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 nearly 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%.
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 decades-old 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 U.S. 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 in the first
zero-fee index funds. Fidelity later expanded the number of ETFs
that trade for 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 controversial 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 per
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.-based 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 alexander.osipovich@dowjones.com
and Lisa Beilfuss at lisa.beilfuss@wsj.com
(END) Dow Jones Newswires
October 01, 2019 17:41 ET (21:41 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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