Schwab cuts prices - for some investors

Feb 16, 2004 @ 12:01 am

By Brooke Southall

Charles Schwab & Co. Inc. is making some big pricing changes, but read the fine print.

The San Francisco-based broker is cutting its sacred-cow commission price of $29.95 to $24.95 effective March 1, under certain conditions.

The 16.7% reduction marks the end of a pricing staple that withstood vicious price wars during the tech bubble.

Schwab also maintained the $29.95 price as its trading business plummeted during the recent recession.

The price chop comes at a time when TD Waterhouse Group Inc. of New York is waging a withering campaign that assails ``higher-priced brokers like Merrill and Schwab.''

It is also concurrent with a pledge by J. Thomas Bradley Jr., president of TD Waterhouse Institutional Services, to feature the differences between what his company and Schwab charge to financial advisers.

Stephen Winks, principal with SrConsultant.com in Richmond, Va., said that Schwab's simultaneous price cut and increase in advice offerings (see related story) is no coincidence.

``This is quite a signal,'' he said. ``Schwab is starting to come to the conclusion that trade execution is a commodity. It shows that Schwab is making a bet on the advice side.''

Quarterly fees

But a careful reading of the small print at the bottom of last Tuesday's four-page Schwab news release about new advice offerings shows that Schwab is sending mixed signals.

The $5 discount applies only to the first 12 trades in an account during the year, and it's for accounts that pay quarterly fees of varying levels. To get the discount without fees, a customer needs to have $500,000 with Schwab. A company spokesman declined to disclose the number of accounts that meet that criterion. The quarterly fee per household is $70 for less than $50,000 in assets, $40 for $50,000 to $250,000, and $25 for $250,000 to $500,000

Quarterly fees aside, Mr. Bradley said, his company's improvements in technology have given him leverage for using price as a reasonable point of comparison - especially when demonstrated as a cumulative effect.

In the example Mr. Bradley used at his company's national adviser conference in Orlando, Fla., he showed a case study of a Schwab adviser who would have saved $315,000 in the course of a year by switching to Waterhouse.

The unnamed advisory firm had 700 clients whose portfolios each had 15 trades. Assuming an average trade of 1,500 shares, he assigned a per-transaction price of $15 to Waterhouse's clients and $45 to Schwab's.

TD Waterhouse charges advisers $15 for a market order of up to 2,500 shares and $18 (flat) for a limit order.

Deborah D. McWhinney, president of services for investment managers at Schwab Institutional, said those numbers don't sound right, because Schwab offers virtually hundreds of customized ``relationship-pricing'' deals to its advisers. She conceded, however, that most of those deals go to advisers with $50 million or more in assets.

Ms. McWhinney said Schwab chose to drop its price because it had achieved economies of scale in online ordering that allowed it to do so.

She added that comparing Waterhouse's commission prices to Schwab's isn't relevant. Schwab's size gives it superior trading muscle to get the best execution.

``TD actually does some of its bigger trades through Schwab,'' she said. ``So does Fidelity.''

But Mr. Winks said Waterhouse has closed the gap considerably. ``TD Waterhouse has scale, and they don't have to be as big as Schwab to be Schwab's worst nightmare,'' he said.

``We are not scale challenged,'' Frank J. Petrilli, chief executive of TD Waterhouse USA, said. Nonetheless, he added that his company was trying to achieve greater scale in its failed merger attempt with E*TRADE Group Inc. of Menlo Park, Calif.

Meanwhile, Fidelity Investments is maintaining its core online trade price of $29.95 for up to 1,000 shares, said spokeswoman Sarah Friedell.

But the Boston firm gives investors a 50% discount for keeping $100,000 or more in assets with the company.

Yet many financial advisers say that they aren't concerned with commission prices anyway.

``I don't care,'' said Dennis Miller, principal with Miller/Russell & Associates in Phoenix, which has $600 million under management. ``We have a different arrangement [with Schwab], and ours is lower than [$24.95]. It's really $200 to $300 a year, and I don' t think investment advisers give a hoot.''

But Eliot Lipson, president of Horizons Financial Advisors Inc. in Alpharetta, Ga., thinks Mr. Bradley's example makes some sense. Mr. Lipson moved his assets to Waterhouse from Schwab three years ago.

``[At Schwab] it was $29, but that was only up to 1,000 shares,'' he said. ``I was seeing $120 tickets'' for larger orders.

Still, Mr. Lipson said, he might sniff around for a better deal. ``I'm starting to look at Ameritrade,'' he said.

But Mr. Bradley said Waterhouse is looking for the pricing sweet spot that balances service and value.

``It's not our objective to be the cheapest,'' he said, ``but I think advisers are more aware of the difference because they're being held to a higher standard by their clients.''

``Our pricing is aimed at the higher-end [adviser], and it's [centered] around equity trading and how much is online,'' Ms. McWhinney said.

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