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What Zero-Fee Trading Tells Us About the Post-Fund Future
10 / 23 / 2019
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Hint: it’s closer than you think.

Five large brokers eliminated commissions on online stock trades in early October 2019. Register for our webinar on what this change means for direct indexing.

RIP trade commissions. Earlier this month, Schwab, ETrade, Interactive Brokers and Fidelity’s announcements to drop most trading commission fees to $0 hit like a tidal wave. We predicted this dynamic and have built our post-fund thesis on declining trading costs. We just didn’t know it would happen so fast! Here’s why it matters.

Historically, investors purchased index funds because they offered unparalleled diversification without the hassle of having to buy 500 individual stocks. It was much simpler to buy a pre-packaged index fund, and pay some fees for the convenience.  These ETFs essentially offered a snapshot of investor preferences and market information, frozen from trading individual stocks within the basket by fees. 

But with the advent of trade-executing technology and aggressive marketing by FinTechs over the past decade, a price war with industry incumbents has steadily driven trade-based fees into the ground. This seismic shift in what is valued and paid for in trading is forcing many in the investment industry to reframe their customer relationships. 

Indeed, while thousands of slightly-differentiated ETFs have proliferated, many in response to investors’ growing demand for investing with their values, few of these funds actually cover their costs. The mathematical justification for funds has eroded: the post-fund future has arrived. 

As we’ve argued in the past, it’s clear the future of personalized investment is not in flooding the market with more static bundles of stocks.  It’s in generating bespoke combinations that evolve with their investors, at low cost. 

Enter Dynamic Custom Indices (DCIs). Advisors can now instantly generate custom portfolios for clients that evolve with market signals, for example in response to new environmental, social and governance (ESG) market data. With zero-fee trades, such DCIs can transact infinitely. Clients pay their usual management fee, but no longer pay for individual trades.   

Of course, a customized index-tracking investment strategy doesn’t guarantee higher returns than a standard index-tracking investment strategy– nor are the upsides of DCIs worthwhile without a powerful software-based management and trading system to automate the process.

But for RIAs realizing the opportunities of customization, the rationale for an index fund feels dated. The question is no longer why should you switch to direct indexing, but rather, why would you stay in a fund?

The kicker: the change in trading fees across the board means advisors don’t have to switch from their preferred custodian. They can stick with their current provider and benefit from OpenInvest’s DCI technology.  That’s less time on back-office work and more time delivering value to clients.  Welcome to the post-fund future.   

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Investment in securities involves the risk of loss. Past performance is no guarantee of future returns. One cannot invest directly in an Index. Any opinions, estimates and forecasts offered in this document constitute judgment as of the date of the materials and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information contained in this document to be reliable but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only and it is not intended to provide and should not be relied on for investment, accounting, legal or tax advice.

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