Russell Investments' CEO wades into the broker war debate, saying that zero commissions could encourage over-trading

• The chief executive of $297 billion asset manager Russell Investments said discount brokers' moves to eliminate online commissions could encourage people to make too many trades.
• "Nothing is necessarily free," Russell CEO Michelle Seitz said in an interview with Business Insider.
• By and large, asset managers would have reason to be frustrated with discount brokerages cutting visible fees for investors. Costs may then be placed on the managers themselves that use brokers as one of their distribution channels.
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A rush of brokerages moving to eliminate US commissions has attracted attention beyond the online trading space.

In an interview with Business Insider last week, the chief executive of asset manager Russell Investments commented on recent moves by a wave of brokers to cut online commissions for stocks and ETFs to zero.

"If what it encourages is more trading in individual securities, it would not be a good outcome over the long haul for clients," particularly in the late innings of the US economic expansion, Russell Investments CEO Michelle Seitz said, adding that the "most sophisticated clients in the world aren't all picking individual securities."

Charles Schwab, E-Trade, TD Ameritrade, and Interactive Brokers all moved to zero within a week of each other, in turn wiping big chunks off of their own market caps. In general, statements announcing the moves highlighted delivering better value to customers, and acknowledged the potential revenue hit.

Russell Investments, acquired by the private equity firm TA Associates four years ago, has some $297 billion in assets under management. Its products include mutual funds offered to both institutional and individual investors.

Seitz also echoed what's emerged as another common discussion point in the race to zero - saying that by cutting visible fees, brokers would be more reliant on less transparent forms of revenue.

"Nothing is necessarily free," Seitz said. "The biggest element of all of these changes to the pricing structure to the end client, I believe, should be transparency - making sure that they understand how the entire ecosystem works."

Read more: Charles Schwab on Charles Schwab: The founder explains why the firm just axed commissions as broker wars reach a fever pitch

That was in line with earlier comments from Brett Redfearn, the SEC's director of the division of trading and markets, who said last week that bringing down prices for investors was a good thing, but brokers also needed to adhere to best execution obligations and be explicit about disclosing other revenue streams, like payment for order flow.

While the practice of selling customers' buy-and-sell orders to sophisticated high-frequency traders is completely legal - E-Trade, Schwab, and TD Ameritrade all do it - payment for order flow has become a hot topic of discussion as commissions fall.

And Seitz said regulators have been shining "a spotlight on all the different layers of fees that come into play that ultimately take away from the return of the client."

"It's important for our industry to not take the easy out of marketing free services without also educating the client on what value proposition the industry and individual firms are making to the client," said Seitz, who was named chief executive in September 2017 after 16 years leading investment management at the financial services firm William Blair.

Read more: The SEC's markets guru just praised brokers for slashing commissions - but warned they still need to do what's best for investors, despite increased pressure to defend margins

By and large, asset managers would have reason to be frustrated with discount brokerages cutting fees for retail investors, because the costs could be placed on the managers themselves that rely on places like Charles Schwab and TD Ameritrade for their distribution platforms.

The asset management industry, meanwhile, has seen broad margin pressure as customers turn to lower-cost passive options. And the race to zero essentially eliminated a revenue stream for online brokers in one fell swoop.

Seitz likened the prospect of trading because commissions are low, without assessing other fees, to eating a lot if the price is cheap.

"If something's free, you go to a buffet, you overeat, and it's not even good food," she said. "From that standpoint, if something's free, people might tend to trade a little bit more."

Credit Suisse analysts pointed out in a recent note that with commissions gone, other revenues less visible to customers - including so-called shelf fees charged to asset managers - would become more important to brokerages. Other such sources of revenue include options pricing, payment for order flow, and spreads on customer money sitting in cash accounts.

And analysts have speculated that the changes to commissions could impact specific partnerships between asset managers and brokers.

On Thursday, Fidelity became the latest to head to zero. In making its announcement, it flagged that it does not pay for order flow, and also addressed it relationship with the asset manager BlackRock.

The Credit Suisse analysts had noted before that announcement that Fidelity had a special ETF partnership with BlackRock that makes the asset manager's iShares the preferred ETF provider commission-free on Fidelity's platform. The analysts wrote that changes to the setup could hit BlackRock's share of business at Fidelity in the long run.

Read more: Fidelity just eliminated online commissions - here's everything we know about brokerages' rapid-fire moves in the race to zero

Fidelity had also already offered commission-free trades on ETFs on Fidelity's own products and some others, like JPMorgan, according to the note.

"We continue to have a great relationship with BlackRock as well as the other ETF sponsors currently participating in our commission-free ETF platform," a Fidelity spokeswoman told The Wall Street Journal on Thursday.

When asked for comment on Thursday, a BlackRock spokesperson told Business Insider: "The elimination of barriers to investing means more and more investors will use ETFs. As the ETF market leader, this is great for BlackRock, as more clients than ever before have access to the value and quality of iShares funds to achieve their investment goals."

Russell's Seitz did not comment on Fidelity's move on Thursday. She said there was "real opportunity" in rethinking industry dynamics to meet clients' needs in a lower-return environment.

"This should not just be about cheaper products and costs," she said in emailed comments following up on the interview last week. "They are necessary, but not sufficient. In not losing the forest for the trees, it is all about delivering investment solutions and meeting the ultimate need for the money our clients have entrusted us with."

Meanwhile, some are also watching to see how the discount broker wars hit Wall Street banks. Morgan Stanley analysts in a large-cap banks third-quarter earnings preview called out the online commission cuts as a factor to watch, both for big banks' brokerage and fee-based revenues.

- Additional reporting by Bradley Saacks