Investor Question

[Snaggletooth]

Not necessarily a tax question, but something we all encounter. I, for one, am investing for myself and another family member.

Two leading brokerage houses, Schwab and Fidelity, heavily advertise that trades are free of commissions. I am certain that both of these entities operate at a profit, and do have revenue whether there is profit or not.

So the question becomes, "If there are no commissions, how are they making money?"

One obvious possibility is they are overcharging when buying, or undercrediting when selling. For example, Red River Bancshares (RRBI) settles yesterday at $66.40. Would Fidelity buy this at $66.40 and charge your account $67.90? Doesn't sound like much of a profit except consider they are trading millions of shares, as well as the covert profit on mutual funds.

Somehow I believe their advertised "no commission" is not transparent.

[kathyc2]

Not necessarily a tax question, but something we all encounter. I, for one, am investing for myself and another family member.

Curious as to what your YTD rate of return is this year with self investing?

[Snaggletooth]

A personal question, but I will respond because Kathy is active and is very astute with her posts. Through September of 2025, my rate of return is 10.25% for 9 months - translates to 13.66% annual return. But in all humility, this has been an unusually good year, as my return over several years hovers between 9 and 10 per cent. Like everyone else, I lost big in 2009 but gained it back in less than 2 years. For what it may be worth, I don't spend a lot of time trading, only three transactions this year - I intentionally sold a bad stock and took a capital loss for tax purposes.

One mistake commonly made is to compare the stock price at the end of the year with the price on Jan 1, and calculate the percentage increase (or decrease). This is a mistake if they don't consider dividends, which is also a real measure of the investment return. For what it may be worth, I have very few mutual funds, overwhelmingly diversifying in corporate stocks. A typical mutual fund skims 6.5% off the top of the investment in new money and gives it back over a period of time.

Mutual funds are good for long-term investment for people who do not choose to spend the time self-investing.

[RAG1775]

I don't believe there is any lack of "transparency" in their statement. Those that are self-trading are most likely a very small percentage of the billions of $$ they handle.
The vast majority of their funds are "managed" where they make their $$.
They also generate $$ from options, of which there are thousands of these transactions on a daily basis. These transactions are not commission free.
Individuals also have extra $$ sitting in their account where Schwab or Fidelity combine these $$ and reinvest them earning far more than they are paying out.
Even though there is no commission to purchase an ETF, there is a cost in handling that fund; albeit reasonable, add up all the funds they handle, that becomes a big number.

[kathyc2]

Just like in Vegas, you'll hit one every now and then, but overall I've never seen an investment dabbler out perform the market.

Through 9/30/25 the S&P was up 13.3%. I have mutual funds at American Funds. Though 9/30 I was up 16.6% total, with the lowest fund at 14.1% and highest at 20.1%.

[Snaggletooth]

Just like in Vegas, you'll hit one every now and then, but overall I've never seen an investment dabbler out perform the market.

Through 9/30/25 the S&P was up 13.3%. I have mutual funds at American Funds. Though 9/30 I was up 16.6% total, with the lowest fund at 14.1% and highest at 20.1%.

I'm glad you're doing so well. Among my customers, American funds are by far the most commonly held, and they do well in comparison to others.

I enjoy the discussion, but the original question was not addressed.

[Lion]

My trades at Morgan Stanley have no commission, but I do pay a quarterly fee based on assets. It was all spelled out in the paperwork and also explained well by my broker.

[Rapid Robert]

One obvious possibility is they are overcharging when buying, or undercrediting when selling. For example, Red River Bancshares (RRBI) settles yesterday at $66.40. Would Fidelity buy this at $66.40 and charge your account $67.90?

You are asking about the Bid-Ask Spread, and How Does It Work in Trading?

https://www.investopedia.com/terms/b/bid-askspread.asp

The difference between [the bid price and the ask price], the spread, is the principal transaction cost of trading (outside of commissions). It is collected by the market maker through the natural flow of orders processed at the bid and ask prices. This is what financial brokerages mean when they state that their revenues are derived from traders "crossing the spread."

[kathyc2]

I'm glad you're doing so well. Among my customers, American funds are by far the most commonly held, and they do well in comparison to others.

I enjoy the discussion, but the original question was not addressed.

It's not like I did anything special to get that return. Majority of well run mutual funds should produce similar results. AF highest load fee is for Class A with less than 25K total invested is 5.75%. This is a one time fee. 16.6% less 5.75% is 10.85%. Higher than your 10.25% "no fee" returns.

Averaging returns of 9-10% over the last several years is not a return to be happy with. S&P over the last 10 years is around 15% which is the range most stock based funds will return.

There are also no fee mutuals that have a return significantly higher than 10%.

[Snaggletooth]

Kathy, if the S&P index is doing so well, and mutual funds are paying so much better, why am I not seeing these wonderful returns amongst my clientele? Certainly not my fault because I will not give them investment advice. Too risky in the event of poor advice, plus I'm not paid to do so...

[kathyc2]

Kathy, if the S&P index is doing so well, and mutual funds are paying so much better, why am I not seeing these wonderful returns amongst my clientele? Certainly not my fault because I will not give them investment advice. Too risky in the event of poor advice, plus I'm not paid to do so...

Returns won't show on tax documents. You would need year end statements in most cases.

[Snaggletooth]

You are asking about the Bid-Ask Spread, and How Does It Work in Trading?

https://www.investopedia.com/terms/b/bid-askspread.asp

Thank you RR, you did address the original question.

[Snaggletooth]

Returns won't show on tax documents. You would need year end statements in most cases.

Of course not. They would be on 1099-DIV.

However, the year-end statements show $2120 and $2000 a year ago, that should be a return of 6.00% And that does not account for the possibility that 6.5% are being shrink-wrapped for any new money a year ago. They keep two sets of books, and if you don't believe it, try cashing out soon after you deposit. This is perfectly legitimate and supposedly transparent if you read the prospectus.

In spite of my distaste, I have three mutual funds, with returns of 9.77%, 8.88%, and 10.26% compounded over several years.