees. Vanguard, the second-biggest brokerage in customer assets behind Fidelity, joined them in January 2020. However, to choose the best brokerage for your needs, consider other factors—including various other fees—that affect how good a deal it is…
Not everything is free, so compare the service fees. Examples: If you need the help of a live person to execute a stock trade by phone, you pay $32.95 at Fidelity…$25 at Schwab, TD Ameritrade and E*Trade…and up to $25 at Vanguard. Using an automated phone service to trade costs $12.95 at Fidelity and $5 at Schwab and TD Ameritrade. E*Trade and TD Ameritrade charge $6.95 for trading US over-the-counter (OTC) stocks, while Fidelity and Schwab do not. E*Trade charges $19.99 for buying many mutual funds…Vanguard charges up to $20 for buying many mutual funds other than its own…Schwab charges $49.95…and Fidelity charges $49.95 for most and $75 for some.
Interest rates for cash reserves vary widely. When you sell an investment or deposit money, several major brokerages put your uninvested cash into a “sweep account” yielding as little as 0.01% to 0.5%. You have the option to move the money into higher yielding money-market funds, but many investors don’t bother to do so out of inertia—or don’t realize they need to do this—and often miss out on hundreds of dollars in annual interest income. Two exceptions: Fidelity automatically sweeps cash for retirement accounts and new brokerage accounts into its Government Money Market Fund, recently yielding 1.24%. Vanguard’s default sweep account, the Federal Money Market Fund, has the highest yield, recently 1.7%.
Just because you pay no commission to trade doesn’t mean you should go wild. The money you save on commissions may not help much if you start making riskier or more frequent bets and/or disregard other costs of trading such as taxes. Studies show that investors who frequently move in and out of investments underperform buy-and-hold investors who regularly rebalance.
