Recently, American Express (NYSE: AXP) announced changes to the fees charged to customers of American Express Online Brokerage. Today I'm devoting the column to my reaction to these changes as a shareholder, as well as what it says about the company's management.

American Express launched its online brokerage service about a year ago, offering free trades for account holders with balances exceeding $100,000, and free "buys" for account holders with balances between $25,000 and $100,000. Trade commissions were $14.95 for sales by the latter group of account holders, as well as all trades for those with account balances less than $25,000. This fee structure positioned the company as one of the lowest-priced discount brokers in the marketplace.

If you take a stroll over to our Discount Brokerage Center, you can pull up a table showing how American Express Brokerage compares to some other discount brokers today. Here is a summary of the primary policy changes that have been made:

  • If your account balance is more than $100,000, you're now allowed only 10 free trades per month.

  • If your account balance is between $25,000 and $100,000, you're now allowed only 3 free "buys" per month.

  • All trades that are not free are subject to a commission of $19.95.

  • All limit orders are subject to a commission of $19.95.
Some of you might be wondering why I've chosen to write about this here. Is it because of the impact these changes have on the account that my investment club recently opened with American Express? No. It's not because of the impact on our Rule Maker portfolio costs, either. (The Rule Maker portfolio is also maintained by American Express.) Based on the way these portfolios are managed, the modifications won't have much impact. Both portfolios typically purchase at market price and trade infrequently. I suspect that this is the case for most investors with a long-term approach to investing.

I'm writing this column because the changes leave me with concerns about American Express' management.

In August I wrote a Motley Fool Research article discussing General Electric's (NYSE: GE) approach towards moving its businesses to the Internet. My opinion is that GE is doing a great job converting its business from an old economy model to a new economy one. Before making the switch, GE tries to learn as much as it can about what its customers want and how its competitors could destroy its business.

From what I've seen, it looks like American Express rushed to get its online brokerage open before it fully understood the related business model. You could argue that the reason for the changes is to combat the efforts of day-traders using it to cut costs.

Why do I say this? A few months ago, the policy was changed to charge commissions on same-day buys and sells of the same security, a technique favored by day-traders. Many of these trades were also likely to have been limit orders, which are more expensive for a brokerage to process. Now American Express has decided to charge for all limit-order trades.

My view is that, unlike GE, American Express failed to consider the impact day-traders would have on a business model it most likely created to court long-term buy-and-hold investors. Based on a discussion I had with the company about this issue last Friday night, these changes should also provide some additional revenue to upgrade the services it can offer to its customers. That actually sounds good, but I'm not so sure. The problem is that the switch has likely cost the company a lot of credibility with customers and shareholders.

From what I can tell from my survey of the Fool's message boards, many people moved their accounts to American Express Brokerage because of the free trades. (Check out the following links for discussion board posts.) I realize companies are in business to make money, but I think these changes go too far. Worse, it hints American Express didn't think the issue through, or simply planned the move all along. Free limit orders were totally eliminated. In an era when most brokers have been lowering commissions, American Express raised them.

Worst of all, I think the changes were a violation of the trust that exists between a company and its customers. It's hard not to have the perception that a "bait-and-switch" strategy was used to attract as many new customers as possible, while all along the plan was to pull the rug out from under them with changes like these once the accounts were established.

When I called the company I was also told that complaints about the changes outnumbered positive reactions by about 20 to 1. This is also something that troubles me as a stockholder. The likely outcome of these changes is that, if they are not either rescinded or modified, American Express will lose existing accounts and/or attract fewer new accounts.

In addition, the changes to the fee structure make American Express' position in the marketplace hard to characterize. Previously, I would have classified it as a low-cost provider. Now, it's not quite an expensive provider, but it's not cheap either.

The bottom line is that American Express management is guilty of some missteps. By apparently failing to fully understand the nature of online trading from the get-go, it's made changes that could result in lost business. It also raises questions about the management team that I didn't have before. As I discussed when I called the company, I can only hope the changes to the fee structure will be either modified or rescinded soon.

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Related Links:
  • So Much to Say, Rule Maker, 10/6/99