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Morgan Stanley report: TD Ameritrade and other rivals may face pricing dilemma after Schwab price chop

San Francisco broker can cut commissions with relative impunity now that it has shifted primarily to fees

Friday, January 8, 2010 – 5:23 AM by Brooke Southall
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Walt Bettinger: After the past two years, our clients are thinking more than ever about their financial future

Charles “Chuck” Schwab has been doing it for decades. The Charles Schwab Corp.'s founder sees an advantage and he takes it — even if it hurts the revenues of his own firm in the short run. It was Schwab’s price cutting that helped to ransack wirehouse commission rates in past years. Now, with help from his protégé, Walt Bettinger, he’s putting the same hurt on fellow discount brokers — many of whom have underpriced his own firm for years. Competitors must be asking: When will this stop? With Schwab relying so little on commissions these days [see the excerpt form the Morgan Stanley report below] for its revenues, the answer may be — not anytime soon. It’s important to note in reading this article the the Morgan Stanley analyst had a change of heart after she published her first report yesterday. The original report remains part this article and you can read her modifications at the end.

Not long ago Charles Schwab & Co. was charging $29.95 for an online trade, and its competitors – especially the old TD Waterhouse, E*Trade and Ameritrade – were closer to the $10 mark.

That pricing grid now seems like ancient history.

In what has the markings of another Charles “Chuck” Schwab-directed move, Schwab retail investors will pay just $8.95 per online trade in stocks or non-Schwab exchange traded funds as of Jan. 19. (Schwab ETFs already feature commission-free online trading through Schwab accounts.)

Formerly, investors who held less than $1 million in household assets at Schwab or who traded fewer than 120 times per year paid $12.95 per trade plus charges for trades larger than 1000 shares. It’s a drop of $4 per trade.

Clients of about 85% of RIAs who custody with Schwab will experience the benefit of the new pricing, according to Schwab spokesman Mike Cianfrocca.

The pricing changes will have a more pronounced impact on the clients of a number of smaller RIA firms who tend to have lower account balances, he adds.

This round of price cuts follows on the heels of Schwab’s 2009 “Make the Move” pricing promotions. RIAs who use Schwab saved more than $6.5 million in trading commissions and transfer of accounts fees during the last six months of 2009 as a result of those earlier cuts, Cianfrocca says.


Schwab has good reasons to continue unilaterally cutting prices, according to Schwab’s president and CEO Walt Bettinger.

“After the past two years, our clients are thinking more than ever about their financial future with an appropriate eye for value, quality and professional help,” he says in a statement. “Our new, low-cost, straightforward commission pricing and portfolio management programs are further evidence of our commitment to giving investors the help and value they deserve, and like the theme of our newest advertisements, they reflect our belief that when it comes to investing, at Schwab, ‘investors rule.’”

The price cuts may have a greater financial impact on competitors – especially TD Ameritrade, which charges $9.99 for an equivalent trade, according to analysts.

TD Ameritrade shares declined 3.44% to $18.91 yesterday after the news of Schwab’s price cut broke.

The drop may have resulted from the report [and ones like it] on Schwab’s price cut issued by Morgan Stanley senior analyst Celeste Mellet Brown:

We believe Schwab’s announcement that it is reducing commissions on equity trades for lower-tier clients will have minimal effect on its earnings (~1c/quarter assuming trading volume and asset levels not positively impacted by announcement), but could have implications for [publicly traded] competitors if they move to match Schwab’s pricing. If Ameritrade decided to lower its pricing for similar customer trades from its current $9.99, we believe there could be $0.02-0.04/ quarter dilution to our current estimates [of its earnings per share], given the company’s higher exposure to trading (52% of LTM revenue vs. 25% for Schwab) and lower share count (595mm shares vs. 1,163mm for Schwab). This would impact our AMTD FY10 EPS estimate by $0.05-0.10 and FY11 estimate by $0.08-0.16.

The shares traded 3.44% higher to $19.56 after hours today. Maybe the rebound resulted from the second part of the Morgan Stanley analyst’s report:

Note, however, that we believe these are bearish scenarios, assuming neither firm benefits from any pick-up in asset gathering or additional trading volumes. In addition, the question remains as to whether or not Ameritrade would move to match Schwab’s new pricing; given that the price differentiation is relatively small and the customers impacted trade relatively infrequently.

After today’s article was published, Celeste Mellet Brown of Morgan Stanley retreated significantly from her original analysis. An excerpt from today’s report is published at the end of this article

Indeed — as suggested by the new report — TD has no plans to respond to Schwab’s price cut — though it does not rule out the option, according to TD spokeswoman Kristin Petrick.

Monitor regularly

“We have no plans to change our pricing structure,” she says. “However it is something that we monitor regularly. If, in the future, we see a need to change our approach, we would of course consider doing so.”

But RIAs are affected by price changes differently than retail customers, according to Petrick.

“TD AMERITRADE Institutional continues to look at each advisor relationship on a personal level to customize a pricing structure that is best for their business,” she says.

Fidelity Investments is not rigid in its approach to pricing either, according to Mike Durbin, president of Fidelity Institutional Wealth Services.

“We are always evaluating our pricing,” he says. “Price should never be a barrier to choosing where to custody a client’s assets.”

The Boston-based broker offered a series of prices cuts in September in response to the initial round of cuts made by Schwab in early July. See: Fidelity’s Durbin debuts with strategic price cuts

Schwab also announced today new managed portfolios of exchange-traded funds available through a low cost fee-based portfolio advisory program. Schwab Managed Portfolios-ETFs use diversification across all the major asset equity and fixed income classes and include TIPs, real estate and commodities. The Schwab Managed Portfolios-ETFs, which have investment minimums of $100,000, will be available to Schwab clients beginning on January 19, 2010.

The Morgan Stanley report calls these managed portfolios a “key initiative” because it allows Schwab to create recurring revenue from ETFs that customers acquire in a buy-and-hold strategy.

Here is part of the update published today by Morgan Stanley:

Investment conclusion: ...With more clarity, we believe our initial “worst-case” was too bearish; if Ameritrade decides to lower its pricing by $1 for similar customer trades to Schwab, we believe there would be $0.01-0.02/quarter dilution to estimates, which we now reflect in our base case beginning in C3Q10.

What’s new: Schwab announced that it would lower all equity trade fees to $8.95/online trade, similar to what its higher-tier customers are currently paying. Ameritrade has not indicated what it plans to do (currently charges $9.99), and we expect more clarity on its 1/19 earnings call. However, we do not expect Ameritrade to lower fees unless it sees an impact to its business. While our estimates reflect otherwise, it is feasible that customers do not move for $1 lower trading costs, and Ameritrade doesn’t lower fees, implying no impact to earnings.

We don’t expect a protracted price war: Equity pricing levels are sufficiently low that we are unlikely to see a price war. In addition, major competitors to SCHW and AMTD already have lower equity pricing.

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See more related moves

Mentioned in this article:

TD Ameritrade
Asset Custodian
Top Executive: Tom Nally

Frederick Van Den Abbeel

Frederick Van Den Abbeel

January 14, 2010 — 1:33 PM

Brooke, great article. Previously, to qualify for the lower pricing required that the client account elect to receive both online statements and trade confirmations in order to receive the lower price. Brooke, is the lower pricing in effect even if clients elect to receive paper statements and paper confirms?

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