Why you may see a greater number of small trades as you review your account

During a recent call with our wealth team, I shared my perspective with colleagues on why clients now might see a larger number of smaller trades as they review their accounts. I’d like to share those ideas with you as well, because while the topic seems simple, it isn’t.

Behind the reason for a greater number of smaller trades lies a complex number of decisions our wealth business has made to modernize and improve our ability to manage portfolios for clients in the most efficient manner. In addition, it highlights the tremendous changes the investment advisory and asset management industries have gone through over the last decade or two.

Industry perspective

Let’s start with those industry changes.

Democratized access—and lower holding costs. The investment industry has worked to democratize access to investment strategies of all kinds. Technology has led to the reduction in the cost of everything having to do with an investment portfolio. For example, when I started in the business, it cost between $2,500 to $3,500 annually to hold a $1,000,000 portfolio of client assets. Today, holding that portfolio costs less than $300.

Lower-cost structures. Asset management businesses invented exchange-traded funds, closed-end funds, interval funds and other structures to make investment strategies more widely available to investors at ever-declining costs. This has made it easier to combine active and passive investment strategies, add alternative investments and create portfolios that used to be available to only the largest institutional investors.

Low-cost trades. In addition, asset managers have created tax-efficient strategies and largely reduced the minimum trade sizes of these investments to thousands of dollars, not hundreds of thousands. Again, when I started in the industry, the average cost to trade one million shares of stock was $60,000. Now, the cost is $0 to $10,000. For us, most mutual fund and exchange traded fund trades have little or no cost.

Easier diversification. The creation of fractional shares provides access to even those very large companies whose stock prices might make it difficult for a small investor to build a diversified portfolio.

What does this all mean for our investors?

Our average balanced portfolio has a weighted average expense ratio of 0.47%. That includes ETFs with expense ratios as low as 0.03% and actively managed funds whose expense ratios are generally less than 0.60%. By contrast, when I ran a mutual fund family 15 years ago, the average expense ratio for funds was over 1.00%.

Furthermore, technology has improved our ability to trade thousands of portfolios at the same time, which improves the quality of execution (i.e., the price you receive or pay for what you are selling or buying) and lowers costs. Years ago, executing a trade across many portfolios took time, hours or even days and usually involved a combination of paper trade tickets, phone calls, fax machines and dot matrix printers. Now it can be done at once through electronic networks, allowing everyone to receive similar price execution.

Small trades used to mean $100,000!

As a result of these advances, we are able to more accurately target an investment strategy to clients’ investment policies while also pursuing tax efficiencies. And rather than timing the market to determine when we should add or subtract a few percentage points from an asset class or position, we are able to stick to our strategic goals by regularly rebalancing clients’ accounts. We do this knowing that the cost of doing so is close to $0 and that systems are in place to provide portfolio managers and the trading team with the information needed to do so accurately.

When I began trading securities early in my career, a small trade was defined as below $100,000. Now a small trade could be considered less than $1,000. As a result, we think differently about how we manage money, the size of the trades we execute and the benefits that these small trades provide clients when building portfolios.