Sir Charles Schwab: No more Mr. Little Guy
By BILL VIRGIN
SEATTLE POST-INTELLIGENCER COLUMNIST
Thursday, August 1, 2002
So long, Chuck. It's been a good relationship. But now you've outgrown us, you want to expand your horizons, move up in the world. We can either move up with you or be left behind.
Oh sorry, maybe Chuck is too familiar a form of address for your more lofty aspirations these days. Perhaps we should address you as Charles ... as in Charles Schwab & Co.
There was a time when Chuck was good enough for both of us. We were tired of paying large annual fees to maintain brokerage and retirement accounts at one of the big "full-service" investment firms. We were spending that money for services we didn't want or use. And we were paying that money for the privilege of receiving recommendations (i.e., having stuff foisted on us) that suited the interests of those selling it more than those buying it.
We figured we could come up with investment "ideas" that were no worse, and might actually be better, than what the big investment house was pushing (the clincher came when the local broker kept calling about a stock involved in a takeover fight, with recommendations that were consistently two or more days late and wrong to boot).
And we were investors, not traders. We wanted someplace where we could maintain our accounts and, on the rare occasion we wanted to trade anything, we could do so at a reasonable price.
Heck, we couldn't have described your niche better if we were in the corporate marketing department. Providing no-frills, efficient service to small investors was what Schwab was all about. If you didn't invent the discount brokerage category you certainly made yourself its biggest name in. With your low-cost services and your supermarket of mutual funds, you were exactly what middle-market consumers needed.
But now Charles Schwab & Co. has bigger dreams. In its own advertising campaign and in national business publication profiles, the company is touting such services as investment advisers and stock ratings. You're going after the big investment houses, but you say you'll be better than they are because you won't have the same conflicts of interest.
Well, maybe so. What's not in doubt is that these new services cost money to offer.
And where is that money coming from? From the loyal discount brokerage customers.
It used to be that you could maintain an IRA and a brokerage account at Schwab without fees. Recently, though, Schwab has begun imposing fees, and those fees are going up.
In the most recent fee statement, Schwab says IRA accounts of less than $10,000 in assets will be charged $40 a year. Basic brokerage accounts or Schwab One accounts will be assessed a fee of $45 a quarter if the assets are less than $5,000; the fee is $30 a quarter if assets are between $5,000 and $50,000.
Fees can be waived if a household has automatic deposits of $500 a month, makes eight or more commission-charged trades a year or has $50,000 in assets invested with Schwab. But we don't make eight or more trades a year -- we're investors, not bettors.
And, sad to report, our investments with Schwab do not these days total $50,000. Maybe you hadn't heard but the market has been down -- a bit -- of late. We don't blame you for that; we picked these investments and we'll live with the consequences. But adding a fee to the losses feels like adding insult to injury. And if all we were interested in were investments that never went down in value, we would have stuck with certificates of deposit -- and we wouldn't have needed a brokerage account for that, now would we?
We suppose we could rope together our other mutual funds and put them under the Schwab umbrella to get over the threshold. But perhaps we don't want all our financial assets in one place. And who's to say that tomorrow the bar won't be set at $60,000, or $75,000 the day after.
But we don't blame you for deciding not to bother less with small accounts such as ours. Higher net worth investors are, after all, where the money is. But we wonder if you have noticed that that segment is also where all the competition is. Are you aware that in Seattle, and likely in other markets around the country, every bank, money management firm, trust company, insurer, brokerage house and (at the rate we're going) bait and muffler shop wants to be a personal investment adviser?
We also wonder whether you're aware of the pitfalls of a discounter trying to move upscale in any business. Or a business in an upscale category trying to move into the discount category.
Elliott Black can tell you something about that. He is president of EBMA Inc., a Northbrook, Ill., marketing consultancy. In his career, he has seen such examples as a housewares manufacturer, whose products were sold in grocery and discount stores, introduce a line of famous-designer cookware to be sold in department and gourmet-cook stores. In the other direction, the maker of quality commercial-grade projectors tried to introduce a model for the consumer market.
Both moves failed, Black says, because the companies involved lacked credibility in the category they had targeted. "Moving upscale is always a challenge for companies known as being at the lower end," he says.
Schwab has been best known for offering accounts that "would do just what I want them to do," Black says. By moving into investment advice, "it makes them no different than anyone else out there." Black says he realizes there's a lot of competition in the discount sector as well, but that's also where Schwab has the strongest brand.
The best way for a company to move up or down the ladder is with a separate line, name or brand, Black adds.
But maybe Schwab will pull off this move to the middle and upper market under its own name. Maybe the brand-name brokerages and investment houses are vulnerable these days, what with unsavory revelations about their practices.
Whatever the outcome of your move, Charles, you'll have to make it without us. We've decided to resolve the dilemma of whether to call our brokerage Charles or Chuck by instead calling it Fidelity. With a lower household threshold and lower fees, it seems to be making a much less concerted effort to run off small investors.
Of course, if Fidelity gets the notion of emulating Schwab, we'll be out looking for a partner again. We don't want to seem too fickle about this. But we also don't want you or anyone else to get too complacent about our loyalty or our willingness to put up with increasing fees.
Maybe in popular songs, the spurned and heartbroken keep a light burning in the window to guide the wandering long-lost love back to the hearth. But when it comes to the care of our meager retirement funds ... buy your own flashlight.
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