Nevertheless, the company is looking for ways to reduce costs internally. Last month, Schwab said it would cut 600 jobs, or about 3% of its workforce, because of the “increasingly challenging economic environment.”
Schwab’s latest move builds on an increasingly aggressive, slash-and-burn approach to price reductions.
Late Tuesday, TD Ameritrade said it would match Schwab’s no-fee trading offer at a cost of as much as $240 million a quarter, or roughly 16% of its net revenue. Interactive Brokers announced last week it would provide free trades. And in recent months, Fidelity, Vanguard Group and JPMorgan Chase & Co. have taken steps to eliminate fees and commissions on some offerings.
According to Schwab Chief Financial Officer Peter Crawford, zero commissions are an inevitable industry trend. Schwab is just trying to get ahead of that.
“We are seeing new firms trying to enter our market -- using zero or low equity commissions as a lever,” Crawford wrote. “We’re not feeling competitive pressure from these firms ... yet. But 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. It has seemed inevitable that commissions would head towards zero, so why wait?’
The developments show just how online stock trading is becoming a commoditized business. As a result, Devin Ryan, an analyst at JMP Securities, says brokerages will need to use their platforms to generate revenue from other services. Those include securities lending, charging asset managers fees to offer their funds, and advisory services.
“They have to give a lot away for free to charge for parts of their platform that are less commoditized,” Ryan said. Firms like TD Ameritrade might start charging subscription fees for access to data, options and margin accounts.
It’s not just brokerages that are facing pressure to cut prices. Fund managers like BlackRock, Vanguard and State Street Corp. have also been forced to reduce the fees they charge, particularly for index-tracking funds. On the day that Fidelity announced it would offer several free index mutual funds last year, shares of other asset managers took a hit.
While the splashy introduction of a free product may attract a lot of customer attention, it could also backfire, according to Dan Ariely, a behavioral economics professor at Duke University.
“The odds are that what people will do is to say, ‘Schwab is offering these services for free, and so they can offer everything for free,”’ he said. The risk is that “when Schwab tries to get these same consumers to do something that costs money, they may say, ‘No thanks.’”