He was talking about 1975, but his statement is a testament on how the more things stay the same.
His company, funnily named Chas. Schwab & Co., mentioned the book in its press release announcing that henceforth it would charge no commissions on most retail trades. https://pressroom.aboutschwab.com/press-release/corporate-and-financial-news/conjunction-chuck-schwabs-new-book-invested-schwab-remove . The press release makes it sound as if Schwab's move to free trades coincided with Chuck's memoirs, as if it was meant to put that final exclamation mark on Chuck's career. That's a bit of truthless hyperbole; trading commissions have been trending towards zero for some time now, and a number of online execution-only brokers had already gotten there. Still, Schwab was the first brand-name to eliminate retail customer commissions. E*TRADE, TD Ameritrade, and to an extent even Merrill Lynch, soon followed suit.
There will be more.
So, is this finally the free lunch we are always told does not exist?
On the face of it, zero commissions really does mean that retail customers can trade securities without having to pay for the privilege. But let's not get carried away. There are number of subtleties here that the simplistic notion of free trades tends to gloss over.
First of all, we shouldn't worry too much about Schwab and the other brokerage firms that appear to be giving away their services. Nor should we be too impressed by their generosity. Trading commissions on retail accounts makes up maybe 3 to 4% of the revenues of a large brokerage firm. Yes they'll be giving that up, but you can bet they wouldn't if they didn't think they will more than make up for it elsewhere.
There is an easy and simple way to think about free commissions. Anyone who took or thought about economics knows that lowering the price of something will result in more of that product being sold. And anyone who has gone shopping on Black Friday knows that steep discounts draw customers. Zero commissions, then, are simply intended to draw more customers to the firm. More customers mean more assets and more trades, and both of those mean more revenues. Those additional revenues, less transparent than the commission on your confirm, will more than make up for the lost commissions.
Consider that more customers mean more assets in the firm. It's a truism that all financial firms -- call them banks, brokerage firms, whatever -- ultimately make money from interest rate spreads. All finance fundamentally involves borrowing money at one rate and lending it out at a higher rate. Brokerage firms do this in part by borrowing uninvested cash from some of its customers to make margin loans to some of its other customers. Any funds in a brokerage account that aren't invested in securities are automatically swept into some proprietary money market fund. The brokerage firm pays interest, but not much. https://www.consumerreports.org/hidden-costs/beware-hidden-costs-of-free-online-stock-trading-programs/.Currently, Schwab pays as little as 0.12% interest on uninvested cash. Meanwhile, it uses some of that cash to make margin loans, for which it charges interest currently as high as 8.825%. Do the math.
Consider too that more customers mean more trading. It's a common misconception that when a retail customer buys or sells a stock, that order is routed directly to the stock exchange. It isn't. It is routed to a market maker. A market maker is another firm -- or even another division of the same firm -- that is in the business of buying and selling securities off-market, making a profit from the spread between the bid and the ask. It is essentially a form of proprietary trading. For most securities these days that spread is very small, generally a penny or less. And as with any low-margin business, profit depends on volume.
But none of that is where the real action is. It won't be long before the marginal cost of effecting stock trades will be zero or close to it anyway. As more securities become cryptosecurities, traded on a blockchain instead of a stock exchange, all of the old ways of trading securities may well vanish. The smart money is recognizing this already. What investors will not pay for executing trades, they will pay for investment advice. For years now firms have been moving towards an investment advisor model, in which revenues (and compensation) are based on assets under management rather than number of trades. In fact, some 60% of retail brokerage revenues now consist of management fees rather than commissions.
Some have speculated that the elimination of trading commissions -- and with them the old-style broker -- is another step towards the institutionalization of the investment advisor. See https://www.bloomberg.com/opinion/articles/2019-10-03/schwab-commission-free-trading-means-disruption-for-advisers. Maybe. But certainly the trend has been in the other direction, with the most successful broker groups leaving large firms and setting up independent shops. The thought that large firms will be able to leverage technology in ways that smaller practitioners can't seems more of a wish than a plan. The nature of technology is such that, except for processing machines that depend on volume (like order processing), it becomes more widely distributed, not less so, as it matures.
Schwab's press release got it close to right, then. The move to zero commissions is not revolutionary. Profitability in retail brokerage will continue to depend less on transactions and more on professional advice. And investors who think they have a bargain need to be wary they don't start treating their portfolios like video games now that they can play for free. Customers who are not adept traders -- that is to say, most of them -- will end up losing more than they ever would have paid in commissions. There is still no free lunch. It's not money for nothing when your trades are free.