Online Equity Trading
More Green Stuff e-Letter: Issue # 4
December 1, 2006
Online Equity Trading: True Value For Free Or The Ultimate Free Lunch?
Alexander Green
Oxford Club Investment Director
Two weeks ago I was in New York city for our annual Oxford Club chapter meeting. My 9-year-old daughter Hannah - a fixture at these meetings for the past three years - came along to keep me company.
She’s a city girl, so we spent the weekend painting the town red. When you’re 9, that means ice skating at Rockefeller Center, a carriage ride through Central Park, a double-decker bus tour of the city, a trip to the American Museum of Natural History (for dinosaurs and mummies!), and a couple of Broadway shows.
Anyway, we were walking back to our hotel through Times Square one night as an enormous red and white neon sign kept flashing the same message to us from Bank of America. “$0 Online Equity Trades. It’s our way of saying thanks.” Hmmm. That got me thinking. So, let’s take a look at the true value of free online equity trading in this issue…
Should You “Buy” Into Free Online Equity Trading?
The late Milton Friedman, free-market economist and Nobel laureate, was famous for saying “There’s no such thing as a free lunch.” Everything, he assured us, has its price.
- No-load funds charge management fees and other expenses.
- Free e-letters like this one often contain advertising.
- And Lord knows how many billions of dollars worth of Orlando timeshares have been sold to folks who showed up simply to claim their “two free tickets to Disney.”
So what are we to make of Bank of America’s recent, highly-publicized zero broker commissions promotion? Is this free online trading program a genuinely good deal… or just a come on?
It’s both. Here’s how it works.
How to Determine the Cost of “Free” Online Equity Trading
If you keep a combined balance of $25,000 or more across your Bank of America checking accounts, savings accounts and CDs, you can get as many as 30 commission-free online equity trades per month.
This may be a good deal for you, provided you’re paying more than that (who isn’t?) and you’re an active trader.
But can Bank of America make money this way? Let me count the ways.
Commission rates have been coming down ever since fixed brokerage commissions were abolished in 1975. (Not only at the big wire houses, but at the discounters, too.) As a result, banks and brokerage firms have found many other ways to skin a cat.
For instance, of the $1.3 billion in revenue Schwab booked last quarter, only 13% came from trading. The rest was made from asset management, the distribution of mutual fund distributions (including no-loads) and banking.
Should you consider Bank of America’s latest offer? Well… remember, Bank of America is not asking you to have a $25,000 brokerage account balance in order to get these free equity trades. It’s asking you to have a $25,000 bank balance. There’s a big difference.
How to Determine the Value of “No Cost” Equity Trading
I have a bank account with Bank of America now, so I know the interest rates they pay. You may not want to leave $25,000 in their interest checking, since it pays next to nothing. If you did, you would be forfeiting the $1,375 a year you could earn in a virtually “risk-free” money market account.
Of course, you could keep that $25,000 in a Bank of America money market or CD. But, as you might expect, their current rates are not even close to the most competitive rates nationwide. So you’d still give up several hundred dollars a year. (There goes that free lunch.)
Aside from the free trades, however, there are some important conveniences to consider. The biggest is consolidation. Your self-direct brokerage account comes with the following:
- Free online banking
- Unlimited bill paying
- Overdraft protection from a linked savings account or credit card, and
- 24/7 access to your funds through the country’s largest bank-owned ATM network.
You can also choose from a diverse selection of mutual funds - and use your Bank of America brokerage to set up a traditional, Roth or Rollover IRA.
So is their new zero-commission online account worth it? It all depends how much you value convenience, savings, consolidation - and, of course, the level of service your former financial advisor would provide.
For a more complete comparison, feel free to visit Bank of America’s website.
Best Regards,
Alexander Green
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More on Free Online Equity Trading:
- Currently, Bank of America’s Zero Cost Online Equity Trading service is only available in the following 17 states (and Washington DC): AL, CT, DE, FL, GA, MD, MA, ME, NH, NJ, NY, NC, PA, RI, SC, VE, VA (and the District of Columbia).
- Bank of America’s Zero Cost Online Equity Trading offer only applies to stocks and exchange-traded funds [ETFs]). Standard commissions apply for all other trades.
- If you make more than 30 trades during a single month, you’ll pay Bank of America’s standard (non-discount) price on the extra moves.
- For joint accounts, the 30 trade limit applies to only the primary account owner.
Wit’s End
“The old believe everything, the middle-aged suspect everything, the young know everything.”
~ Oscar Wilde
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