Schwab fractional investing sets a ‘new standard’ for the industry

It’s the little things.The next chapter in the red-hot battle of the brokers is here, with Charles Schwab announcing Thursday that it will allow its clients to purchase fractions of stocks.It’s the latest in a series of moves by brokerage firms meant to attract customers, including cutting trading fees to zero. On Tuesday, Bank of America joined the charge, saying it would offer unlimited free trades to members of its loyalty program.”I think this is setting the new standard for brokerages in this space,” Dave Nadig, managing director of ETF.com, said Monday on CNBC’s “ETF Edge.” “What does that do for ETF investors? Well, obviously, it gives you a lot more flexibility.”Now, investors and money managers will be able to buy half-shares of costly exchange-traded funds, which can help them diversify their assets in a more specific way, Nadig said.”It certainly makes managing a more balanced portfolio easier at smaller asset levels,” he said. “But I think the interesting question is what does it change about the dynamics of the whole industry?”In the past, 401(k) retirement accounts didn’t typically include ETFs because account managers couldn’t purchase fractional shares via dollar-cost averaging, a process that allows the partial purchase of an equity regardless of price.”Now it could work. So, I think it could open up that market,” Nadig said. “The flip side is this is a big opening for so-called direct indexing, folks that want to put together portfolios not of ETFs but of individual stocks that look like index investments. That’s where I’d expect Schwab to go next.””I actually think the longer-term play here is for folks like Schwab and competitors to start running these massive portfolios of hundreds of stocks on a fractional-share basis as part of their robo-advisor platform,” Nadig said. “It disintermediates the entire packaged product business. So, I think this is early days, I think it’s very exciting, and I think it’s very bullish for investors in general.”John Davi, founder and chief investment officer at Astoria Portfolio Advisors, wasn’t convinced this move would make major waves.”The mutual fund industry has been handling fractional shares for a while, so it’s good that the ETF ecosphere is now kind of catching up to that,” he said in the same “ETF Edge” interview.But the argument that millennials will come racing to Schwab’s platform to get involved in fractional trading was a bit far-fetched for Davi.”There’s something about younger millennials that want to buy half a share of Google and Facebook,” he said. “Right now, if you have $100, you can basically buy one share of 87% of the Russell 3000 index. So, you can get most of the Russell 3000 index without having to deal with fractional shares. But, look, it’s a net positive, I would say, overall. But I don’t think it’s going to encourage more younger millennial investors that want to invest and buy half a share of Facebook.”For Nadig — who cited Robinhood and Acorns as the real leaders in that millennial-facing slice of the market — this story is bigger than just catering to younger buyers.”Long term, the real assets in this business are going to be through wealth management, through 401(k)s, consistent investment programs. All of those things get easier with fractional shares, too,” Nadig said. “So, while the millennial story will get some headlines, there’s a much bigger structural story here as well.”Disclosure: NBCUniversal and Comcast are investors in Acorns.Disclaimer

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