It will cost Charles Schwab Corp. dearly in the short run. But in an effort to win market share and bring its trading charges more in line with some of its low-priced competitors, the San Francisco-based discount broker has slashed commissions on online equity trades to as little as $9.95 for its best clients. Millionaire clients of advisors who custody at Schwab will receive the same deal.
The $9.95 price for market and limit orders, announced May 25, will apply to clients with more than $1 million in “household assets” at Schwab. Previously, these clients paid $29.95, or 3 cents per share, for trades over 1,000 shares. The new pricing plan has no minimum trade size and includes those in the Schwab Advised Investing program.
Initially, Schwab Institutional President Deborah McWhinney said that most of the 1.3 million independent investment advisor client active accounts trading through her unit will see commissions fall from $29.95 to $19.95 per trade for up to 1,000 shares, with an additional 1.5 cents per share thereafter. Larger advisors, she added, would still be able to negotiate special deals. But spokesperson Kelly O’Brien acknowledged that Schwab received “a lot of feedback” from advisors after its announcement and decided to modify its pricing. “Although our standard electronic equity pricing for most advisors will be $19.95 per trade,” she said, “we will be giving advisors who have clients with $1 million in assets under their management and custodied at Schwab the flexibility to offer those clients the $9.95 per trade, provided that the client assets with the advisor are maintained at that level.”
While Schwab conceded that its commission cuts could reduce consolidated revenues by 2% to 3% in the coming 12 months, McWhinney insisted that the move is “a really positive event” for the broker’s advisor channel. “Our [advisor] clients count the cost of a trade in the results they provide to their end clients,” she said. With Schwab Institutional assets now over $300 billion, “we’re ahead of plan,” she said. So even with Schwab’s overall revenues set to decline, “the direction we’re getting is to invest in the [institutional] business.”
Schwab also announced a sliding scale of commissions of $14.95 to $19.95 per trade for several classes of retail clients. In addition, it lowered from $500,000 to $250,000 the minimum amount of household assets necessary to qualify for no-fee access to its Schwab Independent Investing Signature service. The service includes research and priority handling of client calls. Schwab did not reduce commissions on options ands bond trades. It also left unchanged its charges to buy mutual funds sold with transaction fees.
Despite the equity commission cuts, Schwab’s new fees are still well above those of a number of online discount brokers. For example, Brown & Company, a unit of J.P. Morgan Chase, charges $5 for online market orders and $10 for limit orders up to 5,000 shares. Ameritrade, which has been offering both cash rebates and free trades as an incentive to open new accounts, charges $10.99 for market and limit orders for all of its clients. TD Waterhouse, which spokesperson Jennifer Olegario says is “committed to remaining competitive,” charges large customers $9.95 for market orders online, while Fidelity Investments charges its largest and most active retail customers $8 for any online equity trade. Asked about the impact of Schwab’s move on its advisor channel, Sarah Friedell, the Boston firm’s director of media relations, acknowledged that “the market continues to push pricing for equity transactions down and that we need to be responsive to our clients.” She added that “many of our clients have already negotiated reduced equity pricing on behalf of their customers.”