What's up at Schwab? After a flurry of activity in recent years aimed at beefing up the brokerage's lucrative advice business for affluent and wealthy individuals, Charles Schwab & Co. (SCH) announced on May 25 that it will slash prices for trading commissions. And not by a little. Fees are coming down 33% for most online trades and by 66% for wealthier customers with more than $1 million in assets at Schwab.
The move will cost San Francisco-based Schwab an estimated $95 million in lost revenue over the next year, or about 3% of total revenue. Schwab's shares briefly swooned 3% on the news, but Chief Executive David S. Pottruck figures the move will help boost business in the long run.
Don't mistake the commission cuts as a play to generate trades. Far from it. After getting burned in that business following the tech bust four years ago, Schwab has been trying mightily to remake itself as a full-service brokerage. But the war for the so-called mass-affluent investors with accounts of $100,000 or higher, as well as for high-net-worth accounts of $1 million or more, has not been going well for Schwab. It's losing out to stronger players such as Ameritrade (AMTD), which can undercut it on price, and to Merrill Lynch & Co. (MER) and Fidelity Investments, which have reputations for more attentive hand-holding. And Fidelity also offers lower fees. It charges most clients $14.95 for a single trade. That compares with the $29.95 that Schwab has been charging most clients, who will now pay $19.95.
Schwab hopes that the fee cuts, which take effect in mid-June, will help it hang on to a larger share of those customers. It needs all the help it can get. In the quarter ended Mar. 31, Schwab added only 159,800 new accounts, down from 171,000 new accounts a year ago and 232,300 two years earlier. It had a total 7.5 million accounts, down from 8 million in the same quarter a year earlier.
WAITING FOR A PAYOFF
As for high-net-worth accounts, Schwab is still waiting for a payoff from its aggressive push into this potentially lucrative market. Its 2-year-old top-of-the-line advice service, Schwab Private Client, claims about 18,000 customers -- about double a year ago. Those accounts hold $18 billion in assets, up 140% from a year earlier. But that's just a tiny sliver of the market.
Still, the move to cut fees seems to be ringing all the right bells with independent fund advisers. Those are the money managers who handle individual accounts and use Schwab as a custodian for their clients' holdings -- about a third of all Schwab assets. "My one big concern about Schwab was that they were just nickel-and-diming people to death," says Susie Johnston, a financial adviser at Cherry Hills Investment Advisors in Littleton, Colo. "I'm glad to see they are not going to do that anymore with commissions."
The question is whether the commission cuts will be enough. Schwab maintains it is on the right track. But laying claim to a bigger share of the country's investment riches will be no easy task.
Corrections and Clarifications
"Is Schwab's latest come-on enough?" (News: Analysis & Commentary, June 7) should not have concluded that Charles Schwab & Co. is losing market share to Merrill Lynch & Co. Unlike other firms cited in the story, Merrill does not disclose trading volume or the number of accounts in its retail brokerage business.
By Louise Lee in San Mateo, Calif., with Lauren Young in New York