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Investors Win in Broker Price War, But Tread Carefully

March 3, 2017
Brokers, Investing
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When brokers battle, consumers win. That’s the takeaway from a war that began in February, which saw online firms dropping their commissions in quick succession.

It felt like an auction for investor dollars: On Feb. 28, Fidelity Investments cut its long-standing $7.95 stock and ETF trading commission to $4.95. Charles Schwab — which had already reduced its commission by $2 earlier this year — quickly stepped up to match Fidelity. TD Ameritrade then chimed in, announcing it will lower its commission to $6.95 from $9.99 on March 6, and E-Trade followed up with a planned March 13 price drop from $9.99 to $6.95, as well as reducing its active trader rate to $4.95.

Investors clearly have the upper hand here, but that doesn’t necessarily mean they should jump ship to the cheapest option of the moment.

To many, the commission war is a sideshow

If you’re trading stocks several times a day, or even several times a week, these commission cuts make a difference — $2 or $3 on either side of a trade adds up quickly for those who trade frequently.

» MORE: How to buy stocks

But only about 14% of U.S. families invest directly in stocks, according to the most recent data from the Federal Reserve. If your primary investment goal is retirement, and you’re investing for that through a 401(k) or IRA, there’s a good chance your account is built with mutual funds, index funds or exchange-traded funds.

Commissions don’t apply to mutual funds or index funds. ETFs trade like a stock, so they are subject to a broker’s stock commission — but many brokers, including all three of the ones currently locked in this battle, have a lengthy list of commission-free ETFs.

That means you very well may be paying no transaction fees, and a cut to commissions won’t change that. What does affect you: changes to the expense ratios of those funds, which are also battling their way to zero. On Feb. 24, Vanguard cut fees on 68 of its mutual fund and ETF shares, its third such cut in three months. Charles Schwab initiated lower expenses on several of its funds earlier in the month, and Fidelity has also reduced fund expenses within the last year.

» MORE: Find the best broker for you with NerdWallet’s brokerage search tool

Weigh the pros and cons of chasing lower costs

If you’re already investing through a firm that’s recently lowered its prices, embrace that: You’re now getting a permanent discount on the same platform, investment selection, research and execution.

But what if your broker has sat out this race — or played along but trailed behind, like TD Ameritrade?

It feels as if a new commission ceiling has been set — Charles Schwab, Fidelity, TD Ameritrade and E-Trade are some of the best brokers in the business, so there’s little reason for investors to pay more than $7 per trade now. Likewise, if it’s possible to buy an index fund that tracks the Standard & Poor’s 500 for less than 0.05%, there’s little reason to pay more.

But while fees absolutely matter, small price changes here and there aren’t necessarily a reason to jump ship. For one thing, it’s entirely possible we’ve yet to hit the bottom: TD Ameritrade and E-Trade have signaled they plan to keep pricing slightly above the competition, but some brokers may be willing to go even lower. We could see commissions dip below $4.95, as there are already brokers more competitively priced, including the app Robinhood, which offers free trading.

Beyond that, commissions and expense ratios aren’t the only cost consideration — switching brokers costs money. There’s typically a fee to close out and transfer your account, which can run $50 to $75 or more. You may also have to sell your positions, which adds transaction costs — and potentially capital gains — to the tally.

Costs are just one item on a long list of factors you should consider when choosing an online broker. Commissions are important, yes, especially to active, frequent traders. But so are account fees, trade execution, research, investment selection, the broker’s platform, tools and customer service.

As with all things investing, no reaction is often the best reaction. Most investors would be wise to wait this war out.

» MORE: How to choose an investment account

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: [email protected]. Twitter: @arioshea.