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Unlimited Free Trading Hits Limits at American Express

Some customers drawn by the original offer decry the change, which takes effect Oct. 30.

It seemed like the final step in online Wall Street's commission war when

American Express

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announced last November that it would allow investors with more than $100,000 in their accounts to trade stocks for free.

Turns out it was just a false step.

A few weeks ago, Amex announced that starting Oct. 30, it will do away with unlimited free trading. For many investors who signed up with American Express because they wanted to trade for free, the news came as an unwanted surprise. And now some customers are telling anyone who will listen that their next step is out the door.

Barry Murphy,

American Express Brokerage

executive vice president, says the change will allow the company to improve customer service. Amex, also, will still give away some free trades, just not enough to attract the "unprofitable" customers who came for the unlimited offer. And the client contract clearly states that it may charge commissions, he adds.

American Express was the first of several brokerages to get into the free-trading game, and the first big name to risk its reputation on what many online-brokerage analysts have said is an

unsustainable business model. Then


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, where all orders to buy or sell at the market price are free and all customer support is by computer. It planned to make money by charging $5 for orders executed at set prices, collecting payment for order flow, or the rebates it receives from sending its orders to other brokers to execute, and by selling advertising. In addition, little-known broker-dealer

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also launched this spring with a free market-order model.

Shot at the Bigs

For American Express, the move to free was seen as its effort to break into online trading's big leagues. After all, most established online brokers such as



used free trades only as promotional items, giving them away with new account openings, similar to free Internet access or a $75 cash bonus.

For those who tasted the free life at American Express, going back is no easy task.

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message board has been lighting up for weeks with the tales of angry investors. Amex says it has received similar email. Some say they were misled, calling the move "bait-and-switch" or "misconduct" and the brokerage itself "incompetent." Others say without free trades Amex has nothing to differentiate itself.

That last argument is perhaps the most worrisome for American Express. Amex had great success with the free-trading offer, adding about 300,000 accounts to the roughly 200,000 it previously had with little marketing spending, the company says. (Its 500,000 total puts it just behind where No. 6

Datek Online

was at the end of June.) But by backing away from free trades, the financial-services firm could see its total fall.

James Connors, a 40-year-old Chicago investor with several brokerage accounts, is so annoyed, he has closed his five charge-card accounts and is considering closing his brokerage accounts unless Amex reconsiders rescinding the unlimited free-trading offer. He has already opened an account at

Sooner Than Expected

Trevor Hanson, a 45-year-old Chicago business owner, opened an account with American Express last March because of the no-fee trading and figured the offer would last at least a year. "In my case,

the company has removed my only incentive for having my assets with Amex," he says. "The service isn't very good, and there's no compensating advantage."

Claude Macri, a 43-year-old technical writer from Santa Barbara, Calif., is looking for the door, too. "The main thing is I really disliked the fact that they pulled a switch on the commission structure that quickly. It's kind of a matter of principle, too," Macri says. "I think a company that was a little more savvy would have tried to weed out the more high volume people." Macri has only traded seven times since opening his account at the beginning of the year.

American Express' Murphy says the broker is changing its commission structure because a small group was trading too few shares, too often, putting a drain on the brokerage's ability to deliver service. Murphy expects the company will lose about 1% to 2% of its accounts because of the new commission structure. But those accounts, he says, are the customers who have abused the offer, trading 200 or 300 times a month in lots sometimes as small as one or two shares.

"We determined that was not the group who would be the long-term clientele," says Murphy, who notes that some investors still will get some free trades.

New Terms

Under the new schedule, investors with $100,000 or more in assets, receive 10 free market orders a month. Investors with $25,000 to $99,999 in assets will receive three free market orders a month. (Previously they could buy stocks for free.) Limit orders, which many investors prefer because it enables them to set price limits on their orders, cost $19.95 and aren't free under any circumstances anymore.

The economics of the new structure, in which the brokerage charges $75 for orders placed over the telephone with a representative, up from $45, are clearly designed to boost the division's revenue.

In addition, raising prices will enable American Express to boost its customer service on and off the Web site, Murphy says.

"Consumers want a Web site that is outstanding, is up all the time and is easy to use. They want telephone service from people who answer the phone very quickly and know a lot. And they want advice," Murphy says. "We are going to deliver on all three of those categories."

That may be the case, but Barb Tittle, a 51-year-old paralegal in Ohio also really wanted the free trades.

"I had accounts with American Express for a number of years. I only had a few of my stocks with them, and my broker said, 'We are going to have this new online brokerage, and we are going to have this great fee schedule. If you brought all your stocks and bonds into Amex, you could have free trades,'" Tittle explains. The broker told her not to be surprised if Amex raised its rates, so she wasn't. But all the same, those were good days.

Tittle says she'll probably keep some of her long-term positions with Amex. But the others she plans to sell slowly, moving the funds to another online broker.