When Brokers Fight, Clients Win

Charles Schwab (NYSE: SCHW  ) became the latest company to make it even cheaper to own exchange-traded funds.

The leading discount broker -- already offering its in-house ETFs free of brokerage buy and sell commissions -- revealed on Friday that it would be slashing the already cheap annual expense ratios of many of its ETF offerings. Niche giant Blackrock (NYSE: BKL  ) committed to slashing fees on its ETFs at an investor conference earlier this month.

Price wars are great for brokerage clients. Investing gets cheaper. Choices get better. However, price wars come at a price for the companies doing the slashing.

Schwab wasn't getting a whole lot of love ahead of the move. Goldman Sachs downgraded the broker on Wednesday, taking its target price down to $14. Stern Agee went on to initiate coverage of Schwab with a neutral rating, and Evercore downgraded shares of Schwab and smaller discounter E*TRADE (Nasdaq: ETFC  ) on Friday.

It may seem odd to be betting against discount brokers at a time when the markets are near multi-year highs. Aren't folks buying stocks again? Well, the problem is that the push to woo clients and participate in price wars -- while again, great for customers -- isn't kind on the bottom line.

Despite rallying equity prices, analysts see Schwab, TD AMERITRADE (Nasdaq: AMTD  ) , Interactive Brokers (Nasdaq: IBRK  ) , and E*TRADE all posting slightly lower earnings this year.

Company

2011 EPS

2012 EPS Est.

E*TRADE $0.45 $0.42
Charles Schwab $0.70 $0.69
TD AMERITRADE $1.11 $1.05
Interactive Brokers $1.34 $0.93

Source: Yahoo! Finance.

These same analysts see all four companies bouncing back in 2013, but we'll have to see where the price wars are then. Investors are encouraged to take advantage of the lower fees on investing products, of course. Buying into the actual brokerages is something that can probably wait until the climate improves.

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Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Motley Fool newsletter services have recommended buying shares of BlackRock, TD Ameritrade Holding, and Interactive Brokers Group. Motley Fool newsletter services have recommended creating a wrte puts position in TD Ameritrade Holding. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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