On October 1, brokerage company Charles Schwab announced that it would stop charging commissions for certain securities transactions. Schwab’s rate had been $4.95 for online trades, so the impact of going to zero on revenue wasn’t huge for the firm. The same could not be said for rival TD Ameritrade, where commissions were estimated at 20-25% of revenue. Less than two months later, on November 25, Schwab disclosed plans to acquire TD Ameritrade in an all-stock transaction valued at $26 billion. Both stocks rallied on the news, as the shotgun wedding raised prospects of cost-synergies.

Whether or not foregoing commission revenue is very beneficial for investors remains to be seen. Sure, saving $4.95 per transaction will add up (in the same way skipping that cup of coffee every morning turns into hundreds of dollars by year end). But it’s naïve to think custodians won’t make up the shortfall elsewhere. Schwab earns a significant amount of money from idle cash balances in investment accounts. This cash affords their bank a cheap source of capital for lending. Then there’s securities lending: placing your holdings in a margin account, which allows the broker to lend your holdings out – with interest payable to the broker – to hedge funds executing short-sales. Let’s not forget the impact of  of “float” interest as well (miniscule on each transaction, but multiplied across billions of dollars in total transactions is pretty healthy). Oh, and proprietary fund fees – who needs commissions when you can charge a management fee?

Lest that assessment sound cynical, we should note that we actually really like Schwab’s offering for investors: their custody and trade execution are appropriately cheap and good quality. Nor do we begrudge them earning a fee for their work. In this and all similar scenarios, we just urge caution; and be sure to read the fine print. The apparently “free lunch” always comes with a hidden tab.