In an effort to grab more investments from customers, The Charles Schwab Corp. (SCHW) said on Thursday that it will cut trading fees 31% to a flat $8.95 for its smaller clients starting Jan 19, 2010.
The new fees will be applicable to Schwab’s investors with accounts of less than $1 million and who execute fewer than 120 trades in a year. Previously, these smaller investors had paid $12.95 per trade plus charges for trades larger than 1,000 shares. The change in trading fees could reduce Schwab’s first-quarter revenue by $15 million to $20 million.
However, there will be a surcharge of $5 for automated phone trades and $25 for broker-assisted trades. Schwab has already waived the minimum fees required for accounts and reduced expenses on certain mutual funds. The fee waiver is expected to cost the company more than $100 million in revenue in the fourth quarter. Schwab expects fourth-quarter earnings to be hurt by a slowdown in trading volumes.
However, things remain solid at Schwab from a financial perspective, having improved noticeably over the last couple of years. Earnings continue to benefit from management’s aggressive efforts to control cost. Return on equity (ROE) has improved dramatically for three years since 2004 and reached 55% in 2007, but declined to 31% at the end of 2008 mainly due to the economic slowdown and challenging market conditions. Improvement in certain metrics has been hindered by numerous fee cuts, but we continue to see these moves as important in the long run from a competitive standpoint.
We suspect that results of Schwab will continue to be impacted by the challenging market conditions and weakening economy, while the stronger client activity resulting from increased market volatility and management’s aggressive efforts to control cost will provide some relief in the coming quarters.
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