The
Charles Schwab Corp.'s effort to drum up business in its newly launched stable of exchange-traded funds by waiving commissions for its clients continues to draw intense interest from its competitors and advisers. At two separate conferences Wednesday, questions were raised about Schwab's ground-breaking decision with various levels of concern.
Richard Lehmann, an investment adviser firm owner who publishes fixed-income newsletters and an ETF investing newsletter, said he worries that other brokers will rush in behind Schwab with their own new commission-free offerings, to the ultimate detriment of individual investors.
“I can see a large body of people moving into this space to do day trading,” he said at an online iConference sponsored by Forbes magazine. Since many of those traders are likely to be retirees and relatively unsophisticated investors lured solely by free trading, he added, “that is not a positive development.”
The damage will be magnified by competitors of Schwab launching their own ETF lines to remain competitive, he said.
Earlier in the day, TD Ameritrade Holding Corp. chief executive Fred Tomczyk, whose firm competes directly with Schwab for online traders and registered investment advisers, said he is monitoring Schwab's ETF with intense interest.
“We're not seeing any impact on us to date, but we will watch that very carefully and we will respond carefully,” he said, noting that his firm has a lot to protect since it is the largest retail broker for active traders.
Schwab is wielding its marketing muscle to create a buzz about the product, he said at a separate investor's conference sponsored by The Goldman Sachs Group. But Mr. Tomczyk also suggested that the zero-commission offer may not be as altruistic it appears.
“What they are trying to create is an ETF with a 12(b)-1 on it,” he said.
Large ETF sponsors do not impose the trailing commission fee on their products, but Schwab and many sponsors include the right to do so in their ETF registrations. (Two of the three largest,
The Vanguard Group Inc. and
BlackRock on its iShares, have no such provisions in their offering documents.) Schwab officials in the past have said they have no plans to activate the 12b-1 option.
Mr. Tomczyk said Schwab has been “pretty secretive” about its early results, including whether ETF sales are cannibalizing mutual fund sales, though he said he would be equally retentive if TD had been first to market.
Separately, the TD Ameritrade CEO said the firm expects to increase its marketing budget for the second consecutive year and also affirmed the company's forecast that revenue will grown between 7% to10% in 2010. TD Ameritrade, almost half of which is controlled by Canada's TD Financial Group, also is experimenting with putting brokers in some TD Bank branches on New York's the Upper West Side to see if they can gain assets from bank customers, he said.
Schwab last month introduced three passively managed U.S. ETFs covering the broad market, large-cap offerings and small-cap offers. It also launched an international equity ETF. It plans to introduce another four —a U.S. large-cap growth ETF, a U.S. large-cap value ETF, an international small-cap equity ETF and an emerging-markets equity ETF — this month.
Representatives of Schwab did not respond to calls for comment on the remarks of Mr. Lehmann and Mr. Tomczyk.
