REUTERS/Elijah Nouvelage
Walt Bettinger, the chief executive of Charles Schwab.
- Charles Schwab has shuttered a program used to sell products from third-party firms like State Street and BlackRock for zero commissions.
- The move underscores the difficult spot asset managers have found themselves in following the major brokerages' decisions to eliminate online trading fees late last year.
- The wealth management and brokerage firm said in its fourth-quarter earnings results on Thursday that the move came "as a result of the elimination of online trading commissions for US and Canadian-listed ETFs."
- The program also promoted the ETFs in the program to its thousands of RIAs, but asset managers that spoke with Business Insider said the promotion alone was not worth paying OneSource fees.
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The broker wars have uncovered some complicated alliances, and it's not always clear who's friend or foe.
Discount broker Charles Schwab just shuttered a nearly $100 billion program where it sold products from third-party asset management giants like State Street, JPMorgan Asset Management, and BlackRock.
The wealth management and brokerage firm said in its fourth-quarter earnings results on Thursday that it discontinued the program, called Schwab ETF OneSource, "as a result of the elimination of online trading commissions for US and Canadian-listed ETFs."
The move, completed in the fourth quarter, highlights the tough reality the money-management industry has found itself in following the major brokerages' decisions to remove online trading fees for stocks and ETFs late last year.
Thanks to stock-trading startup Robinhood jumping in with zero-commission trades, heavy-hitters like Schwab and Fidelity have had to follow suit and look to asset managers like BlackRock to cover the lost revenues. Outside ETF providers, however, are in a fee battle themselves, and have pushed back at paying extra for a spot on broker programs and platforms.
The investment industry has lowered sticker prices for the end consumer - mutual funds and ETFs are significantly cheaper now, even actively managed options, than a decade ago. But this lost revenue has inflamed the long-time rivalry between asset managers and brokerages, which now have to divvy up a smaller pie.
The zero-sum game has led to clashes between big-name money managers and brokerage platforms.
Ameriprise banned salespeople from Pimco, AB, and Franklin Templeton from talking to the brokerage's advisers in 2017, for example, after the sides couldn't agree on how much to pay for access.
At the time Schwab ETF OneSource was discontinued, it had 15 providers in the program and more than 500 ETFs, a company spokesperson said. It had just over $94 billion in assets at the end of the third quarter, a filing showed.
Third-party providers paid the firm at least four basis points on all assets in the program annually to be a part of ETF OneSource so their ETFs could trade commission-free like Schwab's own in-house funds. At more than $94 billion, Schwab brought in at least $37 million in fees from asset managers that were also competing with Schwab's own, ultra-cheap funds.
The program also promoted the ETFs in the program to its thousands of RIAs, but asset managers that spoke with Business Insider said the promotion alone was not worth paying OneSource fees.
"The big selling point of the program was the commission-free trading of your funds, so your salespeople didn't have to convince an adviser to convince his client that your ETF was so special that it was worth a commission," said one representative from an asset manager familiar with the platform, who asked not to be identified because their firm still has a relationship with Schwab and was not authorized to speak to the press.
The fees have pushed out at least one ETF provider before the program's closure - ProShares left the platform in 2017 over disagreements on costs and customer data.
Schwab's ETF business did not have to pay itself a separate fee to participate in its own program.
Assets once counted under the OneSource umbrella will now be included with other third-party ETFs. Schwab reported nearly $621 million in total ETF assets at the end of the fourth quarter, with the lion's share coming from third-party providers. Schwab has a similar platform for mutual funds.
An evolving industry
When the San Francisco-based firm launched ETF OneSource in 2013 with 105 commission-free products, the firm marketed it as a platform that opened up investors and advisers access to "the most commission-free ETFs anywhere in the industry."
At the time, it launched with its own Schwab-branded funds as well as major providers including State Street, Guggenheim, and Invesco's PowerShares line.
Schwab in March 2019 said it would doubled the number of ETFs on the program to just over 500. The massive iShares line at BlackRock, the world's largest asset manager, joined the program with 90 funds. Invesco, State Street, JPMorgan Asset Management, and others added to the number of funds already on the platform.
Schwab is meanwhile set to close on two major acquisitions in 2020: longtime rival TD Ameritrade for about $26 billion, and some of USAA Investment Management's assets for $1.8 billion.
Schwab axed online trading commissions in October after Interactive Brokers said it was rolling out a new offering with unlimited, commission-free trades on US-listed stocks and ETFs - a move that pushed rivals' shares lower.
The online brokerage industry and the broader digital financial services industry it sits in has come to be redefined by firms' quick moves to commission-free or dirt-cheap transactions and capabilities to draw in a new generation of customers.
