Schwab Slashes Online Stock Commissions, Lowers Fund Costs
(Updated February 3 to add comments from Vanguard and Fidelity in last four paragraphs.)
Charles Schwab Corp. said Thursday that beginning Friday, February 3, it will slash its standard online equity and exchange-trade fund commissions to $6.95 a trade from $8.95, launching what is likely to be the first commission pricing war in six years.
The San Francisco-based discount brokerage pioneer also said it will lower expenses in the next few months on its most popular market cap-weighted index funds to levels below those of competitors Vanguard and Fidelity, eliminating investment minimums for the funds and imposing a single share class for the funds.
The changes are the first made on stock trades at discount brokers since January 2010 when Schwab cut online stock commissions to $8.95 from $12.95. It follows the company’s decision to lower prices on its exchange-traded fund prices last October and comes as retail investors have become more sensitized to fee size amid publicity over the Department of Labor’s fiduciary rule.
“[F]ee awareness and fiduciary expectations will impact the products and services delivered to clients” regardless of whether the rule is modified by the Trump administration, Schwab said in a slide accompanying a presentation to analysts by Chief Executive Walt Bettinger.
Schwab more than a year ago said that it would be able to absorb lower commissions once the Federal Reserve began raising rates rise because of the wider margins it will realize on investing client cash. It underscored its ability to sacrifice price for volume by noting that it expects “very modest growth in retail investor trading volume” coupled, in a self-fulfilling prophecy, with “likely strategic pricing pressure.”
Schwab is betting that scale will play “an increasingly large role in determining the winners, as investors, RIAs and 401(k) plans demand a better value,” according to slides accompanying Bettinger’s presentation.
In a slap in the face to competitors from large full-service firms, his presentation also said that “brand loyalty is more transient than ever” as consumers more willing consider “alternatives that are are more transparent” and easier to use.
While Schwab’s posted online prices leave commissions charged by broker-guided firms far in the distance it could trigger pricing wars at rivals such as TD Ameritrade, which charges $9.99 for standard online trades.
“We’ll take a look this new development as we always do, but price is just one component of the client experience,” TD Ameritrade spokesman Joseph Giannone said in an email. “We’re interested in the entire experience and how all the different pieces — product, price, service — work together and deliver value to the client.
Richard Repetto, a brokerage industry stock analyst at Sandler O”Neill & Partners, said Schwab’s move may not require a response from competitors since it and other competitors have long been pricing trades below their list prices. “There’s an 80/20 rule where 20% of the accounts generate 80% of the revenue, and those 20% receive some form of negotiated pricing in commissions, margin loans, cash interest, etc.,” he wrote in an email. “Key clients aren’t paying rack rates.
Schwab said that effective March 1, expenses on the Schwab U.S. TIPS ETF and Schwab Fundamental Index ETFs will be lowered, to be followed on May 1 by similar changes, pending shareholder approval, on its Fundamental Index mutual funds. The funds will eliminate all investment minimums, be reduced to a single share class, and aligning expenses with those in comparable Schwab ETFs, the company said.
“It’s business as usual at Vanguard,” regarding fund expenses, a company spokesman said in an email. “We’ve been lowering the cost of investing for more than 40 years across-the-board on all of our products.”
Regarding commissions, he noted that Vanguard clients pay no commissions when buying company-sponsored ETFs through its brokerage arm while “a large number of our clients no commission or $2 for equity trades.
With tongue firmly in cheek, he added: “So we have no plans to raise our commissions to match a competitor.”
A spokesman at Fidelity said the company “is always evaluating our overall value proposition and we encourage investors to look beyond just price when evaluating a firm. Fidelity has lowered fees on 27 equity and bond index funds since July 2016, he wrote, and generates price improvement of ten times the industry average through efficient executions of stock trades.