This Just Ruined Robinhood...

What do the guys? It's Graham here, so let's go ahead and spill some drama, or the T, as they say on YouTube, with some of the recent changes that have been going on with Charles Schwab, Robin Hood, TD Ameritrade, and some of the other brokerages that are gonna end up having a major impact on your wallet. Because it's been a while since we've had some good old financial-related drama and competition, and lately things are getting pretty heated.

And all of this is because Charles Schwab—Charles Schwab! It's so difficult to say—anyway, they recently announced that they're going to be eliminating all commissions on stock trading, lowering their fee from $4.95 all the way down to $0. And that is in direct response to so many of the other free stock trading platforms, Robin Hood, who have slowly been sucking away the business from other larger, more established companies by offering lower-cost services and the zero-dollar trades.

And the financial drama doesn't quite end there, because after Charles Schwab announced their zero-dollar trades, several companies have seen a stock price just absolutely plummet, forcing them to either just match the zero-dollar trade or get out. I believe this is just the beginning, so here's exactly what's going on, why I believe this is happening, and how you could use all of this information to your advantage to end up making you more money. And obviously to smash the like button for the YouTube algorithm if you have not done that already.

So anyway, with that said, let's get into the video. Now to start, all of this really began in 2013 when Robin Hood jumped on the scene by offering completely free stock trades. This meant that any time you wanted to buy or sell a stock, you didn't have to pay the four-dollar ninety-five cent all the way up to a ten-dollar fee. And over the recent years, they've gained a rather impressive following, with now over four million users in 2019.

Really until now, Robin Hood had a pretty clear-cut advantage over so many of the other investment brokerages out there. They had a huge appeal towards Millennials. They had a very easy user interface that made it perfect for beginner and intermediary investors. They were an app on the phone, and then, like I said, they offered completely free stock trades. This meant that pretty much anyone could go on, trade with a few hundred dollars, and then hopefully make some money.

From there, due to the popularity of the service, other investment apps began appearing as well with a very similar business model, such as M1 Finance, which offered everything that Robin Hood did, including free stock trades, but also added the ability to buy fractional shares, reinvest the dividends, and then open up a retirement account. But as those free stock trading platforms began gaining popularity, it started to pose a threat for larger, more established brick-and-mortar businesses, which previously charged for stock trades, including Charles Schwab.

Now apparently, as of the other day, Charles Schwab has decided to single-handedly ruin and destroy M1 Finance and Robin Hood with this one single change by eliminating the stock trading fees. Here's how significant this is: First, Charles Schwab is a top-tier full-service bank. They had physical locations where you can actually walk into them. They have amazing 24/7 customer service where you can actually talk with a live, real human being—yes, I am looking at you, Robin Hood!

They have retirement and custodial accounts. They have a great user interface, great research tools, and a very well-designed app. They have free ATM services, and now they also have free stock trades. This also beats Robin Hood and M1 Finance on pretty much every single level. They could begin to siphon business away from all of these other companies. They could gain a stronger foothold on the market, and at the same time, they could save you money.

To me, all of this just makes sense because Charles Schwab has a market cap of about fifty-five billion dollars, and the vast majority of its revenue does not come from stock trading commissions. In fact, according to CNBC, stock trading commissions only make up about three to four percent of its net revenue. So cutting this out entirely might be a huge opportunity to attract new users to its platform and also just end up making a lot more money.

Now, this is because in 2018, they reported that they made seven hundred and sixty-three million dollars from its trading revenue, which sounds like a lot of money. I mean, I wouldn't want to give up 763 million dollars until you look and realize that they made 5.8 billion dollars from net interest revenue, which also grew by 36 percent over the last year. At that rate, all the interest that they make from cash deposits could greatly outweigh all the money they lose by offering completely free stock trading—not to mention all the other business that they can end up taking away from Robin Hood and M1 Finance and so many of the other companies out there.

If you're confused with what net interest revenue is and how this makes them money, then let me explain: See, anytime you have money left over in your Charles Schwab account that isn't being invested, it sits there and it earns you interest. The money that you make in interest is bad; it's really bad actually. It's more so it's horrible. That's because they're only paying you 0.23 percent interest on your deposits. Compare that to a live bank, which is paying you 1.9 percent in interest or what you can get from a thirty-day Treasury yield—about two percent now—or what you can get from Wealthfront, which is 2.07 percent.

Then you have good old Charles Schwab here, which is basically robbing you by only giving you 0.23 percent. So how they end up making a profit from this is that they end up sweeping your leftover money into other non-risky investments. They pay you 0.23 percent and then they make money on the spread from what they make investing that money elsewhere. This is a very large source of revenue for them, and exactly how they can give you other free services elsewhere, like free trading, or free services on their checking and savings accounts, or no foreign transaction fees and free ATM services, and so on.

