Price Wars: Online Brokerage Edition

Last week, Schwab cut its trading fee from $8.95 to $6.95, kicking off the 3rd Online Brokerage Price War – an occurrence that has happened every five or six years since the dot-com boom. Here’s what this “price war” means for the retail investor and the online brokerage community:

Short-Term Scramble

Schwab Fee Cuts.pngThe next few weeks will see Schwab’s competitors scrambling to reset marketing campaigns, hold emergency meetings at the executive level and rethink their 2017 operating models.

Two of Schwab’s largest rivals, E*TRADE and TD Ameritrade, are in the midst of acquiring super-discount brokers OptionsHouse and Scottrade, respectively. These brokers charge $5-7 per trade, but their acquirers have stuck to $9.99 trades since 2010. If E*TRADE and TD plan to start charging their newly acquired customers $9.99, then Schwab’s latest price cut might lure price-sensitive investors, at a time when their primary broker is distracted with integration activities.  

In the short-term scramble, we will be watching to see how Fidelity responds, if TD and E*TRADE sync their prices with their new acquisitions and what it means for lower-cost firms such as Interactive Brokers, TradeKing and TradeStaion, who are already being challenged by upstarts like RobinHood and TastyWork.

Falling Fees, Shifting Valuations

Historically, when one large broker slashes fees, the rest follow suit fairly quickly. That’s why online brokerage stocks plummeted 10% last week: they’ll all be forced to drop fees to stay in the game. Consumers should watch for new deals as brokers get more aggressive on their acquisition bonuses.


Why now? A Historical Reference

The first price war occurred in 2005, after online brokerage valuations tumbled 90% since the dot-com burst in 2000. Brokerages wanted to build their customer bases and rely less on commission fees, so they slashed trading fees, and started focusing more on mutual fund fees and parallel banking services, which provide steadier revenue streams than trading.

In 2010, as the US economy emerged from the financial crisis, brokers began wooing customers to get back into the markets, and lower-fee offerings were a key component of their pitch.

If we use history as a reference, the 2017 price war looks similar to its 2005 predecessor. The asset-gathering strategy is coming back into fashion, but this time it has a robo-twist. Schwab launched its own robo-advisor in 2015, which charges no trading fees but holds Schwab ETFs and a hefty chunk of cash. TD and E*TRADE followed suit last year, with “Essential Portfolios” and “Adaptive Portfolio.” It seems only a matter of time until Fidelity joins the robo-advised party.

In the meantime, low trading fees are getting new clients in the door, boosting trade volumes, and giving brokers a cross-sell opportunity for their more profitable offerings. In short, brokers are slashing fees in 2017 because they can’t afford not to.

The Bottom Line

The 2017 price war is just getting started. While brokers are working to figure out new revenue streams, consumers should keep their eye out for more price cuts, and more robo-advisor offerings, in the next year.

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