Paine Webber, one of the nation’s biggest brokerage houses, announced Thursday that it will raise retail trading commissions by 3%, its first such move in three years.
The fee hike comes amid predictions of record profits for the securities industry and may be an aberration, as several other big investment houses contacted Thursday said they have no plans to follow suit. Most major brokerage firms last boosted retail commissions in 1990.
Nonetheless, the move underscores the widening gap between commissions paid to full-service brokers such as Paine Webber and those charged by “deep discount” brokers. At a time when increasing numbers of individuals are investing in the stock market, the fee disparities are worth noting--and switching brokers for--according to some experts.
“Discount brokers have made significant inroads in services and capabilities and are looking much more like full-service brokers in every area except cost,” says John Markese, president of the American Assn. of Individual Investors in Chicago. “A move like this has really got to put up a flag, signaling investors to start asking themselves what services they’re getting and at what cost.”
According to a 1993 survey, deep discount brokers charge an average of $53 per trade--down from $56 in mid-1991--compared to an average charge of $239 per trade at full-service houses such as Merrill Lynch, Smith Barney Shearson and Dean Witter. Deep discounters include firms such as Kennedy, Cabot & Co. in Beverly Hills; Detroit-based Olde Discount, and Muriel Siebert & Co. of New York.
The gap is slightly narrower for those who use the three biggest discount brokers--Quick & Reilly, Charles Schwab & Co. and Fidelity Brokerage Services--which charge about $101 for the average trade, according to Mercer Inc., a New York firm that conducts regular brokerage surveys. Mercer compiles its statistics by looking at 20 different trades ranging in value from $5,000 to $20,000.
Paine Webber is raising commissions in response to inflation, which has risen 11% since the company last raised commission rates in mid-1990, says Susan Thomson, a company spokeswoman.
The firm will also charge a new fee to customers who want to transfer their accounts to competing brokerage firms. It is not an “exit fee,” Thomson says. Individuals who liquidate their accounts won’t be charged to do so. But if they want to transfer their investment portfolios intact--and without paying sales commissions to liquidate--they’ll have to pay the new fee.
Spokesmen for Dean Witter, Merrill Lynch and Smith Barney Shearson said they have no immediate plans to raise commission rates or hike fees, despite the fact that commissions have not been hiked at those firms in three years or more.
No one was willing to speculate whether commission increases might be in the offing later in the new year. However, several industry insiders said such hikes would be surprising, mainly because the industry is enjoying its most profitable year ever and because technological advances have reduced the cost of trading.
The Securities Industry Assn. predicts that the nation’s brokerage firms will post record pretax profits of about $9 billion in 1993, up from $6.2 billion in 1992.
“Frankly, we’re shocked at Paine Webber’s timing,” said one industry insider who asked not to be named. “Inflation or not, it’s pretty hard to sell a fee increase to your customers when profits are soaring.”
Nonetheless, Markese says, Paine Webber’s move should spur investors to seriously consider what services they need and how much they’re willing to pay. Discount brokers generally can provide a customer with everything a full-service broker does, except advice, Markese notes. Most discounters have research reports available for investors, they can set up margin accounts and automatically reinvest dividends, and some can buy mutual fund shares for you.
If you need help determining how to allocate your assets or how to find a good stock or bond, you probably need a savvy full-service broker or another financial adviser, who will probably charge a fee. But if you’re already making your own investment choices and use a broker solely for trading, you’re paying “entree” prices for dining “a la carte,” Markese says.
The gap in commissions between discount brokers and full-service brokers continues to widen as full-service firms such as Paine Webber raise fees and “deep discounters” cut them. Here are average commissions as tracked by Mercer Inc., a New York firm that conducts annual brokerage fee surveys. The commissions are based on an index of 20 different trades ranging in share value from $5,000 to $20,000.
Type of broker Dec., 1991 July, 1993 “Deep” discounters* $56 $53 “Big 3" discounters** $99 $101 Full-service brokers $218 $239
* Includes such firms as Kennedy, Cabot & Co.; Olde Discount Stockbrokers; Muriel Siebert & Co.; Brown & Co.
** Charles Schwab & Co., Quick & Reilly, Fidelity Brokerage Services
Source: Mercer Inc.