The craving for low-cost and commission-free trades has been steadily growing and international brokers hear consumer demands loud and clear. Internet-only financial institutions, such as E-Trade (ETFC), Ally Financial (ALLY), and Interactive Brokers emerged from this market trend for low-cost, independent investment management. As these companies grew, well-established, larger financial services firms like Charles Schwab (SCHW) and TD Ameritrade (AMTD) added self-directed trading platforms as well. Schwab initially required a minimum of $2500 to open a Schwab One brokerage account. They later reduced it to $1000, along with other large store-front firms. Ally and TD Ameritrade ultimately responded by offering $0 minimum balances, and their competitors followed suit.
What all these brokerage firms have in common for their $0 account minimum is they only offer exchange-traded funds (ETFs) and stocks with commission free trades. Some independent investors may conclude all they need besides their retirement accounts are ETFs and stocks. How they establish their retirement accounts is a separate decision. Most people go through plan sponsorship from their job, and others may already have a long-standing retirement account open with good product choices at another bank.
Commission free stock trading is an attractive bargain that with some training and experience many find reliability and success. However, the limitations of products to choose from on these platforms don’t give investors the possibility of a balanced portfolio. A better approach is to quantify a strategy that encompasses both your long-term goals and style of investing. With these priorities in mind, what you are opening the door to is wealth management.
The importance of mutual fund investments
Any diversified portfolio of assets contains mutual funds. Mutual funds are funded through either equity or debt. Both asset types are widely recommended investments. Wealth advisors and even no-commission financial planners can present many products for you to review. Each may have different success rates and strategies within the asset class. Here’s your chance to compare each product offering to its industry benchmark either with your advisor or on your own.
Unfortunately, Robinhood only offers ETFs, stocks, and options. They are commission-free, yes, but their trading platform doesn’t carry mutual funds, which represent a large portion of actively managed products. By comparison, your retirement fund likely contains many actively managed investments.
In August of 2018, Robinhood began offering 250 global stocks through American Depository Receipts (ADRs). ADRs were a big win since investors could start gaining exposure to global equity markets. Still, as an investor, you don’t have good visibility of the level of risk you have within the total market value of your investments. Therefore, it is more challenging to reallocate your portfolio in a way that can mitigate that market risk.
Is there a cryptocurrency advantage?
Blockchain-based stock companies are growing, and cryptocurrency has become a mainstream legal tender to fulfill transactions. Seven cryptocurrency exchanges worldwide hold over $25 billion in reserves. Bitcoin (BTC), Etherium (ETH), and Tether (USDT) are a few cryptocurrency stocks that trade globally. Cryptocurrencies are produced through blockchain cryptography and, curiously enough, are viewed in developing countries as a new way to generate wealth in areas where economic opportunity is sparse or even non-existent.
Some Millennials, Gen Z, and technophiles worldwide are using blockchain to trade a variety of products with one another. Even wind and solar energy credits are being marketed and traded with cryptocurrency. Software start-ups such as ClimateTrade and CarbonX specialize in the trade of carbon credits with blockchain as well as Synergy Blockchain Technology of Beijing, China, a government-backed carbon exchange. Blockchain is an inalterable piece of data that contains the hash code of the previously generated block and the timestamp when a new block is created. The Robinhood app is attracting investors who see value in the rapidly growing decentralized global currency.
Now that we’ve delved into the importance of mutual funds as part of a diversified portfolio and the excitement of cryptocurrency, let’s consider the impact of taxes on your investments.
Having tax-managed funds in your portfolio
All investments on the commission-free stock trading Robinhood platform are taxable. Also, you don’t have the option to set-up automated dividend reinvestment, which is critical to growing the value of your stocks without investing new capital. The dividends you receive get credited to accounts as cash rather than reinvested in the security that issued them. When you add tax-managed funds or tax-exempt bonds to your portfolio, you can offset the impact of capital gains taxes for trading stocks. One of the most important responsibilities of wealth management is tax management.
Considering a wealth advisor for investment management
Actively managed funds are not going obsolete, but they are facing increasing competition from the growth of low-fee, passively managed ETF and Index Funds. Lesser performing actively managed mutual funds are most vulnerable to the successes of passively managed funds. Applications like Robinhood are unable to replace wealth management because it is a simple platform that isn’t designed to serve as a wealth management solution. Customer service is sparse and mainly provided through emailed responses when you have questions. The company doesn’t have a customer service phone line.
Wealth management firms like SD Mayer offer a holistic approach to your investments and how to manage risk from market exposure. They help to set you on a path to grow wealth from your equity portfolio as well as formulate a strategy that balances your comfort level as an investor and your long-term financial goals. Not many San Francisco firms have the same work ethic, nor can they address all your financial service needs.
SD Mayer is a full-service, tax, accounting, and wealth advisory firm — all offered under one roof in the heart of San Francisco. You’ll find professionals with years of experience who believe in client partnerships for life and who can help you weigh the risks and benefits of options like commission free stock trading. If you are interested in setting up an initial consultation, contact us.
SECURITIES AND ADVISORY DISCLOSURE:
Securities offered through Valmark Securities, Inc. Member FINRA, SIPC. Fee based planning offered through SDM Advisors, LLC. Third party money management offered through Valmark Advisers, Inc a SEC registered investment advisor. 130 Springside Drive, Suite 300, Akron, Ohio 44333-2431. 1-800-765-5201. SDM Advisors, LLC is a separate entity from Valmark Securities Inc. and Valmark Advisers, Inc.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The services of an appropriate professional should be sought regarding your individual situation.