Fidelity Investments, the largest of the online brokerages with 21.8 million accounts, has announced that it has also joined the commission-free trading movement. Effective October 10, 2019, all U.S. stocks and exchange-traded funds (ETFs) will no longer incur a commission, and the base per-leg charge for options trades will also be eliminated. Options trades will be $0.65 per contract under Fidelity's new pricing.

The last couple of weeks have been packed with news of fee cuts. Charles Schwab (SCHW), TD Ameritrade (AMTD), E*TRADE (ETFC), and Ally Invest (ALLY) all cut equity commissions to zero. TradeStation announced a new offering, TSgo, with zero commissions; and Interactive Brokers' (IBKR) new IBKR Lite will also allow equity trades for free. All charge a per-contract fee for options trades. The newly launched Dough app also has free equity trades for a $1 per month subscription. Though Dough does not yet allow options trading, that capability should be available by the end of the year, with no charge.

How Is Fidelity Different?

What sets this offering apart, according to Kathleen Murphy, president of Fidelity Investments’ personal investing business, is the automatic default of a higher paying cash account, plus Fidelity's ongoing commitment to best execution. "I wouldn't characterize our move as joining the party," Murphy states in a telephone interview, "We've upped the bar on who is invited to the party."

Fidelity won our 2019 online brokerage rankings by offering excellent trade executions, and by not accepting payment for order flow. Murphy says in a statement, "Fidelity buy and sell order execution practices provide price improvement of $17.20 on average for a 1,000-share equity order, while the industry average is just $2.89."

Fidelity has been remarkably transparent about what it offers customers, and what it charges in return, even though they keep their own company finances under heavy wraps. Ram Subramaniam, executive vice president of Fidelity Investment’s personal investing business says, "We need more transparency and we need better practices, or we're going to get more regulations." He believes the financial services industry ought to revise its practices so its interests are more aligned with those of the investors it serves.

What About Cash?

As an example, Subramaniam says Fidelity automatically sweep clients' cash into a higher-paying bucket. "Cash is a bigger deal. Even when a customer doesn't trade -- everyone holds cash -- we automatically sweep into higher-paying accounts." Fidelity's cash sweep program currently pays 1.58%. "These numbers add up quickly," says Subramaniam. "If you're not getting enough in the market, you stay in cash."

Murphy says that financial services firms generally pay very little for the cash held in their customers' accounts. "There isn't as much incentive to get their customers on a better investing path because they're making so much money on that idle cash," she states.

When asked how Fidelity will make up the elimination of a large proportion of its commission revenue, Murphy says that the firm is a broad, widely-diversified business with a lot of scale, which allows them to continue adding value. Murphy would not disclose the percentage of revenue that Fidelity is jettisoning since it is a privately-held firm, and stated, "We're not going to start disclosing that now."

Fidelity's fee change is available on November 4, 2019, for registered investment advisors.