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Will These Stocks Survive the Broker Price Wars?

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As the battle for your investing money heats up, discount brokers are hammering each other with everything they've got. Lower commissions and sweet deals to offer free ETFs have become commonplace. But for those brokers who haven't yet figured out what their next steps should be, is time running out to remain competitive?

Throughout the week, we've talked about how Vanguard, Fidelity, and Charles Schwab have cut commissions and offered no-cost ETF trades to their customers. But that leaves plenty of their competitors on the outside looking in. What will they need to do in order to stay competitive?

Who's left?
On the broker side, there are several companies that haven't made moves in the broker price wars. TD Ameritrade (Nasdaq: AMTD  ) has done a good job of integrating its recently acquired thinkorswim unit, choosing to embrace its high-velocity panache by leaving it as a separate brokerage website rather than trying to pull it into the fold of its namesake brand. Similarly, E*TRADE Financial (Nasdaq: ETFC  ) has struggled for its survival as it hasn't posted a profit in nearly three years. Niche player Interactive Brokers (Nasdaq: IBKR  ) has a substantial business as a market-maker, and its brokerage offerings appeal to a different set of actively trading customers who arguably are less likely to be attracted by the likes of Fidelity and Schwab. Scottrade and Sharebuilder are also among those still on the sidelines, although their regular commission schedules were already competitive even after their competitors' cut costs.

On the other side of the coin, one of the motivations in this price war has been to promote and build up demand for exchange-traded funds, either through selling proprietary in-house ETFs or building revenue-generating partnerships with existing ETF providers. With Barclays iShares and Vanguard having arranged for their own ETF distribution, State Street (NYSE: STT  ) and Invesco (NYSE: IVZ  ) PowerShares are the two biggest remaining ETF players that have yet to establish a foothold in the brokerage industry.

For State Street, the stakes are especially high. Its SPDR family of ETFs pioneered the industry and is still an extremely valuable franchise, yet competition from Barclays iShares and Vanguard have toppled SPDRs from a once-dominant position. With the right partnership, State Street could both reinvigorate its position as an ETF giant and earn benefits from helping whatever discount broker it chooses revive its competitive position within the brokerage industry.

As for Invesco, its ETF operations are small compared to its overall asset management business. But it too would obviously benefit from a distribution deal.

Time for a baby shower?
Meanwhile, speculation continues to rage about whether E*TRADE will end up falling prey to a coming wave of consolidation in the industry. TD Ameritrade's CEO recently said that the industry was primed for acquisition activity and that his company was well-positioned to take advantage.

That said, from a pure commission standpoint, neither TD Ameritrade nor E*TRADE necessarily has to answer the call. At roughly $10, ordinary trade commissions aren't obscenely high. Moreover, both offer new customers the chance to trade free for the first month or two, giving buy-and-hold investors the ability to set up a long-term portfolio without any trading costs at all.

In my view, that puts the ball squarely in State Street's court to figure out which of the remaining brokerage companies would make the best strategic partner to offer commission-free SPDRs. If TD Ameritrade were to announce a deal to acquire E*TRADE, it might be just what State Street wants to see to justify negotiating an arrangement with the post-merger broker.

Regardless of what happens, though, the best benefit for investors is that brokerage customers are clearly in the driver's seat as far as getting more services for less money. With the stock market on the rocks again, cutting costs will soon be on everyone's mind once more. That makes it all the more important for you to pick a broker that will let you do exactly what you want at a price that's right.

To find the best broker for your money, be sure to check out the Fool's Discount Broker Center.

Fool contributor Dan Caplinger is looking forward to Sam Waterston smacking down the E*TRADE Baby. Dan owns shares of Interactive Brokers, which, along with Charles Schwab, is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is still standing after all this time.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 05, 2010, at 10:58 PM, MegaEurope wrote:

    Interactive Brokers hasn't "made a move in the broker price wars" because they are already WAY WAY WAY WAY cheaper than all the others.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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