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The Best of Business Week Online: Investing
This Mess Will Cost AmEx
Just a year after it lured lots of clients with offers of free online trading, the firm is slashing the freebies
American Express Co. in 1999 raised a big ruckus in the discount-brokerage biz by offering free online stock trades to customers with as little as $25,000 in their accounts. That eye-catching offer, flashed in many ads, did indeed catch a lot of eyes--and wallets. The company's roster of brokerage clients rocketed from under 200,000 to more than 500,000.
Today the financial-services giant is curtailing the freebies--and ticking off plenty of those new customers. On Internet message boards and in letters to AmEx Chief Executive Harvey Golub, they're screaming about the imminent change. One writer at Fool.com, "Iordana," cried: "If there's a worse online broker, please let me know, because I'm switching and I don't want to have the same experience again." Another, "Derwood1," declared: "Last ex-AmEx investor, please turn out the light!"
Anonymous online complaints about discount brokers are as common as weeds in July. Yet some of these miffed clients raise fair points about AmEx' moves. If you ask me, the company foolishly rushed to make the changes. Now it has a mess to clean up.HIGH ROLLERS. For the record, AmEx isn't rescinding its freebies entirely. The commission schedule works this way: Every online trade for clients with $100,000 or more in an AmEx brokerage account is free. Clients with $25,000 to $99,999 pay $14.95 to sell stock but get free buys. Buy or sell, it's $14.95 per trade for clients with less than $25,000.
Beginning Oct. 30, the fee for accounts under $25,000 is set to rise to $19.95. Clients with $25,000 to $99,000 will also pay the new $19.95 fee for all sells. And instead of unlimited buys, they'll get only three per month, after which the $19.95 fee will apply on every trade. Unlike before, those three free buys must be market orders (at the best available price). Limit orders (to buy or sell at a predetermined price) cost $19.95. High rollers with accounts of $100,000 or more get just 10 free market orders per month before the $19.95 fee kicks in.
Is AmEx legally permitted to make these changes? Yes--and it says it's doing so to thwart the small percentage of day traders who abuse the system. There are two problems, though. The first is that even as it's telling clients that fees are going up, it's still proclaiming the cheaper commission schedule in magazine ads. One that appears in the October edition of Worth, for example, purrs alluringly, "Qualify for free online trading." The fine print lays out the soon-to-be defunct fee scheme.
How come? When AmEx decided to change its commissions in mid-September, "Some [advertising] stuff was out the door and on the printing press, and there was no way to get it back," spokesman David Kanihan said. "But we felt like that was a situation we were equipped to handle" by informing prospective clients of the changes before opening new accounts. Kanihan added that there have only been a handful of calls from new clients who felt misled.
Fair enough, I suppose, but why not wait until all those magazines have hit the recycling bins before implementing the new fee schedule? AmEx responds that it has every right under its shareholder agreement to change the commission schedule.A DENTED REPUTATION. The second problem is more acute if you're among the many who moved an account to AmEx to take advantage of the free trading. AmEx told prospective clients that its aggressive pricing strategy was not a temporary come-on, encouraging those who hesitated at the thought of moving an account. Anyone who has shifted assets between brokers knows it's rarely frictionless. In fact, it's often a pain, and the accompanying fees just rub salt in the wound. AmEx charges $50 to close an account by transferring assets to a rival broker. And that fee is nothing compared with what you could be out because of lost trading time and other aggravations.
That's the prospect facing Larry Van Eenwyk, an AmEx client and a teacher at a financial college in Inner Mongolia (yes, the globe-girdling giant even reaches the autonomous region within China). Lured by the free trading, he moved his money from TD Waterhouse Group Inc. to AmEx last November. Now, he's set on transferring it out. "Bait and switch is what they've done," he told me by phone. "And they're still advertising, knowing they won't be able to honor the offer." He added: "I'm going to avoid AmEx products like a skunk on a backwoods trail."
The way I see it, AmEx has already dented its reputation by hustling through the higher fee schedule before its ads had finished circulating. It can begin to repair the damage by making account transfers to another broker swift, painless and--here's an eye-catching idea--free.
Although the company has considered that option and rejected it, according to Kanihan, I'd say that's another strategy worth revisiting.By Robert Barker; Read Barker.Online Every Friday on Business Week Online.