Past CFO Commentary
The commentary in this section speaks only as of the date specified below. The company makes no commitment to update any of this information.
October 1, 2019
Today, we announced our decision to reduce online trade commissions for U.S. and Canadian-listed equities and ETFs to $0, and to reduce the base charge on options to $0, as well. As noted in the press release, this action is consistent with the principles on which Chuck Schwab founded this company nearly 45 years ago and with the “Through Clients’ Eyes” strategy we have followed ever since then – which have made the Charles Schwab Corporation so successful.
In this CFO Commentary, I want to address two questions that I know are top of mind for many in the investment community – why we did this, and what it means for our financial results.
Why did we take this step, and why now?
Most importantly, it’s the right thing to do for clients, removing one of the last remaining barriers to making investing accessible to everyone and continuing our tradition of challenging the status quo on behalf of individual investors. Additionally, it’s the right move from a competitive standpoint. There has been a clear pause in the so-called commission wars among the “traditional” e-brokers since the price reductions we made in 2017. At the same time, we are seeing new firms trying to enter our market – using zero or low equity commissions as a lever. We’re not feeling competitive pressure from these firms…yet. But we don’t want to fall into the trap that a myriad of other firms in a variety of industries have fallen into and wait too long to respond to new entrants. It has seemed inevitable that commissions would head towards zero, so why wait? We have a business model that doesn’t depend on commission revenue, a long-term orientation and a history of being willing to disrupt ourselves based on client needs and competitive dynamics. That’s exactly what we are doing here – we’re making these pricing changes because we believe they enhance both our value proposition and our competitive positioning, encouraging the consolidation of client assets and trades at Schwab.
What does this mean in terms of our financial results?
Looking at recent activity, we estimate that this pricing reduction is equivalent to approximately $90-100 million in quarterly revenue, which roughly translates to 3-4% of total net revenue. Note, however, that commissions per revenue trade (CPRT) have been falling for multiple years, so the potential revenue impact in coming quarters could very well be smaller, holding all else equal.
It would have been easy for us to kick the can down the road, to hold off on responding to the proliferation of free commission offers for another quarter, another year. Especially considering the somewhat mixed macro environment. But that approach is not what has made us successful for over four decades. Chuck Schwab built this company with a culture based on listening to our clients, maintaining a healthy respect for competitors, being willing to disrupt ourselves when appropriate, and prioritizing long-term growth and success even if near-term results are impacted. These are the qualities that have made us a premier asset gatherer in our industry, and that continue to help us deliver long-term value for our clients, our employees, and our stockholders.
This commentary contains forward-looking statements relating to the impact of the announced pricing moves on the company's value proposition, competitive positioning, and consolidation of client assets and trading at Schwab; the estimated impact on quarterly revenue and total net revenue from the pricing reduction; and long-term value. Achievement of these expectations and objectives is subject to risks and uncertainties that could cause actual results to differ materially from the expressed expectations.
Important factors that may cause such differences include, but are not limited to, the effect of pricing changes on client acquisition, retention, and asset levels, including cash balances; the company’s ability to accurately assess the elasticity of client demand for trading services; general market conditions, including the level of interest rates, equity valuations and trading activity; competitive pressure on rates and fees; client use of the company's investment advisory services and other products and services; the company's ability to monetize client assets; regulatory guidance; client sensitivity to interest rates; the effect of adverse developments in litigation or regulatory matters and the extent of any charges associated with legal matters; any adverse impact of financial reform legislation and related regulations; and other factors set forth in the company's filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.