The cost of mainstream investing is coming down–not in a trickle, but in a rush. You expect low prices from online brokers, where there’s a price war raging now. E*Trade recently offered $150 to customers of Discover Brokerage Direct if they’d switch. Ameritrade is offering free trading for a month.
But who expected giant American Express Financial Services to offer free trades too? At americanexpress.com/trade you can now buy and sell stocks and no-load mutual funds at zero cost, if your account is worth $100,000 or more. Accounts under $25,000 pay $14.95. With a midsize account, you can buy stocks free but will pay $14.95 to sell. (At AmEx, as with the other brokers mentioned here, there are limits and exceptions, so check.)
“Pure order execution is a commodity that costs very little,” says AmEx senior vice president Ruediger Adolf, who doesn’t want to lose one more account to Ameritrade. He expects to make money on customers’ cash balances, interest on their margin loans and investment advice (it costs $44.95 to talk to a broker) and by selling pricey financial-planning services.
The big, full-service brokerage firms dismiss “free trade,” and believe they’ll always get the affluent clients who need advice. But people with serious money have “play money,” too, and they’re increasingly taking it to online firms. And what about young investors? To them, full-service firms look like their grandfathers’ guys.
With it: To get with it, Morgan Stanley Dean Witter now offers online investing at $29.95 per trade, for people with $2,000 to open an account. At Merrill Lynch it’s $29.95, but on accounts of $20,000 and up. At Salomon Smith Barney it’s $19.95, through an account you open with its merger partner, Citibank.
To look more like planners, the big firms have also moved toward “fee based” brokerage. Instead of paying commissions per trade, clients pay a percentage of the assets in their accounts. In return, they get unlimited stock trading (through a broker or online), plus access to all the rest of the firm’s financial services.
Fee-based accounts target people who trade stock portfolios worth around $100,000 and up. Here, too, costs are falling fast. Merrill drew the latest line in the sand, with a minimum fee of $1,500 a year and a top of 1 percent. What now for Smith Barney and PaineWebber, with a top of 1.5 percent? Or Prudential Securities, at 1.5 percent plus $24.95 per trade? Even now, all fees are negotiable–at PaineWebber, down to 0.75 percent. Financial planners who charge 1.5 percent to manage individual stock accounts will also find it harder to hold their price. (If you have a broker but don’t trade much, stick with commissions; they’re cheaper than fees.)
There’s an older form of fee-based brokerage–the “wrap account”–for people investing as little as $10,000 to $25,000. With wraps, brokers typically put your money into a mix of mutual funds. Instead of commissions, you pay a fee. The listed fees average 1.5 percent, says consultant John Payne of Cerulli Associates in Boston, but you can generally get a quarter-point off the listed charge. (You also pay the mutual funds’ own money-management fees.)
Meanwhile, at the online brokerage firms, fees are settling at $10 to $15 for a plain-vanilla market trade, says Kenneth Michal of the American Association of Individual Investors in Chicago, whose annual price survey will be published next month. The lowest: Brown & Co., at $5. But instead of cutting prices more, most of these firms are working on better, more reliable service, Michal says. That’s going to be important when the trading bubble bursts and the unprofitable brokers scramble to stay alive. (Brokerage accounts are insured for up to $500,000 by the Securities Investor Protection Corp.)
David Pottruck, co-CEO of Charles Schwab, believes that all brokers, including those online, will eventually “tier” their pricing–giving better deals to the more profitable accounts. At Schwab, for example, it now takes $5,000 to open an account, up from $2,500 before. “We couldn’t make money on smaller customers, given the amount of service they want,” Pottruck says. For the clients it keeps, Schwab is offering more personal advice.
Semiaffluent: Financial planners will also have to charge their better customers less, says Mark Hurley, president of Undiscovered Managers. His firm finds money managers for planners who run retirement accounts. Today, “semiaffluent” clients (investing $250,000 and up) generally pay 1 percent or more. Hurley expects that within seven years, competition will slash that cost to no more than 0.4 percent. Mom-and-pop shops will be squeezed.
Here’s what the firms of the future could look like: a planner to help you diagnose your needs; legal, insurance, tax and investment specialists to create your plan, and a high-tech system, to deliver services. As a model, AmEx could be pretty close.
Small investors with simpler questions will be served by the Internet. Every week there seem to be more online tools for budgeting, debt reduction, financial education and investment planning.
To help you use these tools, storefront planners might spring up–say, the way H&R Block delivers income-tax services. As for mutual funds, investors are already moving toward those with lower costs (to see how your current fund’s expenses cut into your future gains, check personalfund.com). The next frontier: 401(k) plans. Surveys by the Spectrem Group show that employees have no clue about their plans’ administrative costs (hint: smaller plans pay more). “It’s a golden age for consumers,” Pottruck says. The tougher you are on costs, the faster they’ll fall.
