The home-selling business is by no means the first financial-service industry upended by a forced change in how commission-based transactions are paid.

It was almost a half-century ago – May 1, 1975 to be precise – when Wall Street was required to rearrange how brokerages were compensated for the stock trades they processed. Ending that industry’s fixed commission rates surprisingly ignited a revolution in how Americans invest in the stock market.

So anybody forecasting the outcome of this summer’s homebuying confusion is, at best, making a wild guess.

The rules regarding who gets paid what are undergoing a sharp retooling this month. It’s the result of legal settlements made by the National Association of Realtors and other parties after a jury found real estate brokerages colluded to keep commissions artificially high.

In the short run, the switch frees home sellers from a longtime industry norm – paying commission to the buyer’s agent. New procedures have the potential to dramatically alter how house hunters look for housing – and what they pay for transaction services.

It’s a mess, with the scope of the transformation up for serious debate. And the comfort of status quo may muzzle dramatic alterations to the process.

But what occurred on Wall Street during the past half-century suggests there are plenty of possibilities for massive changes for house hunting.

Revolutionary change

The New York Stock Exchange – the world’s biggest trading platform and an icon of ruthless capitalism – had for nearly two centuries barred brokerages from competing for clients based on commissions.

Rules dating to 1792, just after the Revolutionary War, led to industry standards for commissions, which did not vary, no matter the size of the customer or the trade.

It took the nation’s 1960s deregulatory itch to put Wall Street’s pricing habits under scrutiny by its regulator, the Securities and Exchange Commission, and antitrust litigators at the Department of Justice. Much of the industry fought these outsiders pushing for market-based commission pricing.

Look, old habits die hard in many fields. Fear – real or imagined – slows necessary changes.

Insiders worried that competitive commission pricing would wipe out many brokerages and cost numerous employees their jobs. The stability of the entire stock market was in question, they claimed.

In addition, the changes were spun as hurting small investors the most. The industry had been quietly giving big institutions price breaks, and those discounts were forecast only to grow. Brokerages would make up for those losses with higher commissions for others. And there were fears that small investors might simply be ignored.

As the debate raged, the SEC simply set the date for change. Congress then seconded the move. The stock exchange and its brokerage members were left with a “what’s next?” moment in what were otherwise very bad times on Wall Street.

Note that the stock market in the 1970s was not a popular place for individuals or institutions to put their money. For the entire 10 years, Wall Street’s venerable Dow Jones index rose a total of 5% – never crossing the 1,000 mark in that decade. In the past year, the Dow crossed 40,000, FYI.

Perhaps it was all those industry stresses that sparked an entrepreneurial fervor, at least for a projected loser in the turmoil – the small investor. And it took a California entrepreneur to pioneer the promise of suddenly untethered commission rates.

Charles Schwab – yes, the founder of the brokerage that bears his name – decided to create services for what today is a less-than-tiny niche: the do-it-yourself-investors. Schwab offered discounted commissions to this flock, which rarely drew serious interest from many old-fashioned brokers.

The discount brokerage had been hatched. And these price breaks sparked an investor revolution that fueled many consumer-friendly innovations.

One big change was the mutual fund business, once a speciality option mainly for wealthy investors. These funds – professionally managed pools of stocks, bonds and other assets – became immensely popular with energized small investors who saw them as a simple way to build a well-rounded portfolio.

And, in the spirit of discounted commissions, “no load” options were a popular twist that charged no up-front sales commissions.

Bottom line

The long-run results of commission slashing on Wall Street are quite stunning.

What in today’s dollars might cost $3 a share to trade before 1975, now cost an investor pennies – if anything at all, depending on one’s relationship with their brokerage.

Stock ownership – directly or indirectly through funds – has gone from roughly one-fifth of all Americans in the 1970s to more than half of US households today.

And those mutual funds that had $40 billion in collective assets in 1975? This year, they hold $30 trillion-plus.

To be clear, it’s not just lowered commissions that are driving small investors. The elimination of many corporate pension plans, replaced by consumer-directed retirement options, has boosted individual investing.

The stock market exited the unprofitable 1970s into a half-century of huge gains. Even the often dull bond market created immense wealth, riding the drop in double-digit interest rates to near-zero in the pandemic.

Hey, investing became sexy. Still, 1975’s breakup of competition-stifling rules helped tweak Wall Street’s mindset.

Money management went from a transaction-based business model to one where long-term relationships with clients – folks who’ll pay modest annual fees – are the big profit maker.

OK, that’s not home sales. At least not in 2024.

Swapping housing is pretty much a one-time sales transaction for most parties involved. Now, good agents may get repeat business over the decades – or referrals to friends and family that can boost their bottom lines. But again, it’s primarily buying and selling.

In 1975, virtually nobody on Wall Street had a clue the small investor revolution was coming.

So, for housing, it might take an entrepreneur or two to figure out how 2024’s commissions overhaul could produce something nobody’s talking about today as a win-win for consumers and industry alike.

Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at jlansner@scng.com

Originally Published:

Source: www.mercurynews.com