The Hidden Costs of Free Investment Services

Looking gift horses in their mouths.

John Rekenthaler 22 November, 2021 | 5:28AM
Facebook Twitter LinkedIn

Stock selloff on app

A Little Knowledge

Most people recognize that free offers aren’t. If you receive 60,000 airline miles for obtaining a credit card, the award doesn’t come from the goodness of the company’s heart. An auto dealer’s finance department doesn’t offer zero-interest loans without getting something in return. And Publishers Clearing House … Well, I haven’t yet figured out how that firm makes money. But apparently it does.

The same principle applies to investment bait. Even before the news about payment for order flows broke, Robinhood’s (HOOD) clients realized that somehow, somewhere, the company generated revenue. Otherwise, the organization wouldn’t remain in business. Long before that, no-load fund investors understood that while their admission was complimentary, their stay was not.

Frequently, though, such knowledge is superficial. Customers recognize that their gifts are subsidized, but they don’t know how. Consequently, they assume that somebody else is footing the bill. Or, as with mutual fund expenses, they grasp that they themselves are liable, but they underestimate their full costs. For example, fund expenses are reported as percentages rather than dollars, and are quietly removed from assets, rather than explicitly charged to shareholders.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

Get the Latest Personal Finance Insights in Your Inbox

Subscribe Here

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Charles Schwab Corp79.94 USD4.46Rating
Robinhood Markets Inc Class A23.52 USD-1.71

About Author

John Rekenthaler

John Rekenthaler  John Rekenthaler is Vice President of Research for Morningstar.

© Copyright 2021 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy