Spurred by higher costs and changes in their products, large full-service brokerage firms such as Merrill Lynch have raised commission fees as high as 25% in recent months, with some of the increases targeted at small investors.
Meanwhile, some firms are also changing the way they pay brokers, rewarding them for handling wealthier clients and, in effect, discouraging them from spending a lot of time with the less-affluent.
These developments, some analysts say, reflect a reduced dependence on traditional stock trading commissions as a source of income for brokerage firms. These changes also reflect a realization among brokerages that handling smaller investors costs more and results in less profit.
The changes could prompt some small investors to switch more of their trading to discount brokers, which in recent years have been taking an increasing share of the stock trading business from full-service firms.
'Start Charging More'
The fee increases "are going to make that many more investors focus on whether they really need a full-service broker," said James R. Quandt, president and chief executive of Security Pacific Brokers Inc., the discount brokerage unit of Security Pacific National Bank.
"It's good business to start charging more when the product's hot," said James Cloonan, president of the 98,000-member American Assn. of Individual Investors, noting that the fee hikes come amid booming trading volume in stocks. "But it will drive more people to discount brokers."
Some industry officials and analysts predict that these and other developments will help blur the distinctions between discount and full-service brokers. Already, many discounters are offering many of the same products as their full-service brethren, such as mutual funds, individual retirement accounts and cash management accounts.
"The service level distinctions are diminishing," said Hugo Quackenbush, senior vice president for strategic planning and marketing at Charles Schwab & Co., the nation's largest discount brokerage.
The latest changes will not change the basic process by which investors are billed for stock purchases. Investors who trade stocks will continue to be charged commissions, generally between 1% and 2% of the value of the transaction.
The commissions, usually billed to the customer's account with the firm, go to the company, and brokers are paid a percentage, usually between 20% and 50%, depending on the volume and size of transactions they handle.
Nearly every major brokerage has either raised commissions or altered its compensation structure for brokers in recent months, said Perrin Long, brokerage analyst for Lipper Analytical Securities Corp. They include Dean Witter Reynolds, which increased commissions 3.5%, and Paine Webber, which said it upped fees on the average by "less than 5%." But the move that so far has gotten the most attention was by Merrill Lynch, the nation's largest brokerage firm.
Merrill Lynch's plan, which took effect June 20, clearly was aimed at the smaller investor. The firm raised commissions by an average of 4.8% on trades of $10,000 or less, but fees on trades of $10,000 or more were not changed.
Merrill Lynch increased fees on the smallest trades as much as 25%. For example, on a $1,000 trade of 100 shares at $10 each, the commission was boosted to $50 from $40. By contrast, fees on an $8,000 trade of 100 shares at $80 were increased only about 1%, Merrill Lynch spokesman James Flynn said.
Fees Steadily Rising
To be sure, this is not the first time that brokerages have raised commissions for small investors. Indeed, fees for retail investors have been steadily rising since May 1, 1975, when the Securities and Exchange Commission allowed brokerages to set their own commissions.
Since then, rates charged to retail customers on average have risen to between 31 cents and 32 cents per share from 24 cents, according to analyst Long. Meanwhile, rates have declined sharply for pension funds, money managers, banks and other institutional clients that buy securities in bulk. Those rates now average between 6 cents and 8 cents per share, down from 22 cents before May 1, 1975, Long estimated.
The latest changes come as national full-service brokerage firms are earning less revenue and profit from stock commissions and an increasing amount from such activities as investment banking, institutional brokerage, corporate finance, underwriting and sales of tax shelters, insurance, individual retirement accounts, mutual funds and other products.
Meanwhile, costs of computerization and other equipment, higher taxes and higher administrative expenses have made stock trading more costly. That makes smaller trades less profitable.