Schwab cutting commissions to meet low-cost competition

Most brokerage clients to pay $19.95 per trade

May 26, 2004|By BLOOMBERG NEWS

SAN FRANCISCO - Charles Schwab Corp., the biggest discount brokerage, said yesterday that it will cut trading commissions next month by as much as 67 percent to compete with lower-cost Internet brokers such as E*Trade Financial Corp. and Ameritrade Holding Corp.

In making the biggest change in its pricing since introducing $29.95 Internet trades in 1998, Schwab will drop commissions by a third, to $19.95, for most customers and cut fees for clients with at least $1 million in assets at Schwab to $9.95, Schwab said in a statement.

The company said the price cuts could reduce revenue 2 percent to 3 percent in the 12 months after the move. To minimize the drag on profit, Schwab will restrict hiring in some units.

Schwab's shares dropped 8.4 percent after the announcement, but recovered to close down 28 cents, or 2.9 percent, at $9.27 yesterday.

The price cuts signal Schwab's effort to regain its top position in the discount-brokerage business as it attempts to attract wealthier clients who pay fees based on asset levels for trading and investment advice.

Ameritrade passed Schwab with the highest daily average trading volume when the Omaha-based company completed its acquisition of Datek Online Holdings Corp. in September 2002.

"It's a competitive market out there, and Schwab is trying to take a proactive approach to increasing the number of transactions that get done," said Kenneth Worthington, an analyst at CIBC World Markets. "They've got to be a little more competitive on the pricing."

"We're aggressively trying to grow all the parts of our business," Schwab Chief Executive Officer David Pottruck said in an interview.

For the past two years, Schwab has lagged behind E*Trade and Ameritrade as it cut costs and tried to redefine itself as a seller of advice to compete with full-service rivals such as Merrill Lynch & Co. Schwab shares had risen 11 percent in the past year, trailing Ameritrade's 53 percent increase and E*Trade's 73 percent gain. Merrill Lynch rose 36 percent.

"We've heard from our clients that our pricing needs to come down," Pottruck said. "We wanted to make sure that they were offered a more competitive price point."

Customers will "reward" the company with more trading and assets for cutting commissions, he said.

Schwab clients who trade the most, have the most assets or buy Schwab's advice will get the lowest prices. E*Trade charges $9.99 and $19.99 for online trades, depending on assets and the number of trades. Ameritrade charges $10.99 for all trades.

Last month, Schwab reported that its first-quarter profit more than doubled, to $161 million.

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