The Cost of Whole Shares: Why Fractional Shares Matter More Than You Think

A clock can lose a single second each day and hardly be noticed. It ticks on, imperceptibly out of step with the truth. The error is so small that it feels irrelevant until the days accumulate into weeks, the weeks into months, and eventually the loss is no longer measured in seconds but hours.

Portfolios can drift in the same way. The cause is less romantic than the movement of a clock, but just as steady: the restriction, still enforced by many custodians, that trades must be made in whole shares.

We often hear about fractional shares in the context of access: a way for retail investors to own a slice of companies like Tesla or Amazon without buying a full share. That is a real benefit. But for serious investors, especially in advisor-managed portfolios, the advantages are broader and more consequential: reducing cash drag, minimizing tracking error, and preserving tax alpha. 

How Small Gaps Become Real Losses

When you can only transact in whole shares, a portion of each trade is left behind as idle cash. That cash earns little and quietly erodes the return of the portfolio. This is cash drag.

The imprecision does not stop there. Whole-share trading forces allocations to land near their targets rather than on them, and over time those small deviations accumulate into tracking error drag: a portfolio that drifts away from the performance it was built to deliver.

It also constrains what can be done in tax-loss harvesting. Without fractional shares, you cannot always sell the exact quantity needed to harvest the full loss, nor can you reinvest every dollar of proceeds into the replacement security. The result is less capital back in the market and less of the tax alpha: the incremental after-tax return that disciplined harvesting can generate.

Cash drag. Tracking error drag. Lost tax alpha. None are catastrophic in isolation, but together they work like seconds slipping from a clock

Why It Persists

The barrier is not technical. Most custodians already allow retail investors to have fractional shares. The difference lies in incentives.

Idle cash is profitable to a custodian, not to you. It is swept into short-term instruments or deposited at affiliated banks, where it earns interest. The gap between what the custodian earns and what it credits to you is theirs to keep. The more cash stranded by whole-share restrictions, the larger that spread becomes.

Imprecision also makes packaged products more appealing: model portfolios, mutual funds, and other vehicles that carry embedded fees or revenue-sharing agreements. This creates a quiet nudge toward solutions that generate more revenue for the custodian, even when more precise, lower-cost options might better serve the client.

Retail investors trade more frequently and keep a larger share of their portfolios in cash. Both behaviors produce significantly higher revenue per dollar of assets than advisor-managed accounts. That built-in profitability makes it easy for custodians to offer fractional shares to retail clients without concern for their own economics — a calculation that does not favor extending the same to advisors.

Incentives explain persistence. The restriction survives because the custodian’s gain outweighs the client’s loss.

Why We Work with Altruist

A custodian should clear obstacles from compounding, not place them in its path. That principle guided our decision to work with Altruist, which is why we continue to value them as the preferred custodian for our clients. They offered fractional shares from day one, removing a persistent source of cash drag, tracking error, and lost tax alpha. Today, every portfolio we manage can hold fractional shares, execute tax-loss harvesting with precision, and maintain allocations with minimal idle cash.

The Principle

Some will see fractional shares as a technical feature. We do not. In investing, precision is not cosmetic; it is a principle.

It is often the smallest things that decide the largest outcomes. Our responsibility is to remove every friction we can and to guard against those we cannot. Because in the mathematics of compounding, there is no neutral ground. And the investor who ignores the small things has already chosen which side they are on.