~ Industry White Paper shows that investors are paying quite dearly for “free” trading due to hidden industry practices by brokers that are more than subsidizing the costs of free trading, suggesting that paying commissions can be a better, more transparent, cost-effective and fiduciary approach
NEWTOWN SQUARE, Pa., June 17, 2020 /PRNewswire/ — TradingFront, an innovative technology and unified custodian solution for independent RIAs, announced today the release of new industry research that documents the lack of transparency around “commission-free” trading, and suggests that paying commissions for trades can be a more transparent, cost-effective and fiduciary approach for investors and their advisors.
The paper highlights three of the various ways brokers make hidden revenues that more than make up for the give-back in zero commissions for trading: 1) Revenue sharing arrangements with mutual funds, 2) the harvesting of client cash assets through bank sweep programs, and 3) the increasing prevalence of so-called “payment for order flow,” whereby brokerages sell their client’s orders to institutional traders. These represent a few of the methods brokers use to benefit financially, without completely disclosing those practices to clients. The paper argues investors should be aware that “free trading” is most certainly not free.
“These non-transparent practices are a wake-up call to the industry and suggest that subsidizing free trading in this way opens up the industry to further negative headlines for misleading claims, and potential regulatory action, as well as potential class-action lawsuits. In a world where fees are increasingly hidden, we suggest RIAs go in the opposite direction, and offer more transparency.” said Yang Xu, CEO of TradingFront, and author of the white paper.
TradingFront believes that the industry should take a stronger position against “free trading,” as it is clear that investors are paying, sometimes quite dearly, for that free trading. The white paper sheds light on trends and industry practices, and provides the counter case to the conventional wisdom that commission-free trading is always the best approach. It argues that, instead, commission-based pricing for brokerage services is more direct and transparent, so that investors know exactly what services they are receiving and paying for, consistent with a fiduciary model that should be embraced by the financial services’ industry leaders – independent registered investment advisors (RIAs).
According to the white paper, one significant advantage for RIAs and their clients of paying commissions is complete pricing transparency.
“The key is to have a clear and compelling message about how your fiduciary model requires that you act in your clients’ best interest. By weighting these three key factors of how brokers make hidden profits:
- Revenue Sharing
- Cash Spread Harvesting
- Payment for Order Flow
against the ‘free‘ trading offers, and often it makes better economic sense for clients to work with a low-cost, transparent platform that does charge trading commissions.”
To provide further perspective on the scope of these hidden revenue streams that are subsidizing “free trading,” TradingFront’s white paper reveals that brokers’ revenue sharing with mutual funds via “shelf space” payments can run into the hundreds of thousands of dollars per mutual fund. Cash spread harvesting is also widespread. For instance, the industry’s largest broker, Schwab, earns more than two-thirds of its revenues from interest rate spreads. In addition, payment-for-order-flow revenues can exceed hundreds of millions of dollars per broker. The paper makes the case that these practices illustrate the magnitude of these non-transparent pricing practices.
To access the white paper, please visit www.tradingfront.com/whitepapers.
TradingFront is a white-label, customizable technology platform built expressly for RIAs. Our feature-rich, cost-effective solution helps RIAs efficiently run and grow their business and delivers a world-class experience to their clients. Designed by RIA industry veterans, technologists and partnered with Interactive Brokers, TradingFront is on the leading edge of the future of wealth management technology.