In the summer of 2018, Vanguard announced it would eliminate commissions on most exchange traded funds, including many sold by its competitors. This latest move expands that to stocks and options trading.
The move follows announcements by other major brokerages in the fall to eliminate commissions for ETFs, stocks and options, including Charles Schwab, TD Ameritrade, E*Trade and Fidelity.
Those moves had many advisors questioning how the firms were going to make up the revenue lost. Schwab, for instance, makes up the revenue on selling order flow and net interest revenue from the cash it holds in client accounts.
In its announcement, Vanguard said it does not sell order flow, and its brokerage clients are automatically swept into the Vanguard Federal Money Market Fund, with a current yield of 1.55% and an expense ratio of 11 basis points.
Brokerage firms typically place the cash portion of a client’s portfolio into a so-called “sweep” account, usually with an affiliated bank, that earns the client very little, with yields hovering around .04% to .13% at the major brokerages for small amounts of cash.
Fidelity has had a long-standing policy of automatically placing excess client cash in retail brokerage and retirement accounts into its government money market fund.
"As we move to an environment in which 'zeros' dominate the headlines and explicit fees become implicit, we encourage investors to look more deeply at the total cost picture," said Karin Risi, managing director of Vanguard’s retail investor group. “Vanguard remains a vocal proponent of clear and transparent fee disclosure."
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