FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 15, 2019

Discount Brokers Slash Stock Commissions To Zero – Why?         

IN THIS ISSUE:

1. It May be “Game Over” For Stock Trading Commissions

2. How Big Brokers Plan to Increase Profits With Zero Commissions

3. Why the Dem’s So-Called “Wealth Tax” is a Really Bad Idea

4. A Wealth Tax is an Unprecedented Invasion of Privacy

Overview

Over the last couple of weeks, most large discount brokers, and even Fidelity Investments, announced they were slashing stock trading commissions and other fees to zero. This news surprised many in the financial media. I’ll explain why they’re doing it as we go along today.

In the second half of today’s letter, I’ll explain why the so-called “wealth tax” proposed by the Democrats is a really bad idea. Not only is it a bad idea for the economy, but it would be an unprecedented invasion of our privacy – even if you are not wealthy. You really need to know about this. Let’s jump in.

It May be “Game Over” For Stock Trading Commissions

In a surprise move in the first week of this month, several large discount brokers announced they were cutting online stock trading commissions to zero – including Charles Schwab, TD Ameritrade, E-Trade Financial and Vanguard.

Interactive Brokers Group, another large discount broker, actually started the trend when it announced in late September that it would be rolling out a new “lite” version of its trading platform with free, unlimited trading for US equities and certain other products.

Then on Thursday of last week, Fidelity Investments announced it was slashing online trading commissions to zero effective on November 4, and that includes zero fees for exchange-traded funds (ETFs) and options transactions, it said. Before Thursday’s move, Fidelity charged $4.95 for online stock trades. Fidelity’s online brokerage has 21.8 million accounts and $2.3 trillion in assets held for retail customers.

The move to zero stock trading commissions will mean a significant revenue loss for these companies, and their stocks were hammered just after the announcements. But as I will explain below, the companies are betting they’ll make up for those losses as the money they have on deposit grows, perhaps significantly.

The fast-fading fees are another round in an ongoing race to shrink broker fees, and Fidelity represents one of the last major holdouts among the behemoths of the brokerage business to go zero-commission. It remains to be seen if giants like Merrill Lynch, Wells Fargo and Morgan Stanley follow suit.

Reactions to the announcements to slash trading commission to zero were met with generally favorable reactions in the financial media and are considered a big win for retail investors. However, there were also concerns that zero commissions might result in investors overtrading their accounts to their detriment. We’ll just have to see how that goes.

How Big Brokers Plan to Increase Profits With Zero Commissions

Basically, the big brokers believe their new offers of zero commissions will result in a lot of new assets flowing their way. If true, they believe they will make up for lost profits by increasing fees they earn on excess cash and other services. Let’s take Charles Schwab as an example.

In Schwab’s case, it will continue to make money mostly in the way it already makes the majority of its revenues: by taking cash deposits from its accountholders, and paying out less interest on those cash balances than it earns from whatever it does with the excess cash.

Big brokers like Schwab only have to retain a percentage of the assets they have on deposit from customers in cash on-hand. The rest they can loan out to other institutions who will pay higher rates than Schwab pays out to its depositors – in the same way banks do.

Schwab pays accountholders a little bit of interest on their cash balances – 0.27% on average in 2018.  At the same time, it earns a lot more interest by lending those excess balances out – 2.57% on average, again in 2018. That’s a very nice spread!

By making its brokerage product more attractive by offering zero-fee trades, they assume this will induce customers to bring more business to Schwab, including more cash balances, which Schwab can earn a net interest margin gain. Other large brokerages use similar transactions for their excess balances.

So, the bottom line is: Schwab, TD Ameritrade and the others can give investors free trades because they expect to make money by taking their excess cash deposits and earning significantly more than they are paying customers.

This is great news for our clients who have money with our recommended Advisors who use TD Ameritrade and Fidelity.

At the end of the day, this is a win-win so long as you’re not leaving too much of your wealth with them in cash, and you’re not overtrading your account because commissions are free. We’ll see what happens – I’ll keep you posted.

