Schwab fund fees making few waves

Charles Schwab & Co. Inc. will impose a new fee on its mutual fund transaction-fee platform this summer, at a time when advisers, fund companies and investors are most sensitive to price shocks.

Yet if the past year’s price increases by the San Francisco broker are any guide, the latest charge could prove to be a non-event.

Schwab is wrapping up one of the most sweeping rounds of price increases in its history, but protests have remained faint.

That appears to be the result of Schwab’s calculated efforts to offer graceful options.

The company gives advisers and retail investors a chance to modify their behavior or cough up more assets. Schwab only seeks more fees from business partners such as mutual funds, where the value proposition is clear or its market power holds sway.

For instance, as of next month, Schwab’s transaction-fee platform will charge mutual funds $20 a year for each fund position investors hold.

minimal ripple effect

The new fee is causing only slight ripples.

Of the 900 funds on the transaction-fee platform – only seven, representing less than 1% of the $144 billion in Schwab supermarket assets – have begged off.

Two of the three exiting fund companies are Aster Investment Management Co. Inc. of Larkspur, Calif., and Longleaf Partners Funds of Memphis. Both have yanked their funds from the Schwab supermarket. In a development unrelated to the new charge, a fourth fund company has yanked the five funds it had on OneSource, Schwab’s no-transaction-fee platform.

Schwab is keeping advisers buffered from this fallout through special arrangements. Advisers can continue to add to client positions with these four mutual fund companies if accounts are already in place.

If the accounts aren’t in place, then advisers can contact their Schwab Institutional representative, and, in most instances, the company will accommodate the opening of new accounts with the otherwise estranged fund firms, according to Schwab spokesman Lance Berg.

Mr. Berg says a key principle in keeping customers happy through the price hikes is Schwab’s willingness to offer them ways of avoiding the increases by modifying their investing habits.

For instance, the charge for a broker-assisted trade climbed 83% last year, to $54.95 from $29.95, but customers can avoid surcharges by trading online.

Schwab imposed fees and service reductions on smaller accounts both for its advisers and its retail customers.

But it also offered them the opportunity to beef up balances or promise future cash flows to avoid these fees.

These promises might take the form of automatic paycheck deposit in the case of customers. For advisers, it might be part of an aggressive asset-gathering strategy.

But Charles “Chip” Roame, principal with Tiburon (Calif.) Strategic Advisors, says there may be a more obvious reason why Schwab spends so little time defending its price increases: It low-balled itself.

low-balling itself

“You should almost want a little attrition [of clientele] to show you pushed the envelope [on price],” Mr. Roame says.

He says this is conceivable, considering that Schwab charges half what Merrill Lynch & Co. Inc. of New York does on a per-asset basis. “Schwab needs to learn to charge for advice.”

But Daniel E. Purcell, president of Index Street Advisers Inc. of Corona del Mar, Calif., says Schwab has gotten too pricey for him.

Index Street, which has $25 million under management, has $15 million with Schwab. But Mr. Purcell now says he is moving all his assets to Ameritrade Holding Corp. of Omaha, Neb., and TD Waterhouse Group Inc. of New York.

“I was starting to go a little berserk over [Schwab] looking at their prices, he says. “I saw where they were going.”

But Mr. Berg says the price hike isn’t causing a lot of waves.

Advisers with less than $10 million at Schwab will be forced to pay quarterly fees of $1,200 as of July 1. Previously, only advisers with balances of less than $3 million paid a fee, which was $600.

The move potentially affects 1,800 of Schwab’s 5,800 advisers.

“We won’t know until July 1 [for certain], but we’re not seeing departures,” Mr. Berg says.

He emphasizes that Schwab has offered advisers options to avoid the fees. Advisers could bring more assets to Schwab, or they could move the assets to the retail platform.

But Mr. Purcell thinks that advisers are slow to move assets under any pricing pressure because they don’t want to open a Pandora’s box of customer-related issues.

potential lag effect

A lag effect may occur whereby Schwab sees a rash of departures when advisers get around to making custody decisions in the future, he adds.

“Maybe they didn’t push [the pricing envelope] far enough short-term, but is that the way to go in the long term?” Mr. Purcell asks.

Asking not to be identified, one employee of a fund firm that is exiting Schwab’s platform echoes the sentiment.

Schwab – by luck or guile – picked the perfect time to raise prices, because mutual funds are shellshocked from asset withdrawals, the employee says.

Schwab isn’t willing to do anything to rock the boat currently, the employee adds.

But that could change.