UPDATED: Merrill Edge Won’t Mimic Schwab’s Zero-Commission Offer–Executive
(UPDATE: Since the publication of this story, Bank of America on October 21 said it would expand its loyalty program to offer unlimited free stock, ETF and options trades for “preferred rewards” clients. The service will still charge a $2.95 commission for clients who are do not qualify for the preferred rewards benefit.)
Charles Schwab’s unleashing of a pricing war among discount brokers won’t generate a copy-cat zero-commission deal for customers of Bank of America’s Merrill Edge unit, an executive said on Thursday.
Schwab on Tuesday said that as of October 7 it will eliminate commissions on online and digitally-generated stock and exchange-traded fund orders for all customers, regardless of how much they have in their accounts. The decision prompted similar announcements by rivals TD Ameritrade Holding Corp. and E*Trade Financial Corp. (along with a steep drop in all the online brokers’ stock prices).
Merrill Edge, which promotes its low-fee offering primarily to customers of its Bank of America parent and to sub-$250,000 accounts of Merrill Lynch brokers, is not entering the battle.
Edge “is a vastly different value proposition compared to other brokerages that focus solely on free trades or investment only,” Aron Levine, head of consumer banking and investments at BofA, said in an email.
Merrill Edge charges $6.95 for stock trades, but bank customers can qualify for free trades under a relationship-based Preferred Rewards (PR) program based on their use of other Bank of America products and services.
Self-directed Edge clients qualify for ten free trades a month if they keep at least $20,000 at Bank of America, ramping up to 30 free trades for balances of $50,000 and 100 free trades for customers with $100,000. About 82% of Merrill Edge trades are already free as part of the preferred rewards plan, according to a company spokeswoman, but Edge also employs 2,800 “financial solutions advisors” who work with customers for fees and commissions.
“We continue to look at ways to enhance the PR program,” Levine said. The program also offers participants discounts on mortgages and auto loans, as well as lower fees for use of Edge’s Guided Investing (robo) service.
Schwab, for its part, appears to be extending its adoption of Bank of America and other commercial banks’ strategy of profiting from the spread between what they pay on client cash (deposits and sweeps) and what they earn on loans and investment of the cash.
Schwab, whose marketing materials do not include Edge as a competitor, already generates more than 50% of its revenue from net interest margin on cash. Only about 7% came from commissions last year.
In a blog accompanying Schwab’s zero-commission announcement, Chief Financial Officer Peter Crawford estimated that the offer will cost the company $90-100 million in quarterly revenue, or 3-4% of total net revenue.
Schwab also continues its long-established strategy of promoting its offerings to all investors. “Price should never be a barrier to investing for anyone, whether an experienced investor or someone just starting on the investing path,” Schwab CEO Walt Bettinger said in announcing the price cut.
Schwab had $1.95 trillion in client assets in its retail brokerage business as of June 30. Edge had $220 billion as of that date.
Merrill Lynch Wealth’s 14,800 full-service financial advisors do not get paid on accounts with less than $250,000, but receive incentives for referring those accounts to Edge.