By Grant Easterbrook
This article is reprinted by permission from NextAvenue.org .
Recently, Charles Schwab /zigman2/quotes/201281754/composite SCHW +1.18% , TD Ameritrade /zigman2/quotes/207561492/composite AMTD +0.99% and E*Trade /zigman2/quotes/205731930/composite ETFC -3.81% eliminated trading commissions on stocks and ETFs. Can you expect to see $0 fees and commissions coming soon for other financial products and services?
Below is a look into the crystal ball for such prospects when you go to a car dealer, use a real estate or insurance agent or hire an accountant to prepare your taxes. Each of these services can either be provided through online processes at a lower cost than the “human” method or has unsustainably high profit margins that haven’t caught up with the underlying tech-enabled costs.
Buying and financing a car
Traditionally, purchasing an automobile has involved going to a dealer, negotiating with a salesperson and navigating complex financing terms. But online car research and sales platforms like Autotrader, Cars.com /zigman2/quotes/210492562/composite CARS -7.54% , Carvana and Vroom have increased price transparency and simplified the financing process.
Given this trend and the fact that car salespeople typically earn about 25% of net profits on a car sale, little wonder that car shoppers only spent 12% of their time online browsing traditional dealers’ sites, according to a 2018 Cox Automotive survey . Americans are finding lower prices online and online retailers have already started to lower costs for car buyers, a trend that will accelerate in the 2020s.
And these dynamics don’t even scratch the surface of the potential for on-demand self-driving cars that may lead some Americans to forego ownership in favor of using an app to call a car when needed. Even if self-driving cars arrive later than expected, the 2020s could well see Americans pay less for cars.
Buying a home
If you use a real-estate broker, you’ll often pay a commission of 5% to 6% (split between the agent for the buyer and the agent for the seller). That’s higher than in many other developed countries.
For example, real estate commissions in the United Kingdom are typically between 1% and 2%. If commissions here dropped to U.K. levels, Americans would save about $8,000 in fees on the average $200,000 home.
Why have American broker fees remained so high, even with the rise of online real estate platforms like Redfin and Zillow? /zigman2/quotes/204413973/composite Z -4.31%
The answer is that homes are still primarily listed through the industry’s Multiple Listing Service (MLS). And that structure helps maintain high commission fees for real-estate agents on both sides of the transaction. The MLS structure, however, is currently under investigation by the U.S. Department of Justice. And some of the largest national real-estate firms are facing lawsuits over MLS and agent fees.
Also, according to a New York Times article by economist Justin Wolfers, rebates on real estate commissions are legal (if rare) in 40 states, lowering what some home buyers pay.
So, U.S. residential real estate commissions may well fall this decade. That would accompany a loss of many real-estate broker jobs along with an acceleration of online real estate platforms’ ability to replace human agents. How soon this happens will depend on the outcome of these lawsuits and the government investigation.