Is there any price better than free?
I mean, seriously: Free!
Costless.
Gratis.
$0.
It has to be the best deal going around, right?
Right?
You're onto me, aren't you.
You know that there's a 'but' coming.
A huge 'but'.
Maybe not. Maybe…
Just kidding. You're right.
Free is good.
But!
Nothing is truly free.
There's always a catch. Or a cost. Or a trade-off.
Sure, Facebook is free. Except that in return you become the product that's sold to advertisers. And preyed on by apps and advertisers who use what they know about you to mess with you. Exhibit A: Cambridge Analytica. Exhibit B: Targeted (fake) election ads.
Enough said.
Air is free, too. I mean, not clean air — just whatever air polluters choose to leave us with. But of course there's a cost. You just can't measure it, so we all, as a group, pretend it's free to pollute. Some freedom.
And then there are free share trades.
Yet another brokerage mob is offering commission-free trades for Australians who want to trade on the US exchanges.
Free!
What could possibly go wrong?
Well, — and from here on, for the avoidance of doubt (and to placate any lawyers reading), I'm talking generically, and not about any particular current or future broker! — there's the not-free stuff:
Like inactivity fees.
Or withdrawal fees.
There's the often-unknown-or-hidden cost of converting your Aussie dollars to greenbacks.
What happens to your email address?
What will you be cross-sold?
Do you have to pay a subscription fee?
What interest will you lose out on by holding your cash with that broker?
Are you covered by CHESS (on the ASX) or the insurance scheme run by SIPC (in the US)?
Free isn't quite so 'free' any more, is it?
Now, I'm not saying the trade-off mightn't be worth it.
For all I know it's still a stonking great deal.
Or maybe it's not.
See, our brains go into meltdown when 'free' is mentioned.
If you don't believe me, consider the foreign exchange mob (I can't remember who, and I didn't bother Googling) that markets its services as 'no commission'.
See if you can get there before me… how could they possibly do it without fees?
Yep, by giving an inferior exchange rate.
They're 100% right that no fees are charged, but would you rather:
1. Pay no fees, and get $620 for your $1,000; or
2. Get $650 for your $1,000 and pay a $10 fee for the privilege?
(Hint, if you answered #1, I have a bridge I'd like to sell you)
And if you reckon no-one would fall for such a deal, ask yourself why the FX dealer uses that pricing mechanic (and marketing strategy).
It's not quite 'bait and switch', but it's a pretty good case of misdirection, huh?
Want another example?
I haven't seen the ad recently, but one Big 4 bank was advertising a 'cashback' home loan a while back. All you had to do is sign up to their loan, and they'd throw you a few gorillas ($3,000 from memory) for the deal.
Tempted? Of course you are.
I dare say it was a pretty effective campaign.
I also bet — I'd almost guarantee — that loan had a relatively unattractive interest rate.
It's almost certainly a dumb financial decision — get a few grand now, pay much, much more over the life of the loan.
But people did it, because our brains short-circuit really quickly on this stuff.
(If they didn't, the Big 4 Bank and the foreign exchange company wouldn't waste their time and money on these types of products or marketing campaigns!)
So, when someone offers you something for free, it pays to wonder why — what's in it for them?
Again, it's not necessarily a bad thing… but unless you know what the deal is, you're bringing a knife to a gunfight.
And you know what? That mightn't even be the worst of it.
Because you know what else free brokerage does?
It lowers the barriers to action… removing what economists call 'friction'.
When you had to pay $150 to buy or sell shares, it required two things. You needed to save more money (assisting and rewarding discipline) and you needed to trade less frequently (because buying, then selling and buying something else cost $450!)
You had to be thoughtful. Careful. Diligent. Slow.
Now?
Average holding periods have fallen precipitously. And that was before zero-dollar brokerage exploded in the USA.
If it's costless (or close enough), then where's the friction? Where's the mental handbrake? Where's the 'Maybe I'll think about this for a bit' response?
Gone? Just about, yeah.
Why not buy today, sell tomorrow morning, buy something else at lunch and then sell it before the end of the day?
Why stop and think? Why be long-term when there's just no need to.
It's free!
Or is it?
My old man used to say 'you get what you pay for, and you pay for what you get'.
That's not always true, of course, but it's a good yardstick.
The other truism is that we value more highly that which we pay for, compared to that we get for free.
Don't get me wrong — in general, I'm all for lower cost for investors, across the board, including fees paid to fund managers and financial planners.
But remember the examples, above.
Just because the transaction is free, doesn't mean it doesn't cost you anything.
For investors, the hidden costs might be the most insidious of all. The temptation to day-trade. To sell on a whim, and buy on another whim. To forget all about the value of 'long term, buy to hold' investing, and, hell, just break loose!
And lest you think this is only about brokerage (and I'd be happy if I've made you think twice), it's only partly about that.
Mostly, it's about the one thing that even those who accept the premise tend to underrate: the overwhelming importance of behavioural psychology.
And, for investors, behavioural finance.
A good stock pick will make you money once. Learning the principles of a good investment will make you money many times. But a thorough and increasingly instinctive understanding of behavioural finance will pay off more times in your life than you can possibly imagine.
That's the lesson I want you to take from this, to become a better investor (and manager of your own money) by understanding how our brains instinctively work.
Then taking control, and making better decisions.
Fool on!
