In a nod to the smaller investors who gave the firm its early success, Charles Schwab Corp. has eliminated its remaining account service fees and its $3-per-order handling charge on equity trades.
The decision affects about 650,000 Schwab account holders with balances below $25,000. Average service fees ranged from $120 to $180 annually per account. (Some customers still may be charged if they don’t keep at least $2,500 in brokerage accounts, or a minimum of $2,000 in retirement accounts.)
Schwab’s strategy of reducing fees—this is its seventh price cut since 2004—puts pressure on rivals, including E*Trade Financial and Ameritrade, to differentiate themselves beyond offering cheaper trades.
When combined with the cost of a new national advertising program, relinquishing the fee income is expected to reduce fourth-quarter earnings by about $40 million pretax, or 2 cents per share.
Such cuts are a hallmark of founder Charles Schwab, who recently returned as chairman and CEO. Historically Schwab has been happy to exchange one-time earnings hits for the opportunity to expand market share. In 1986, for example, the firm pioneered the no-annual fee IRA.
Schwab is in a position to eliminate the fees because it has substantially eliminated the high overhead structure that demanded the fees in the first place. The company has shed more than $300 million in annual expenses since mid-2004. The company projected that its earnings for the current quarter will range between $195 million and $205 million, the second highest three-month profit in the San Francisco-based company’s history.