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February 02, 2017 at 10:21 AM
Charles Schwab Corp. announced Thursday that it is cutting its standard online equity and ETF trade commissions from $8.95 a trade to $6.95 for trades made by advisors who custody with Schwab, for retail clients and clients of its Personal Choice Retirement Account (PCRA) program.
In a presentation to analysts and the press, CEO Walt Bettinger also said that the firm has “broadened” its previous “satisfaction guarantee” to “refund the particular cost” of commissions, transaction fees, or advisory program fees, “for any reason” to clients. Schwab previously had offered that money-back guarantee to clients from its fee-based advisor solutions, in which Schwab would “eliminate” a quarterly fee, Bettinger said, for “an unhappy client.”
As for cutting expenses of its Schwab-labeled index funds, Bettinger positioned it as “consistent with our heritage to level the playing field for all investors,” and said it was making its fees “as low as and lower than any other” major provider of index funds, citing in particular Fidelity and Vanguard.
“We’re eliminating all minimums for our index mutual fund,” he said “so all investors will pay the same expenses,” referring to the fund’s operating expense ratio,” which he said meant the pricing of those two index fund competitors “begins to approach our pricing only if you have $5 million to invest.”
Schwab’s press release said its competitors’ trade commissions as of Jan. 31 were $7.95 at Fidelity, $9.99 at TD Ameritrade and E-Trade, and $7 to $20 per trade at Vanguard, depending on the number of trades made.
As for its mutual fund expenses, the Schwab release cited the following expense ratios (see table below) based, it said, on the funds’ prospectuses.
In a presentation that covered the strategies and financials for 2016 and 2017, both Bettinger and Bernie Clark, head of Schwab Advisor Services’ RIA custody business, spoke bluntly of both the firm’s competitors and its strategy of putting Schwab’s scale to work on behalf of its retail and advisor clients.
After a “a strong year in assets and returns for our shareholders,” Bettinger said “we’re beginning some initial steps to benefit our clients through disruptive actions.”
| Investment Amount |
|||||||||
| $5,000 |
$100,000 |
$5,000,000 |
|||||||
| Schwab S&P 500 Index Fund |
0.03% |
0.03% |
0.03% |
||||||
| Fidelity 500 Index Fund |
0.09% |
0.045% |
0.035% |
||||||
| Vanguard 500 Index Fund |
0.16% |
0.05% |
N/A |
||||||
| Schwab Small-Cap Index Fund |
0.06% |
0.06% |
0.06% |
||||||
| Fidelity Small Cap Index Fund |
0.19% |
0.07% |
0.06% |
||||||
| Vanguard Small Cap Index Fund |
0.20% |
0.08% |
0.07% |
||||||
| Schwab U.S. Aggregate Bond Index Fund |
0.04% |
0.04% |
0.04% |
||||||
| Fidelity U.S. Bond Index Fund |
0.15% |
0.05% |
0.04% |
||||||
| Vanguard Total Bond Market Index Fund |
0.16% |
0.06% |
0.05% |
||||||
(See Schwab.com for more details on these expenses)
Highlights of 2016 included, he said, that financial “planning activity increased substantially, that it was the “fifth consecutive year that clients entrusted us with more than $100 billion in net new assets,” and that Charles Schwab Corp. estimated a “$300-$400 million benefit” would accrue to the firm with the Federal Reserve’s next rate increase; subsequent Fed hikes would provide a $200-$300 million benefit.
As for the benefits of corporate tax reform promised by the Trump administration and Congressional Republicans, Bettinger called prospects for reform an “ongoing story,” but the company estimated it would benefit Schwab to the tune of $450-$600 million annually. He called clients’ potential movement of money now in money market funds to Schwab Bank as a result of rising rates a “significant opportunity” for the company, which he said could produce a “very substantial incremental revenue and growth opportunity.”
Bettinger said the firm expects that RIA channel growth in general will “outpace other segments,” in large measure due to the movement of breakaway brokers to the independent channel. He also commented on the Deptartment of Labor’s fiduciary rule, saying that regardless of whether the rule is changed or delayed by the president or Congress, “that train has left the station.”
When asked whether cutting the cost of trades and reducing the OER of its index fund would affect Schwab’s financials, Bettinger said that Schwab’s continued growth would make that a nonissue. “We didn’t make our move in response to any competitors’ moves,” rather that Schwab’s intent is “to not have pricing be a barrier to anybody looking to invest.”
