Updated to include analyst comment, TD Ameritrade statement.
NEW YORK (
) -- Mutual fund giant Fidelity Investments has sharpened its focus on U.S. retail investors, taking aim at the core customers of the online brokers by lowering all of its commissions for online U.S. equity trades to $7.95 each, and introducing commission-free online trading of 25 iShares ETFs.
Fidelity announced the initiative as part of a partnership with
, which recently completed its acquisition of Barclays Global Investors, a deal that included the iShares franchise, on Dec. 1. Fidelity said it anticipates the commission-free trading for these ETFs would be in place for at least three years in its press release.
Among the offerings included in Fidelity's program are the iShares Shares S&P 500 Index Fund, iShares Russell 2000 Index Fund, iShares Barclays Aggregate Bond Fund, iShares MSCI EAFE Index Fund and iShares MSCI Emerging Markets Index Fund.
Fidelity made clear that the new $7.95 flat commission, which is available regardless of the amount of assets a customer has, was targeted at undercutting the online brokers, specifically comparing its pricing plan to those of
Charles Schwab Corp.
Shares of all three brokers were lower in late trades with E*Trade down 2.5%, Charles Schwab off 1.5%, TD Ameritrade falling 3.1%. Volume on E*Trade was above 71 million, surpassing the issue's three-month trailing daily average of 44 million, while Ameritrade's volume of 26 million was more than five times its trailing three-month daily average of 5.1 million.
Schwab actually kicked off this latest price war on Jan. 19, lowering its price for all online equity trades to $8.95 from $12.95. David Weiskopf, a spokesperson for Schwab, says the company has no plans to re-consider its pricing structure in the wake of Fidelity's change.
"As the expression goes, imitation is the sincerest form of flattery," Weiskopf says. "We appreciate the fact that Fidelity is following our lead, and feel very good about the offerings we have as they provide our clients and investors with a tremendous value."
E*Trade also issued a statement in the wake of the news, saying it competes "not only on price but overall value." The company's pricing structure provides for lower rates based upon trading frequency and asset levels. It's lowest fee of $6.99 per trade is based on making 1,500 or more trades per quarter. A $7.99 fee per trade is available for customers executing between 150 and 1,499 trades per quarter. With $50,000 or more in assets, investors become eligible for fees of $9.99 per trade or $12.99 per trade, based on activity levels.
"We regularly monitor overall customer satisfaction with an emphasis on service, pricing and product to ensure we address customer needs as the marketplace demands," E*Trade says. "We continuously look at how we can make our pricing simpler and more transparent and will continue to study the market in light of the recent competitive moves."
TD Ameritrade has a flat price of $9.99 for online trades, according to its Web site. Kim Hillyer, a spokesperson, notes TD Ameritrade has had a flat-rate pricing system for nearly a decade and says the company sees no reason to change anything in the wake of the Fidelity news.
"We've found that small differences in pricing don't matter all that much anymore," she says. "A dollar or two isn't as important as the total package
of services and tools we offer."
Fidelity's prior pricing structure for online U.S. equity trades used a tiered approach with three price points of $8, $10.95 and $19.95, based on criteria like the amount of assets in a customer's account and trading frequency. There were also varying charges related to the amount of shares involved in a particular transaction that have now been wiped away, says Jim Burton, the president of Fidelity's retail brokerage business.
From the highest price point of $19.95, which was typically paid by customers with the least assets, the $7.95 flat fee represents a cut of 60%. It's these smaller investors that Fidelity is hoping to entice.
"Fidelity has been a price leader for many years," says Burton. "We've always listened to our customers and this change is a reflection of that as well as the competitive marketplace."
Rich Repetto, an analyst with Sandler O'Neill Partners, issued a research note to clients following the news, saying Fidelity's news represents no change for active traders who are the most desired customers for online brokers for obvious reasons.
"An important underlying fundamental of the eBrokerage industry has been the 80/20 rule, where approximately 80% of the trades are generated by the top 20% of accounts," Repetto writes, noting that top customers at both Fidelity and Schwab already had access to lowered pricing levels before these recent cuts.
His take is essentially that Fidelity has "more to gain than lose" by doing this, possibly through consolidating some of the assets of certain lower-to-mid tier customers, but he doesn't see the decision putting significant pressure on E*Trade or TD Ameritrade. He also notes that Fidelity's flat rate is still above the $7 fee of privately held Scottrade.
"We point out that saving $1-$2 per trade for customers who trade 15-20 times per year equates to an annual savings of $10-$50," Repetto writes. "To us, this seems like an insufficient threshold to transfer an account."
Written by Michael Baron in New York.