On Oct. 1, Charles Schwab & Co. announced that it would be reducing its commission rate for online trading for U.S. equities and exchange-traded funds (ETFs) from $4.95 to zero beginning with the start of trading on Oct. 7. Shortly after that announcement, TD Ameritrade announced its intentions to eliminate its commissions on the same types of securities. The following day, E-Trade announced its intentions to do the same thing.
It remains to be seen if the likes of Fidelity, Pershing, State Street, Royal Bank of Canada, TradePMR, and Interactive Brokers will follow suit for investment advisers. While Interactive Brokers introduced a light version of its platform that does not charge commissions, it is unclear whether that service is available for investment advisers and their clients.
What remains clear is that these announcements have legal and regulatory implications for most investment advisers. First, investment advisers that have negotiated asset-based pricing with their clients’ qualified custodian should review those agreements and consider whether those agreements result in achieving best execution for their clients. Second, investment advisers that sponsor or participate in wrap fee programs should review the implication of these announcements by their custodians. Lastly, investment advisers should more generally consider all of the effects of the recent news.
Asset-based pricing is precisely what it sounds like: a negotiated agreement between an investment adviser and one of its qualified custodians that its clients will pay a single, asset-based charge for trade execution instead of incurring commissions each time the investment adviser trades in the client’s account. Investment advisers who enter into these arrangements have made a calculated judgment that their clients participating in asset-based pricing will trade frequently and will benefit from pricing based on a percentage of the assets held in their account as opposed to the number of transactions that the investment adviser expects to make. This rate is a low-to-middle single digit basis point fee.
Given the news that certain qualified custodians are reducing their commission schedules on trading in U.S. equities and ETFs, investment advisers that maintain asset-based pricing arrangements should immediately review whether these arrangements make sense for their clients. If the bulk of their trades involve U.S. equities and ETFs, it would seem that these arrangements are not in keeping with their obligation to seek best execution.