No-Commission ETFs Gaining Ground

April 04, 2008

Wells Fargo, Zecco and BofA report surge in business from free-trading platforms for ETFs, mutual funds and stocks.


The old adage that exchange-traded funds aren't wise investments if you're dollar-cost averaging or making small purchases just isn't true anymore.

In the past year and a half, at least three major brokerages have started offering no-commission trades. That basically shoots down the biggest rap on ETFs over index mutual funds.

So how is the advent of no-commission ETFs panning out?

Pretty impressively, so far, at least. Let's take a look at where the ETF pricing revolution has come in the past year.

From The Start

Wells Fargo Investments began offering 50 free ETF trades a year per account in June 2005. That plan also included stocks and the old dogs on the block, traditional mutual funds. The only catch was that you had to have at least $250,000 with the bank to qualify.

Even with such a high minimum, the response was strong enough that last February Wells Fargo decided to expand its free-pricing platform. It lowered the minimums to $25,000 and bumped up the number of free trades to 100.

And let's emphasize that's per account. So if you've got an IRA, you get 100 free trades. If you've got a taxable account, that's worth another 100 free trades per year.

For example, I've got a rollover IRA, a Roth IRA and a traditional IRA along with a taxable account through the brokerage's free-trading program. In theory, I could make 400 free trades a year ... something that's unlikely to ever happen.

And unlike its other major rival, Bank of America, the Wells Fargo offer doesn't require you to leave a certain amount in a low-interest savings or checking account. You're forced to open what's called a PMA (Portfolio Management Account). It's basically a souped-up checking account without any minimums unto itself.

The PMA checking account serves as a link to the brokerage side of the business. Any combination of investment dollars and/or PMA deposits on the books is good enough to qualify for free trades.

But there are similarities. Both Bank of America and Wells Fargo demand at least $25,000 upfront to qualify for free-trading. And each throws in access to a wide range of other free banking as well as brokerage services. Still, those common traits at least in my mind are trumped by Wells Fargo's more flexible requirements on what you can do with that initial $25,000 to open an account, (i.e., you don't have to keep at least that much in a relatively low-yielding deposit account at all times).

Free Trading Spills Into Other Areas

In the little over a year that Wells Fargo has been providing free trades, it says business is booming. "We saw a 42% increase in the fourth quarter of 2007 over the same period the previous year in number of accounts. And assets linked to the PMA accounts went up 34%," said Jeff Cornman, a Wells Fargo vice president.

"That's really telling the story that our new pricing resonated with the public. They've really brought in a lot of new assets," he added.

With so many new accounts opening, "a large percentage of the asset growth is coming from new clients," Cornman said.

And he stresses that the current pricing will remain permanent. "We rolled out free-trade pricing on a limited basis two and a half years ago. So we really took that time to study the type of business this generates. Based on those results, we felt very confident in moving forward by expanding the program."

Promises, Promises, Promises

Well, anyone who has jumped on these discount trading platforms in the past has probably heard the same sort of promises before. This time, some positive signs are on the horizon that these new free-trading offers might stick. For one, Wells Fargo says it's aiming for its investments side to contribute a quarter of the company's total earnings in the future.

In 2007, brokerage and related activities represented about 16% of the company's earnings.

"Wells Fargo is committed to the investments business. It's a core part of the bank's overall strategy. And we see this pricing program as key to building long-term relationships with clients," Cornman said.

In other words, the bank wants more investors who can use Wells Fargo for their credit cards, home loans and investment purchases.

Along those lines, Wells Fargo says it's seeing a healthy increase in deposits into the banking side of the business. "Those same clients who brought in brokerage assets also increased their overall relationships in other types of accounts with the bank," Cornman said. "They're also putting money into CDs, checking accounts and savings accounts."


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