Now this is not necessarily a bad thing if you just don't keep a lot of money in their account earning 0.23 percent interest, but if you do keep money for them, and they anticipate you will during the interim between when you buy and sell a stock and wait to buy another one, then just realize that you're not making a lot of money. This is for Charles Schwab profit. As they say, nothing is ever really truly free, and this is just the cost of them doing business.

Regardless, the effect by Charles Schwab to offer zero-dollar trades did not go unnoticed and had a very far-reaching impact. Shortly after its announcement, TD Ameritrade's stock plummeted by over thirty percent because, according to the SEC filing for TD Ameritrade, 36 percent of the company's revenue came from commissions and transaction fees. This means that Charles Schwab's $0 Commission would undermine one-third of TD Ameritrade's revenue.

Because of that, not surprisingly at all, TD Ameritrade the next day announced that they too would also be offering zero-dollar commissions on stock trades. That also means for TD Ameritrade a loss of an estimated two hundred and twenty-two to two hundred and forty million dollars per quarter—all because of one single change by Charles Schwab.

So with all that said, here's my take about what's going on and what this means for you, and also what I think is going to be happening in the future. To me, this is just a race to the bottom, and every single company is now going to try to undercut one another in an effort to get your business and get your money. Even though Robin Hood was certainly a pioneer of these zero-dollar stock trades, I find it unfortunate that Robin Hood just lagged when it came to everything else.

Just my opinion here, but their customer service sucks. You can't reinvest the dividends, you can't buy fractional shares, they don't have any retirement accounts, and they don't have any banking services. This just left the door open for other more established companies to replicate the Robin Hood model, then do it way better and then just absolutely demolish and destroy them. I personally believe that we're gonna start to see other brokerages follow this model and also offer $0 stock trades until it really just becomes the new industry standard.

Companies are either gonna have to suck it up or just get left behind, but I believe this opens the door for many other companies to get into the banking business model, which is where I believe a lot of the real money is. Like, why bother trying to get $5 commissions when instead you can get someone's entire life savings under management? You could get them using your checking and savings accounts, and then eventually you can offer them auto loans, personal loans, and mortgages.

At that time, you could just make way more money. As we enter a time where market uncertainty is causing wealthy households to now keep 27 percent of their assets in cash and out of the market, it makes sense why some of these companies are now offering free trading as an incentive to move money over, where it will hopefully just sit and then the company can make some profit from it.

Like I said, I believe this is really just the beginning, and we're gonna see what happens. But I could imagine Vanguard soon following with zero-dollar trades, E-Trade following with zero-dollar trades, and Fidelity following with zero-dollar trades until eventually it just becomes the new normal. I can also see a lot of these companies expanding into banking services as a way to lure more customers in and make more money and more profit.

But overall, I have to say it's a benefit to you as the customer to have all of these companies competing for your business. The more competition that we have, the lower the fees will be and the more money you will have left over in your pocket to spend on iced coffee and smashing the like button for the YouTube algorithm.

But all that aside, I do just have to say you should be aware that if you do move your money over to Charles Schwab, just please do me a favor and make sure you don't leave too much money in their account, just sitting there earning 0.23 percent in interest. Because in my opinion, that's really not that good, and you could just be earning way more money elsewhere.

But besides that, if you're gonna use them for their overall services and investing, I have to say good on Charles Schwab for doing this. I think it really sets a great industry standard that many other companies should be following.

So with that said, you guys, thank you so much for watching. I really appreciate it. As always, if you have not already subscribed, make sure to destroy the subscribe button, destroy the notification bell so YouTube notifies you anytime I post a video, which is three times a week, Monday, Wednesday, Friday, 3:30 p.m. So, sniffer time!

Also, make sure to add me on Instagram; I post there pretty much daily! So if you want to be a part of it there, feel free to add me there. Also, add me on my second channel; it is called The Graham Stephan Show. I post there every single day. I don't post here, so that means if you not want to see me every single day on YouTube—brand new video, right?—just go ahead and add me in there.

And then one last thing I want to address: I know, I know some people are gonna comment to be like, "Damn, that's a cheap shirt! That's near the frugal shirt, that lifestyle sleaze!" I just want to say this shirt was free! This is a zero-dollar shirt. I got this shirt as a gift and now I wear it. This shirt is cheaper than my two-dollar and ninety-nine cent t-shirts.

So for anyone out there who's thinking that I'm giving in to the lifestyle inflation, now I'm spending money on clothes, just so you know, just for the record, we got to close the book here and then the video too. But yeah, free shirt for anyone who's wondering. And that's how you do it on the Graham Stephan channel.

That said, anyway, thanks for watching, and until next time!