FREE TRADES

Investors have seen free trade incentives for a long time. Most online investors with significant portfolios are offered some sort of "10 free trades" or "30 days of free trades" as an incentive for opening an account.

Today Bank of America riased the bar. B of A announced that all online brokerage customers with at least $25,000 in deposits will be entitled to 30 free trades per month. Since your average online brokerage customer trades far less than that, B of A has essentially made the equity trade free.

I see this as part of a long term trend of margin compression in financial markets. Investors are beginning to understand that they can easily get market exposure from low cost index funds, and it is only a matter of time before the 1.5% or so the average equity mutual fund charges comes under serious pressure.

My feeling is that in the long term the investment management industry will have to move towards a modified version of the partnership model that most hedge funds use. Eventually clients will have to pay managers based on the quality of work the manager does. Managers should expect to eventually earn X% of the return above a benchmark, what that percentage is and what the appropriate benchmark will be up in the air, but in the long term that is really the only model that makes sense.

Timothy Burger
timothyb(at)timothyburger.com