Zero commission fight could pressure wirehouse earnings

If they follow lead of Schwab and others, profits could get dinged, according to one analyst

Oct 2, 2019 @ 4:51 pm

By Bruce Kelly

The decision by discount brokers to eliminate trading commissions for online investors could spill over to the large wirehouses and eventually pressure earnings, according to a new report by an industry analyst.

Charles Schwab Corp. announced Tuesday it was eliminating online trading commissions. TD Ameritrade announced later in the day and ETrade on Wednesday that they also would offer zero commissions for online trades.

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"We believe that Schwab's move will accelerate pricing pressure in the industry, but we would caution investors that the potential impact is not equal among all brokers," wrote Brian Kleinhanzl, managing director and equity analyst with Keefe Bruyette & Woods.

If Morgan Stanley, Bank of America Corp., which owns Merrill Lynch, and Wells Fargo & Co. each made similar moves and erased brokerage commissions, the earnings per share impact from such a move would be a hit of roughly 2.3% to 6.6% in next year's earnings per share, he wrote.

"We show this as a worst-case scenario, and the reality is that banks would likely push clients to fee-based accounts as an offset and could possibly raise fees elsewhere as an offset," he wrote. "Removing all retail brokerage transaction revenues results in an [earnings per share] decline of 6.6% for Morgan Stanley, 2.3% for Bank of America, and 2.6% for Wells Fargo."

The outlook is not all gloomy for the banks that own the wirehouses, he noted.

"Many investors get free trading today in some form and we have not seen a large amount of money in motion to firms that offer partial free trading thus far," Mr. Kleinhanzl wrote.

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