The Balance of Affordability between transfer agents and brokers has shifted again.
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What is ‘The Balance of Affordability’? It is a term I use to discuss which option is most affordable when more than one way exists to obtain some good or service.
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For a long time, it was more affordable to use a security’s transfer agent to purchase shares than to use a broker. (This assumes there was the option to buy via the transfer agent.) However it appears things have shifted again.
What’s with the Transfer Agents?
Several changes have caused the shift. Firstly, companies seem to want to reduce the costs they pay transfer agents, so lower prices means transfer agents are now passing costs to the shareowners. Companies, which in the past were eager for customers to buy their shares and so did not charge for stock purchases via transfer agent, now charge fees. Dividend reinvestment at many transfer agent now incurs a flat fee plus per share charge. And of course there is a fee to sell.
What’s with the Brokers?
At the same time, the rise of no-cost brokers who now do not charge commission for purchasing U.S.-based securittes, has driven down prices in that industry. In addition, many of these brokers now do not charge any fees for dividend reinvestment. So essentially, when buying stock costs nothing more than the price of the stock, and dividend reinvestment incurs no charge, then it is easy to say ‘the price is right.’
Which Direction?
So, the combination of both situations directs us to consider that if one is starting their financial independence journey now, it would probably be less expensive in many cases to go the no-cost broker route compared to the transfer agent route. Since the fees charged by transfer agents vary by company, there is no blanket statement that covers all cases. In addition, there is no crystal ball about future costs.
What It Means
The rise of no-cost brokers means that these brokers need to find other sources of revenue. Losing a major source of income dictates a change in orientation, and not all changes are better for the customer. While automation of processes is a driver of lower costs, there is some limit to how much automated processes can lower costs. These brokers typically will charge higher fees for other services, even if commissions are zero. So it is advantageous to investigate a broker’s full fee structure before choosing one.
The Future or the Past?
The trend of no-fee brokers may or may not survive long term. A few years ago, one early no-fee broker (Loyal3) did not. It was purchased by a second broker whose plan was to institute a monthly fee just to maintain an account. There was a mad scramble to transfer assets elsewhere before the deadline. As a result, it pays to pay attention.
On The Other Hand
While some of the first no-cost brokers were small start-ups, the trend has moved to some large and established institutions. As examples, both Fidelity and Charles Schwab now charge zero commissions for on-line trading of U.S.-based equities. Other companies followed suit.
Therefore…
It pays to make an informed decision where to invest one’s money. Keeping costs low has an outsized effect one one’s long-term wealth. The lower the costs, the more you get to keep.
How have you handled the trend to no-cost brokers? Let me know here.
The illustration of a mythical beast is from the 15th Century manuscript ‘Book of Hours’ currenty housed at he Yale University Beinecke Rare Book & Manuscript Library.
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