May 31, 2020

Yes, You Can Get Free Trading. But There’s Often a Catch.

And free trades might not even be worth that much to you. Few enlightened investors are chasing hot stocks anymore; they’re buying and holding a diversified mix of index funds to help them pay for big life events like college and retirement. (Index funds are basic mutual funds that track wide swaths of the stock market.)

The big brokerage firms know this, and many of them have followed the lead of smaller, upstart firms like Betterment, which are known as roboadvisers, to provide mass-manufactured digital portfolios that operate largely on autopilot, and cost very little.

Schwab introduced its own digital investment service in 2015, and tried to one-up its competitors by making its service “free.” But there was a catch.

Many roboadvisers typically charge an overall fee — say roughly 0.30 to 0.50 percent of a customer’s assets annually — along with the (usually very low) underlying cost of the investments. Schwab omitted that overall fee, charging just the cost of the underlying funds.

But investors must keep anywhere from 6 percent to 29 percent of their portfolio in cash, which currently pays 0.45 percent, according to a Schwab spokesman. Schwab earns more money the bigger the allocation is.

In 2017, Schwab added a premium service for those with at least $25,000 in assets, which includes help from a human certified financial planner: That now costs $30 a month, plus a one-time initial $300 fee, along with the costs of investments. And it also requires the high cash component.

Even with a commission-free trading structure, said Greg McBride, chief financial analyst at, “there are other revenue levers behind the scenes that brokers can pull.”

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