Charles Schwab Corp., which has morphed into a full-service brokerage, is planning to slash the price many clients pay for online trades. The move is widely seen as a bid to attract more business, but investors fear the move may have a negative impact on revenues. At one point yesterday, Schwab shares were off by more than 8 percent. The stock recovered, closing down just 2.9 percent.
“We’re aggressively pricing our services to make sure they appeal to the broadest range of investors possible,” said CEO David Pottruck, who added that the company was not trying to start a price war among online brokerages. It’s just that pricing has become more important, Pottruck said. Research analysts at New York-based Sandler O’Neill echoed these sentiments in a May 26 report, viewing the price reductions as a “defensive” response to a “deteriorating market position and pricing competition from peers like Fidelity and E*TRADE.”
However, the largest price reductions (60 percent, to be put in place in June) are aimed at keeping wealthier clients, a strategy that analysts say indicates a desire to be more competitive with full-service giants Merrill Lynch and Smith Barney. This, the analysts expect, will continue to have “uncertain results…until revenues grow into its higher expense base.”
Online equity trading costs will be lowered for individual investors based on household assets or their trading activity. For households with at least $1 million in assets at Schwab, equity trades will now cost $9.95—down from $29.95—regardless of trading frequency or share amount.
Those households holding between $100,000 and $1 million in assets will now pay $19.95 per trade for the first 1,000 shares, plus 15 cents per share thereafter.
Clients with less than $100,000 in assets at Schwab will pay on a sliding scale, $29.95, $19.95, and $14.95 per trade, depending on frequency of trades. Clients that make more than 30 trades per quarter will pay $14.95 per trade regardless of share amount.
Additionally, the asset minimum requirement for no-fee entry into Schwab’s Independent Investing Signature service has been slashed from $500,000 to $250,000. This service provides investors access to a wide range of research, performance reporting, as well as Schwab equity ratings and advice.
While the company believes the changes will enhance its “value proposition and competitive position,” management estimates the lowered prices could reduce revenues 2 percent to 3 percent in the next year. To counter these losses, the company plans “significant restrictions on new hiring” in its Individual Investor and Active Trader businesses. No specific measures have yet been determined.
Total client daily average trades were up 37 percent in April as compared to last year. However, trading fell 13 percent from March levels in the first 10 days of May, according to a statement by Pottruck.