Bank of America's Merrill Edge goes to zero-dollar trades amid price war

Bank of America’s no-frills brokerage has joined the no-fees game.

The bank said Monday that Merrill Edge’s self-directed program will expand its zero-dollar online trades, which were limited and varied in number by customer segment. Now it will offer unlimited commission-free trades of stocks, exchange-traded funds and options for self-directed clients who are also enrolled in the bank’s Preferred Rewards, a program that gives clients additional benefits — like rewards on credit cards or preferential interest rates — for using multiple products and services at the company.

Merrill’s hybrid option, called Guided Investing, charges 45 basis points each year with a $5,000 investment minimum, or 85 basis points with a $20,000 minimum if clients want a human adviser. Guided Investing clients who are not enrolled in Preferred Rewards will pay a flat rate of $2.95 for online stock and ETF trades, down from $6.95, according to BofA.

The move follows similar offers from other major brokerages in the last two weeks, as the wealth management industry races to woo clients with the lowest-priced products possible.

Earlier this month, Charles Schwab cut commissions to zero on online trades of stocks, ETFs and options — emulating the model popularized by trading apps such as Robinhood, which have struck a chord with young investors.

Schwab’s elimination of trading commissions was matched by TD Ameritrade just hours later. Since then, it has been a cascade of announcements as almost every major financial institution — including E-Trade and Fidelity — has launched free trades or some variation of the offer.

“It’s tough to see a lot of differentiation right now,” said Josh Rowe-Heupler, general manager of investing at LendingTree/MagnifyMoney. “The market seems to be maturing, and big fish have entered the pond.”

Schwab expects to give up about $100 million per quarter in revenue, while TD Ameritrade says it will sacrifice about $240 million per quarter. E-Trade estimated that it would have taken a $75 million hit to revenue in the second quarter.

The new pricing model even created a credit negative for the retail brokerage industry, according to a Fitch Ratings report. Brokerages may be pressured to emphasize other sources of revenue and will likely face further industry consolidation, according to the report.

However, Bank of America says that since the majority of its trades were already free to clients through the benefits program, the firm is not forecasting a serious decline on revenue.

“Expanding to unlimited free online trades for all members may have less of a cost impact for us than for some of our competitors,” a spokeswoman said in an email.

Combined client assets across the Merrill Edge guided investing and self-directed platforms were approximately $223 billion as of September, according to the firm.

The average ETF charges $4.70 per $1,000 invested, but some products that track broad U.S. equity indexes now charge as little as 30 or 40 cents, according to Bloomberg. In fact, more than 97% of cash flowing into ETFs goes to those that charge 20 basis points or less.

“The headline ‘Free Trades’ is no longer competitive,” Rowe-Heupler said. “It’s going to get even more complicated.”

In the competitive marketplace of index funds even free might not be cheap enough. Salt Financial, which currently runs a $10 million ETF, plans to actually pay clients to invest in its funds. During the first year, holders will receive 50 cents for every $1,000 invested in its newest ETF.

Bank of America says it has approximately 2,600 branches with financial advisers and provides digital banking services to nearly 38 million active users, including approximately 29 million mobile users.