On Thursday, Charles Schwab (NYSE:SCH) announced the repeal of two expensive impositions on its account holders. First, it will no longer charge inactivity fees -- those $30 charges that brokers hit you with when you don't trade often enough, or don't have a big enough bankroll for their liking. Second, Schwab will stop charging its $3 order handling fee.
It's been four years since Schwab first introduced this fee. At the time, the company was charging roughly $30 per stock trade and had been doing quite well as the day traders lined up to cash in on the Internet bubble. But when the burst arrived, and dependable, double-digit annual portfolio gains became a thing of the past, Schwab saw an exodus in the ranks of its paying customers. Paying $30 a trade wasn't much of a hardship when your money doubled every few years, but when the market turned south, investors flew with it, right into the arms of cheaper discount brokers like Ameritrade (NASDAQ:AMTD), Toronto-Dominion's (NYSE:TD) TD Waterhouse, and E*Trade (NYSE:ET).
Schwab's solution was to charge the few remaining loyal customers even more. Milk 'em for all they were worth. And so was born Schwab's infamous $3 "stealth commission." If you made a trade, you paid a commission plus an order handling fee of $3. And how was an "order handling fee" different from a straight commission? Why, it's got a completely different name, silly! Thus could Schwab keep advertising $30 commissions, while actually charging 10% more.
Unfortunately for Schwab, its customers weren't buying the "rose by any other name" gambit. As you can see on this chart (look back toward early 2001), the company's stock price continued to nosedive as investors fled the premium-priced discount broker -- and the price hasn't returned to its early 2001 levels yet.
Well, it's been nearly half a decade in coming, but Schwab has finally realized the error of its ways. With earnings stabilized and expected to rise 5% to 10% year over year in the current quarter, the company has decided that now is the time to take yetanotherstep toward price competitiveness. At last report, it was charging most ordinary customers -- those who have modest account balances and trade a few times a month -- $13 commissions, or $16 with the stealth commission added in. Starting now, make that just $13.
Almost there, Schwab. Just a little lower, and you'll be able to compete purely on quality again -- and not have your rivals undercutting you on price at every turn.
Schwab seems to be on the "baby steps" program toward price competitiveness. Read about its past price cuts in these Takes:
Fool contributor Rich Smith has no position in any of the companies mentioned here. He does maintain a brokerage account with Ameritrade, and Schwab is a recommendation of Motley Fool Stock Advisor . The Fool has a disclosure policy.
