Is “Free” Stock Trading Really Free?

Is “Free” Stock Trading Really Free?

 Press Release: On December 3rd, SC Public Radio Host interviewed Les Detterbeck. This message, that there is no ‘Free Lunch,’ is extremely important.

 Click here to listen to the audio, and or please read the transcript below.

Mike Switzer: Since 1975, when the U.S. Securities and Exchange Commission, SEC, deregulated stock broker commissions, rates have been falling. Recently several major discount firms have announced completely free stock trading, but our next guest says that you should beware of any offer of a free ‘lunch’. Les Detterbeck is a Chartered Financial Analyst in Charleston, South Carolina, and a member of the South Carolina chapter of the CFA society, we have him on the phone! Les, welcome back to the program.

Les Detterbeck: Thank you Mike it’s a pleasure to be here!

Mike Switzer: So let’s just dive right in. Do you have plenty of clients now who are taking advantage of this free lunch?

Les Detterbeck: Many of our clients use Schwab, in fact we use Schwab as our main custodian. The equity trades are now at zero, but Schwab and others have been offering Mutual Fund trades at zero for some time. To make the major announcement about stocks and exchange funds going to zero was a pretty major one in the industry, and we have been using that yes.

Mike Switzer: Are you expecting this to spread industry wide?

Les Detterbeck: Yes, we expect that it will. That’s what has been happening over the last decades as the cost of commissions went down from $50 to $20 dollars, then $10 dollars to $4.95, so it’s not a surprise that this area of income for the brokers for much of their business that the commissions are going to be down to zero.

Mike Switzer: Does this mean then that they are making money in other ways once they have you as a client, or are there hidden fees somewhere that you are paying and don’t realize?

Les Detterbeck: No, I don’t know that there are hidden fees but there are three basic sources of income from the brokerage firms. In the beginning 30, 40, even 50 years ago, the trade commissions were the majority of their income; now it’s a very small amount. The other area has been operating expense ratios that is on Mutual Funds that they trade. There are expenses included in there and there is a portion of that fee that brokers can obtain. The last major item would be in the area of uninvested cash, the cash that’s within brokerage accounts that is not invested in specific securities.

Mike Switzer: And so they are basically able to make enough then to drop trading costs for the consumer to zero?

Les Detterbeck: Yes, that’s exactly right. None of us can begrudge them the opportunity to make a profit. They’re doing a good job, we expect they need to make income, they’re just getting it from other sources these days.

Mike Switzer: So, is this going to stay in the discount broker arena, or spread to the full service brokerage firms?

Les Detterbeck: It’s spreading although it’s going slowly that way, Mike. Obviously the big name full service brokerages have people and have brands that people love causing them to stay with them. So, we have seen some of that but it may still be a while before that changes.

Mike Switzer: Now are the firms that are offering this putting any conditions in place, like you have to have this level of account investment $100,000? 1 Million?

Les Detterbeck: We are not aware that they have that. In fact the general idea, one of the main areas as I’ve mentioned, is the uninvested cash and Schwab, that we know so well, one of their business strategies to collect more deposits, for example. A portion of those deposits will likely be in cash and they can use and invest that cash to make money there, so I think it will be something they will look at obtaining deposits in whatever size those might be.

Mike Switzer: And so Les, it sounds like that managing the cash portion of one’s portfolio might be becoming more important?

Les Detterbeck: Most definitely! Certain people may have cash; 5, 6, 7, or 10% of their portfolios, and that money is not working for them. So if the balance of their portfolio is earning 10% a year for example, but 10% of the portfolio is sitting in cash, their return is 9% under those circumstances. The result should be that investors should look at maintaining a small amount of cash, 1-2%, stay invested, stay with an appropriate asset allocation, and make sure your money is working for you.

Mike Switzer:  Well Les, as always, thank you so much for your time.

Les Detterbeck: Thank you so much, Mike.

https://dwmgmt.com/

DWM 1Q16 Market Commentary: Are You Getting Enough Sleep?

satisfying sleep2It’s all perspective: If you had fallen into a deep sleep on December 31 and woken up March 31 and looked up your portfolio balance, it was like nothing really happened. Maybe up one or two percent. Decent start to the year…

But for those of us that woke up every day and are required to watch along closely, you know that 1Q16 was anything but tame.

January and the start of February were downright ugly for the stock markets with the Dow Jones having its worst start ever and the S&P500 torpedoing into correction status. But things turned on a dime in mid-February and markets rallied. The big catalysts being: monetary easing by central banks, firming of oil prices & other commodities, a healthy US labor market and a weakening dollar.

Let’s take a look at the scoreboard:

Equities: The MSCI AC World Equity Index registered +0.2%, essentially unchanged (or “unched” in trader lingo). Value lead growth for the first time in a while. In another show of turning tides, the S&P500 didn’t take top billing this time, up a modest +1.3%. Mid Cap stocks as represented by the S&P MidCap 400 Index fared quite well, up 3.8%. The equity markets abroad were rather mixed: more developed international equities had a rough showing, -3.0% as represented by the MSCI EAFE Index; while emerging markets proved to the big winner, up 5.0% as represented by the MSCI Emerging Markets Investable Market Index.

Alternatives: The big standout in alts: Gold – as represented by the iShares Gold Trust ETF, up 16.1% – had its best quarterly gain in three decades. Then again, some absolute return strategies were challenged by the whipsaw and fell into the red. In general, as a group, alternatives were also about “unched” using the Credit Suisse Liquid Alt Beta Index, -0.6%, as a proxy. More importantly, they played their role this quarter: They did a decent job protecting the first several weeks of the quarter when the equity markets were swooning. From empirical studies, we know that by minimizing the overall portfolio’s downside during times like these, the portfolio can sooner recover and achieve new highs that much quicker.

