Bank of America has announced that it will start offering free online trades to customers who are self-directed and maintain balances of $25,000 or more in their bank accounts. This offer is not available now; they will be rolling it out across the country, and it is expected to be available everywhere between now and spring 2007.
I’m very excited about this for my clients and readers, whom I expect will qualify as “self-directed” at most brokerages. Even if my clients end up not qualifying for this, the online discount brokers I use will probably be forced to cut their commissions even further. Thank you, B of A!
Why is this important? Because brokerage commissions are the one thing standing between small account holders and full diversification without mutual funds. To gain the full benefits of diversification, an account needs at least different 20-30 positions, which translates into 20-30 commissions. To be competitive with index funds, trading commissions should be less than 0.5% of account value, which, for a $25,000 account would mean about $5 each. A typical discount broker usually charges three times this amount for an account this size.
30 free trades a month opens up a whole new strategy for the owner of a $25,000 account. She could put together a portfolio of stocks that closely mimics most any market index, for free. This would allow her tax-manage her account, by choosing when to take capital gains (an option which is not open to owners of mutual funds), and do so for less than the expenses of the cheapest index fund.
The downside is you have to maintain a balance of $25K in your bank account to get the free trades in your brokerage account, but there’s no reason you have to keep the $25K there after you have a portfolio you’re satisfied with.
I’ll definitely be mentioning this at my investing workshops.