Emboldened by its highest profits since the dot-com boom, Charles Schwab Corp. is dropping its remaining account service fees in the latest step back to the stock brokerage’s low-cost heritage.
The decision to drop the service fees, announced Thursday and effective Oct. 1, affects about 650,000 accountholders with household balances below $25,000.
Separately, Schwab also projected its earnings for the current quarter will range between $195 million and $205 million, the second highest three-month profit in the San Francisco-based company’s history. The anticipated results translate into 15 cents or 16 cents per share, above the mean estimate of 14 cents among analysts surveyed by Thomson Financial.
Hoping to accelerate its recent momentum, Schwab plans to spend about $30 million on a new national advertising campaign. The marketing expense, coupled with the elimination of the service fees, will trim 2 cents per share from Schwab’s fourth-quarter earnings.
Relinquishing the account service fees will cost Schwab about $40 million annually, a sacrifice that the company believes it can afford after shedding more than $300 million in annual expenses since mid-2004.
“We sort of lost our way by imposing fees to pay for an overhead structure that, quite frankly, was too high,” Christopher Dodds, Schwab’s chief financial officer, said during a Thursday interview. “Now that we have eliminated the high overhead, we are giving back some of that (savings) to our clients.”
The service fees typically ranged from $120 to $180 annually per account. Some customers still may be charged if they don’t keep at least $2,500 in brokerage accounts or a minimum of $2,000 in retirement accounts.
Besides dropping the service fees, Schwab also is abandoning a $3 handling fee for stock trades.
The latest fee cuts continue a trend established since founder Charles Schwab returned as the company’s chief executive officer 14 months in an attempt to end years of declining revenue as some of its less expensive rivals, including E-Trade Financial Corp. and Ameritrade Holding Corp., lured away customers.
Besides cutting costs, Schwab has focused on lowering fees in a return to the discount philosophy that he pioneered 30 years ago. His predecessor, David Pottruck, had been boosting fees as he added more advisory services and other perquisites that alienated many of Schwab’s frugal customers.
Coupled with the moves announced Thursday, Schwab estimates the reduced and eliminated fees will save customers about $375 million annually.
The strategy has encouraged substantially more stock trading among Schwab’s customers. In August, for example, Schwab’s revenue-generate trades averaged 215,300 per say, a 61 percent increase from the same time last year. The customer balances in Schwab accounts also have increased by at least $6 billion in each of the past three months
“In many dimensions, we are in the better shape than we have ever been,” Dodds said.
The turnaround has lifted Schwab’s market value by more than 70 percent since Charles Schwab came back as CEO. Despite the company’s recent progress, Schwab’s shares remain well below their high of $51.67 reached 6½ years ago.