Fixed Income: We saved the strongest asset class on the quarter for last. Fixed income powered by dovish central bankers and declining yields had a pretty remarkable quarter. The Barclays US Aggregate Bond Index, the most popular bond benchmark, was up 3.0%. And like with equities, emerging markets stood out as evidenced by the JPMorgan Emerging Markets Bond Index, +5.3%. Fixed Income really hasn’t been the first pick from the litter for many asset managers in a long while, but this quarters shows why it deserves a place in everyone’s portfolio, even if it’s just a small allocation.

Here are some general comments looking forward denoted by negative (“-“) or positive (“+”) influence:

  • (-) Economies around the globe remain sluggish.
  • (-) Some areas within equities seem expensive. For example, the S&P500’s TTM P/E is 18.2, higher than its 10-year average of 15.8. Other areas, particularly emerging markets are the opposite – they’re downright cheap even after this quarter’s rally.
  • (+) The U.S. Fed in this quarter communicated that they are dialing back their pace of raising rates, which the markets definitely welcomed. Probably only one more, if any, tightening this year.
  • (+) Energy has bounced off lows. The market has already beaten up those companies that rely on higher oil prices. All the while, the consumer still is enjoying this “gasoline holiday”.
  • (?) Upcoming Presidential election hasn’t seemed to scare the market much so far, but volatility could increase as time marches on and uncertainty remains.

Probably the biggest thing is the change in tone: there is a much better tone of the markets than when we wrote our last market commentary. There’s hardly any recession talk now compared to a lot of it then. However, we still have a lot of the same uncertainty. And our markets are more correlated – meaning they move more in tandem – than ever. One big geopolitical or some strange unforeseen event or maybe an altercation of a current event can switch the tone immediately…at least for the short term. And, folks, anything can happen in the short-term.

So for those that like action, strap on the seat belt and enjoy the ride. Or for those that would rather relax, enjoy a nice long sleep and check your portfolio account balance next quarter. You may just sigh another breath of healthy fresh air and go back to bed. Sorry, long-term disciplined investing can be quite boring, but can be quite profitable.

To finish – and in another sign of positivity – Go Cubs! This is the year!

DWM 3Q13 Market Commentary

Detterbeck_sample_for_title_page_(just_mountains)[1]It is hard to get excited about the near term outlook for financial markets given the negative news we constantly deal with. For example, the government is currently in shut down mode, we face another debt ceiling impasse in a few weeks, and the Fed has decided that the US economy isn’t strong enough for the Fed to taper bond buying yet. In the bizarro world of investing, traders actually like to hear “bad news” like that the economy isn’t that strong. Why? Because then the accommodative Fed policy can continue. And that is reason #1 behind the stock market rally since 2009 and why markets continued to be strong in 3Q13. Times will be a’changing when this artificial foot on the gas takes a break.

Almost all asset classes jumped in 3Q13. Equity markets, and not just the domestic ones, had big returns. The S&P500 was up 5.2% and diversified international stock funds were up 10.2%. Fixed income markets, after a disastrous 2Q13, bounced back nicely with the average taxable bond fund up 0.8% for the quarter. And the liquid alternative funds that we followed generally posted modest, yet solid returns.

To reiterate our view on investment management philosophy, we would like to point out a few things. First things first: it is not about which individual stock one holds. That is, its not whether you own Coke or Pepsi in your portfolio. If you want to play individual names, you certainly can, but we wouldn’t advise a big allocation to that. Why? Because it’s kind of like going to Vegas. Vegas is fun, but that’s gambling, not investing. DWM is about controlled investing. We don’t look to hit home runs. We look to preserve capital by protecting the downside and growing the portfolio in a controlled manner.

Empirical studies show that what it is all about is how much you have allocated to the different asset classes. That is, how much you have in stocks, bonds, and alternatives. Keep in mind that these asset classes all behave very differently.

  • Stocks historically offer the greatest rate of returns, but come with the most volatility. Furthermore, some market timers would tell you that stocks are “long in the tooth” right now given the amazing run they’ve been on since bottoming out in early 2009.
  • Fixed Income has historically been viewed as a “safe haven” and has provided 7-9% returns over the last 30 years. Yet that coincided with a steady declining interest rate environment that is most likely now over. Fixed income still provides a significant role in everyone’s portfolio as a diversifier and capital preservationalist, but expected returns going forward should be significantly lower than the high single-digit percentage rate that investors have become accustomed to.
  • Lastly, alternatives provide an additional asset class that can produce new sources of returns with lower correlation and reduced volatility. We expect volatility and returns to be somewhere between what you would expect of stocks and bonds, with an extra bonus emphasis on downside protection.

We all should be glad that these asset classes operate very differently as it provides the “smoothing effect” on the overall portfolio. Because of this, overall portfolio returns may lag what equity markets do in bullish times, but more importantly, they shouldn’t experience huge downside losses when times get rough. And without those big holes – like the 35-50% holes all-out equity investors found themselves in 2008 – it takes a much smaller time to dig out and hence geometric compounding can do its thing, leading to ultimately better long term results.

That said, we have enhanced our quarterly reports by breaking out asset class performance. Clients will see this near the end of their reports. We also are providing an Asset Allocation “soil chart” which shows the client’s asset allocation over time. We think this helps explains exactly how and why the overall “household” portfolio is performing the way it is.

Drop us a line if you have any questions on asset allocation or investment philosophy. Or even better; come to one of our upcoming seminars this month focusing on how to invest in a rising interest rate environment, followed by an hour of fun. In Charleston October 23rd, and Palatine October 30th. We hope to see you soon!

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT