2019 Best Online Broker Awards
Investing Brokers
Chuck Schwab on Zero Commissions and the Origins of the Discount Broker
The original discount broker on why zero commissions were inevitable
By Caleb Silver
When Charles Schwab announced that it would cut trading commissions to zero on October 1st, 2019, it created a seismic shift in the online broker industry. Schwab's competitors soon followed, upending the economics of the retail brokerage industry that relied on trading commissions as a source of profits for centuries. But for Schwab, the announcement was the culmination of the revolution that Chuck Schwab started in the early days of founding his eponymous firm.
I recently had the opportunity to interview Chuck Schwab to celebrate the release of his memoir, Invested: Changing Forever the Way Americans Invest, which coincided with the announcement of the elimination of trading fees.
Charles Schwab Interview
Since the late 1970's, Schwab and its competitors have been slowly lowering fees to entice more retail investors into the market. It worked. Schwab (the company) is now a multidimensional financial services firm that boast $3.7 trillion in assets with 18 million customers around the world. While the elimination of trading fees costs the company between $80 million and $100 million in revenue per year, the original discount broker has found other ways of earning a profit since opening for business in 1973.
Chuck was one of the pioneers of low cost trading. In 1975, he took notice that the Securities Acts Amendments of 1975 put an end to fixed trade commissions, which were were as high as $80 for stocks. The major expense had relegated investing to institutions and well-heeled investors only, but with fixed commissions now headed for the history books, Chuck Schwab, and a few other entrepreneurs, realized this opened the door for individual investors to really participate in the stock market and build their wealth.
Courtesy Schwab.com.
"We probably didn't know it at the time, but May 1st 1975 was a watershed moment for individual investors and for the markets," said Schwab in 2005. "With the sudden arrival of negotiated stock trades that were less than half the cost they had been, a major barrier to investing went away for the average American."
Nearly 15 years later, Schwab, now Chairman of his firm, reiterated his career-long quest to eliminate trading commission for retail investors. "I always wanted to take commissions out of the equation," he told me when I interviewed him recently in New York. "They are an encumbrance on bringing people to invest."
Vanguard Finally Joins Commission-Free Trading Movement
Who Wins a Brokerage Price War?
Charles Schwab vs. E*TRADE
Key Trends That Reshaped the Financial Services Industry in 2019
Charles Schwab's Main Competitors
Charles Schwab vs. TD Ameritrade
May Day Definition and History
May Day refers to May 1, 1975, when brokerages changed from a fixed commission for securities transactions to a negotiated one.
An Inside Look at Brokerage Accounts
A brokerage account is an arrangement that allows an investor to deposit funds and place investment orders with a licensed brokerage firm.
A broker is an individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor.
What Is Regulation Best Interest (BI)?
Regulation Best Interest is an SEC rule that requires broker-dealers to only recommend financial products to their customers that are in their best interests.
How Brokerage Companies Work
A brokerage company's main responsibility is to be an intermediary that puts buyers and sellers together in order to facilitate a transaction.
Registered Representative (RR)
A registered representative (RR) is a person who works for a brokerage company and serves as a representative for clients trading investment products such as stocks, bonds and mutual funds.