Why the Dem’s So-Called “Wealth Tax” is a Really Bad Idea

Most if not all of the potential Democratic Party challengers to President Donald Trump in the 2020 election are pushing controversial proposals to tax the rich. They claim the money would pay for healthcare for all, the creation of a federal childcare program, increasing tax credits for poor or middle-class households, action on climate change and other social programs. That all sounds good as most liberal tax-and-spend proposals do on paper.

Yet in the space below, I will argue that a ‘wealth tax’ is a really bad idea for the economy and entrepreneurism in general. Even worse, it would be an unprecedented invasion of privacy. I don’t believe most supporters of a wealth tax have considered the privacy aspects of having to report to the government details on ALL of the assets they own. That’s really scary!

Senator Elizabeth Warren, for example, is proposing a 2% annual tax on household wealth in excess of $50 million, which would rise to 3% on every dollar of wealth one owns above $1 billion.  Most other Dem candidates are now proposing something similar.

The idea of taxing wealth on those who have net worths of $50 million to $1 billion or more might not sound so egregious on the surface, but the implications for a free-market economy and the American Dream are chilling. Most countries that have imposed wealth taxes in the past have abandoned them. Yet according to recent surveys, a majority of Americans support the idea:

This chart is particularly disturbing in that it suggests over 60% of Americans favor a wealth tax. As usual, it does not reveal how the question was asked, or how biased it may have been. But even if the poll question was unbiased, and even if the percentage favoring a wealth tax was just 50%, we should be very concerned. Here are some reasons why.

First, $2.75 trillion in additional taxes over 10 years is simply not that much money. With budget deficits projected to top $1 trillion per year for at least the next decade, the wealth tax will come nowhere near balancing the budget, much less paying for the dramatically expanded social programs noted above.

Second, wealthy people and their accountants find ways to reduce or avoid paying such taxes. This has been true throughout history. This explains why most countries that have implemented wealth taxes have abandoned them – just take a look at Europe.

And third, a wealth tax discourages successful people from accumulating more wealth. They often stop expanding their businesses, stop creating more jobs and frequently relocate their operations to other countries where the tax burden is less egregious. This is exactly why President Trump slashed the US corporate tax rate, which was among the highest in the world.

A Wealth Tax is an Unprecedented Invasion of Privacy

Far worse, in my opinion, than the damage it would do to the economy, a wealth tax would be a major invasion of our privacy. I don’t think most liberals promoting the idea have thought this through. Wealth taxes would be an unprecedented assault on people’s privacy that would make the privacy transgressions of giants like Google, Facebook and others look like small, insignificant activities.

Think about this: Government bureaucrats would have the right to demand lists of all your assets – as well as the right to examine your home(s), properties, brokerage accounts, bank accounts, storage facilities and everything else – to determine if you have crossed the wealth tax threshold. They would also have access to the records of everything you have bought or sold, for the same purpose.

I believe most Americans would vehemently oppose a wealth tax if they knew what an invasion of their privacy it would be – because even if you’re not wealthy, you have to prove it!

Here’s another aspect of a wealth tax that I’ll bet the liberals promoting it haven’t considered. A wealth tax would mean less wealth to tax. Taxing the mere possession of property and securities, by definition, makes them less valuable. Many people would have to sell assets to pay for the tax on what they own.

Likewise, the value of an asset, especially a financial one, can be heavily influenced by the health of the economy. The radical tax and regulatory schemes proposed by the Democrats would slow the economy to a crawl again.

Despite thousands of years of experience, these political hacks cavalierly assume that costly, burdensome rules and higher taxes don’t affect people’s ability to do business. Yet the fact is, they do! Americans of all wealth levels need to understand this.

Best regards,

Gary D. Halbert

SPECIAL ARTICLES

The End of Stock Trading Commissions is Near

Why the “Wealth Tax” Has Been Abandoned All Over the World

Gary's Between the Lines Blog Democrats Are Wrong - Middle Class Incomes Are Surging

 

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