Schwab scrambles to perk up business
Stock-trading prices lowered and commissions reduced to help lure new clients tempted by online firms
David R. Baker, Chronicle Staff Writer
Wednesday, May 26, 2004
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Charles Schwab Corp. slashed its stock-trading prices Tuesday in a bid to bring in more business, cutting commissions by more than 60 percent for its wealthiest clients.
Wall Street gave the change a chilly reception.
Schwab's stock price fell 8 percent in early trading before bouncing back and finishing down 28 cents, or 3 percent, at $9.27. The company warned that lower commissions would trim revenue by 2 or 3 percent in the next 12 months.
"It's a smart move. We'll see how profitable a move it is, and I think that's why you're seeing the shares get whacked," said analyst Mike Ford- Taggart with the Morningstar research firm.
The move represents a partial return to Schwab's origins as a low-cost brokerage for the average investor.
As its customers have aged, San Francisco's Schwab has offered more services -- more financial advice and planning -- that shifted the company away from its old, bare-bones approach to trading stocks. Online competitors such as E-Trade Financial Corp. and Ameritrade Holding Corp. seized Schwab's old niche, undercutting the company's prices and stealing customers.
Schwab won't abandon its high-end services, Chief Executive Officer David Pottruck said Tuesday. But the lower prices will help lure new clients tempted by the online firms.
"Our competitors are all increasingly aggressive, and we also want to be increasingly aggressive," Pottruck said. "The best deal often comes from competitive pricing and more service, and that's what we're trying to do."
Starting in mid-June, Schwab customers whose accounts hold at least $100, 000 in stock or other assets will pay $19.95 for each trade, down from $29.95. Customers with more than $1 million in their accounts will pay $9.95, compared with $29.95 now.
Ford-Taggart, the Morningstar analyst who owns no Schwab stock, said the brokerage had been in a strategic bind. Entry-level investors were going to E- Trade and Ameritrade, while investors searching for expert advice went with more traditional Wall Street firms.
Lower prices, combined with Schwab's name recognition, will help win more business from investors just entering the market, Ford-Taggart said.
"If I were an E-Trade or Ameritrade executive, today would not be a good day, knowing the grand-daddy of low-cost (brokerages) is putting the boots back on," he said.
The dip in revenue Schwab predicted should be temporary, Pottruck said. The company hopes to make up the lost income within two years, he said. In the meantime, Schwab will scale back hiring to compensate.
Even with the price cuts, Schwab will remain more expensive than its competitors. E-Trade, for example, charges $12.99 per trade for clients whose accounts are worth at least $50,000. Ameritrade charges $10.99.
Pottruck said, however, that his company wasn't looking to be the least expensive. Instead, Schwab will pitch its combination of service, reputation and cost.
"When you combine all the benefits of performance and people and prices - - you put all those together -- we think they're compelling," Pottruck said.
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