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Personal Finance

TD Ameritrade Jumps Into Price War With Fidelity and Schwab

Investors want their services cheap or free these days, whether it’s an adviser, a mutual fund, or a trade.

Another day, another clash of the brokers' broadswords. 

One day after Fidelity Investments announced a fee cut for individual investors, and 12 hours after Charles Schwab Corp. followed suit, TD Ameritrade Holding Corp. waded into the fray. Late Tuesday night, the company said it had lowered commissions on standard online retail trading to $6.95, from $9.99, a trade. The lower rate also applies to options trades, though the company maintained its 0.75 cent fee on individual contracts.

The rates don't match those of its rivals. Fidelity and Schwab lowered retail commissions on online trades to $4.95, from $7.95 and $6.95, respectively, and moved from a fee of 0.75 cents per individual options contract to 0.65 cents. Fidelity is the nation's largest online retail brokerage, with 17.9 million accounts and $1.7 trillion in client assets as of Dec. 31, 2016.

"There is an effort underway in our industry to redefine value," Tim Hockey, TD Ameritrade's chief executive officer, said in a statement about the lower commissions. "While some are leading with price, our clients tell us it's much more than that."

After detailing the customer experience the firm offers clients, however, Hockey said that "with our pending acquisition of Scottrade on the horizon, we have a unique opportunity to enhance that experience in the future with lower pricing for all of our clients."

Vanguard Group on Friday lowered expense ratios for 68 ETFs and mutual funds. That was the third set of cuts by the company since December. State Street Corp. and BlackRock Inc. had lowered their ETF fees earlier in the year.

The moves fit into a larger trend, as the big brokerage firms vie for market share. "We're in an era where people are demanding near-free everything, whether it's for an adviser, mutual fund, ETF, or on trades," Bloomberg Intelligence analyst Eric Balchunas said. "It's made it into everybody's brain that what they pay in fees will be a big determinant of what their return is, and that it's something they can control."  

Sometimes the arms race over basis points (100 of them in a percentage point) and half basis points can get "silly," said Dan Wiener, editor of the Independent Adviser for Vanguard Investors. On Friday, for example, Fidelity ran ads in major newspapers comparing expense ratios on some of its exchange-traded funds (ETFs) and index funds with those of similar products at Vanguard Group. One ad showed a 0.045 percent expense ratio on a Fidelity S&P 500 Index fund next to the 0.05 percent charge for a similar Vanguard fund.

Fidelity soon found it had lost those bragging rights. New fund reports from Vanguard showed a 0.04 percent expense ratio for its S&P 500 fund, Wiener wrote in an e-mail to clients. 1

"One basis point on a $10,000 investment adds up to a whopping $1," Wiener observed.

One upstart firm took advantage of the fee-cutting scrum to take a shot at the giants of the industry. Commission-free online brokerage Robinhood said in a statement, "We're happy to see Fidelity lower its commission fees. Ideally, they would have eliminated them altogether, along with the required $2,500 account minimum." 

Fidelity also lowered rates for investors who trade on margin, with money borrowed from their broker. The new rates span five tiers of assets, instead of six, and start at 8.325 percent for a balance of up to $24,999. Under the eliminated tier, you were charged 8.825 percent for balances up to $9,999. The rate on balances from $50,000 to $99,999 fell, from 7.235 percent to 6.875  percent, and on balances from $100,000 to $499,999, from 6.825 percent to 6.575 percent.

Schwab's margin rates 2 remain higher than those at Fidelity, and TD Ameritrade's 3 top Schwab's.

Fidelity hopes young investors, among others, will be attracted to its lower fees. "Millennials are starting to come into the market, and they represent a huge customer segment for the future," Ram Subramaniam, president of Fidelity's retail brokerage business, said. Last year, the company launched Fidelity Go, a robo-adviser catering to "digital first" investors.

Millennials are living in a world in which the damage that high fees can do to a retirement portfolio is widely discussed. A U.S. Department of Labor rule requiring firms that handle retirement accounts to act as fiduciaries—advisers who must put clients' interests before their own when recommending investments—was to go into effect on April 10. The Trump administration has ordered the Department of Labor to reconsider the rule. Its fate is now uncertain.

All the more reason to make sure your adviser is a fiduciary, bound to watch out for you when it comes to high fees and other perils of investing.

  1. As Vanguard noted in a press release about the funds, "expense ratios represent the actual operating expenses for the prior fiscal year...meaning investors have already realized these savings by the time they are reported."

  2. The rates at Schwab are 8.5 percent for margin debit balances up to $24,999, 8 percent on balances from $25,000 to $49,999, 7 percent on balances from $50,000 to $99,999, and 6.875 percent on balances ranging from $100,000 to $249,999. The rate is 6.75 percent for balances from $250,000 to $999,999; 6.25 percent for balances from $1 million to just under $2.5 million; and 6 percent for debit balances of $2.5 million or more. 

  3. At TD Ameritrade, margin rates start at 9.25 percent for balances under $10,000, then fall to 9 percent for balances from $10,000 to $24,999. The rate is 8.75 percent on balances from $25,000 to $49,999, 7.75 percent between $50,000 and $99,999, and 7.5 percent on balances between $100,000 and $249,999. For margin balances from $250,000 to $999,999 the rate is 7.25 percent, and 6.5 percent on balances above $999,999. 

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