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Who’s benefiting most from commission-free trades?

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As discount brokerage giants embrace the race to zero commissions, the biggest winners so far have undoubtedly been retail investors. But, clients will also gain advantages as their advisors find new ways to manage portfolios — without having to worry about racking up commissions.

The move to commission-free trades will have longer term effects on the strategies and products advisors use to help clients reach their investing goals. Cheaper trades mean advisors will likely spend more time rebalancing portfolios and finding greater tax advantages through strategies like tax-loss harvesting, experts say.

It could also be a boon for technology providers, like turn-key asset managments platforms, that provide advisors access to portfolio managment tools, like automated rebalancing.

“Cost has been effectively taken off the table,” says Alois Pirker, research director at Aite Group. “You can now do a lot more tactically.”

According to the Tax Policy Center, U.S. investors reported more than $20 billion in taxable net losses in 2017, the most recent tax year that data is available. Total taxable gains totaled more than $634 billion during the same period.

Trade frequency will go up, Pirker says, and there will be more indexing and tax-loss harvesting. “It’s an absolute catalyst,” he says.

While tax-loss harvesting is widely used in the industry and generally marketed as a value add by advisors, the usefulness largely depends on a multitude of market conditions and the specifics of clients' investing needs. (The strategy takes losses in an investment account to offset the taxes owed on capital gains. The empirical data is still up for debate.)

However, most experts agree that tax-loss harvesting can be beneficial for the right clients in specific market conditions.

For example, $4 billion in unrealized losses are not being harvested across more than 150,000 Orion Advisor Solutions accounts at the major custodians, according to an Orion study. The reason?

High trading costs.

Advisors would have accrued $250 million in fees to execute those trades, according to the study. The firm assumed a $400 cost per optimization, which was rebalanced quarterly.

One long-term winner could be direct indexing strategies, says William Trout, a senior analyst at Celent. Clients may look to invest in direct indexing strategies that trade in a customized basket of securities instead of more traditional products like ETFs.

“Why have a one-size-fits-all ETF if you can customize market exposure to your needs more precisely, and trade individual securities free of cost?” Trout says.

The predicted uptick in trading isn’t necessarily good for client outcomes, Trout says, at least in regard to achieving long-term goals. “Keep in mind that commissions have been in steady decline, and for the most part, don’t really affect the overall growth of the portfolio or long-term returns.”

While advisors may switch from index-tracking passive products to more active investment strategies, the real winners may be large tech platforms, he says. “The real beneficiaries will be the purveyors of technology like TAMPs that are able to rebalance and optimize portfolios to individuals’ tax needs,” Trout says.

The race to zero has altered the brokerage landscape and will continue to affect the products and strategies advisors ultimately use to manage portfolios. One certainty is that cheaper trades give advisors more options when managing portfolios — and the ability to show greater value to clients.

“With trading costs eliminated, the ability to build to individual requirements and exposure levels around taxes, social restrictions and concentrated positions will become all the more important,” Trout says.

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