TD Ameritrade (NASDAQ:AMTD)
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2 Months : From Sep 2019 to Nov 2019
By Alexander Osipovich and Lisa Beilfuss
Charles Schwab Corp. said it would eliminate commissions on online stock trades, one of most dramatic moves yet in a broad-based price war that is crimping profitability across the financial sector.
The move by Schwab -- the largest publicly traded e-broker, with 12 million brokerage customers -- rattled online brokers that have been squeezed by investors' expectation that fees for financial services should be low or even nonexistent. Shares of larger banks and brokerages also declined as the Dow Jones Industrial Average dropped 1.3% on concerns about a worsening U.S. economic outlook.
Digital upstarts such as Robinhood Markets Inc. helped popularize the zero-commission model in the online-brokerage business. But the race to zero is also happening in other areas of finance, like asset management, where Vanguard Group and Fidelity Investments recently eliminated fees for many funds offered on their platforms, and financial advice, which some digital advisers are offering free of management fees. Meanwhile, a broad investor shift into index-based investing strategies has eaten into the fees reaped by firms on Wall Street and beyond.
"There are certain parts of finance that have become commoditized," said Devin Ryan, an analyst at JMP Securities LLC. "Trading is one of them."
Shares of TD Ameritrade Holding Corp. plummeted 26% in their biggest one-day percentage decrease since 1999. E*Trade Financial Corp. dropped 16%, and Schwab fell 9.7%. The three firms' declines wiped out more than $13 billion in aggregate market value.
Another rival, Interactive Brokers Group Inc. -- which set the stage for Schwab's price move last week when it announced plans to launch a zero-commission stock-trading service -- fell 9.4%.
After the close of trading Tuesday, TD Ameritrade said it, too, would cut online trading commissions to zero. TD Ameritrade said it expects the loss of commissions to wipe out $220 million to $240 million in quarterly revenue, or 15% to 16% of its top line.
Eliminating trading commissions is the latest step in a long road for Schwab, founded by Chuck Schwab to bring investing to the masses. When regulators in 1975 abolished fixed trading commissions -- blowing up a decadesold system that had allowed stockbrokers to charge hefty fees with little competition -- he launched one of the first discount brokerages and took on Wall Street with ever-declining fees.
This year, e-brokers and Wall Street trading desks alike have been hurting because of falling stock-trading volumes, as concerns over slowing economic growth have made investors more cautious. Interest-rate cuts by the Federal Reserve have dealt another blow, by cutting into e-brokers' ability to collect interest on clients' cash.
Analysts warned other online brokers would be forced to follow Schwab's lead. "There is no way to sugar coat this development," analysts at Wells Fargo said in a research note. "We were hoping the challenging macro environment (i.e. declining interest rates) would prevent the industry from competing on price like this, but that is clearly not what is happening."
Schwab may be better positioned to weather the storm. Compared with its rivals, it is more reliant on its banking arm and less dependent on commissions, which make up only about 7% of total revenue.
TD Ameritrade, meanwhile, derives about one-quarter of its revenue from trading. For E*Trade, commissions comprise about one-fifth of total revenue.
Some e-brokers may need to merge with competitors to survive, JMP's Mr. Ryan said. That process has already been under way, with TD Ameritrade acquiring Scottrade in 2017.
Asset managers also have been shaken by the shift toward ever lower fees. Investors' surging demand for cheap index funds has thinned the ranks of Wall Street stock pickers and rewarded those players able to meet investors' appetite for low-fee products. In some cases fees have sunk to zero.
Last summer, Vanguard said it was making online trading free for almost all exchange-traded funds bought and sold through its brokerage platform. A month later, Fidelity unveiled the first zero-fee index funds. Fidelity later expanded the number of ETFs that trade free on its own platform to more than 500.
Fee-free financial advice also is cropping up, disrupting the business of old-school financial advisers which typically charge 1% to 2% of a client's assets annually. In 2014, Schwab announced its system that uses algorithms to provide portfolio-management services. For some customers it has waived fees for the digital advice in exchange for a relatively high cash allocation that flows into Schwab's bank. Robo adviser Wealthfront Inc. last year made its automated financial planning free to anyone who downloads the company's app.
Online brokerages such as E*Trade became hot during the 1990s dot-com boom as day trading took off. But they recently have lost ground to the likes of Robinhood, the Silicon Valley startup that has lured many first-time investors and traders.
Founded in 2012, Robinhood has amassed around six million users, many of them millennials, with its smartphone app that lets investors buy and sell stocks without paying a fee. Robinhood's success has sparked an array of imitators offering free stock trades, including Webull, M1 Finance, TradeZero and Dough.
A spokesman for Robinhood said, "The changes taking place across the brokerage industry reflect a focus on the customer that's been inherent to Robinhood since the beginning."
Even the biggest, boldest names in financial services have been forced to play this game. JPMorgan Chase & Co. last year unveiled its You Invest product, which offers customers at least 100 free stock or ETF trades a year and is aimed at younger, first-time investors. Bank of America Corp.'s Merrill Edge also offers some commission-free online stock and ETF trades, an offering it expanded in February.
To make money, zero-commission brokerages like Robinhood rely heavily on a practice called "payment for order flow," in which they route customers' orders to buy or sell shares to electronic-trading firms such as Citadel Securities and Virtu Financial Inc., in return for cash payments. Robinhood is also a lean operation that doesn't spend money on legacy operations like the bricks-and-mortar storefronts offered by TD Ameritrade and Schwab.
Schwab's move on trading fees is set to take effect Oct. 7. It applies to commissions for stocks, exchange-traded funds and options listed on U.S. or Canadian exchanges.
The San Francisco financial-services company currently charges a commission of $4.95 for online U.S. stock, ETF and options trades. Charles Schwab said clients trading options will continue to pay 65 cents a contract.
"We don't want to fall into the trap that a myriad of other firms in a variety of industries have fallen into and wait too long to respond to new entrants," Chief Financial Officer Peter Crawford said in a note on the company's website. "It has seemed inevitable that commissions would head towards zero, so why wait?"
Other online brokers grappled with the prospects of a race to zero. TD Ameritrade said it was reviewing the Schwab announcement. "We will remain competitive," a spokeswoman for the Omaha, Neb., brokerage said.
A Fidelity spokeswoman declined to say whether her firm was considering a commission cut of its own. "We will always look for ways to leverage our scale to deliver even more value," she said.
Vanguard is "happy to see others in the industry continue to follow our lead in reducing the cost of investing," a spokeswoman said. E*Trade didn't respond to requests for comment.
Interactive Brokers said it welcomed Schwab's announcement, which came just five days after the firm unveiled its commission-free "IBKR Lite" platform.
"The more the merrier," the company's Chairman and CEO Thomas Peterffy said in an email.
--Justin Baer and Dawn Lim contributed to this article.
Write to Alexander Osipovich at firstname.lastname@example.org and Lisa Beilfuss at email@example.com
(END) Dow Jones Newswires
October 01, 2019 19:19 ET (23:19 GMT)
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