How does Charles Schwab make money? How brokerage firm generates revenue from its investment and banking services?

How Charles Schwab Makes Money

Charles Schwab is one of the largest brokerage firms in the United States. It has millions of accounts and trillions (yes, trillions) of dollars in client assets. And that’s just the brokerage side. Billions of dollars can be found at Charles Schwab Bank.

Follow the Money

If you want to know how Schwab makes money from all of this, we simply need to follow the flow of money. The broker charges $4.95 for every stock transaction and most ETF trades. Schwab also charges a $5 surcharge for placing one of these trades through its automated phone system, and using a living, breathing agent to place a trade is an extra $25.

Commissions on other products generate more revenue. Option contracts are an extra 65 cents on top of the $4.95 base charge. Broker-assisted surcharges apply here, too.

Mutual funds at Schwab carry various fees. A few thousand have a $49.95 transaction fee (on the buy side only). Although Schwab doesn’t charge anything for a mutual fund phone trade, a broker-assisted trade costs the standard $25 extra.

Schwab’s lineup of mutual and exchange-traded funds carry expense ratios, which are probably a very large source of income even though the expense ratios are low. For example, we found thirteen Schwab mutual funds with assets over a billion dollars. A small percent of a billion dollars is a lot of money.

And don’t forget about futures. The commission is $1.50 per contract per side. And some futures trades could have several contracts per trade.

Secondary bonds are $1 each with a $10 minimum and $250 maximum.

There Are More than Commissions

On some commission-free products, you may think Schwab isn’t making any money; but actually it does. For example, Treasury bonds at Schwab are commission-free, but Schwab acts as principal on these trades. This means that the broker is counter-party to trades, i.e., if you’re buying, Schwab is selling to you. It can make or lose money on these trades. It also imposes a markup on purchases and a markdown on sales, further increasing revenue.

Robo Advisor

Have you heard that Schwab’s robo-advisory program is free? Well, the brokerage house charges nothing for the service; but it’s able to make money in other ways. For example, Intelligent Portfolios keeps a large percentage of customer accounts in cash. Schwab in turn uses this cash to fund its operations. It also makes money off of the ETF’s that the computer algorithm trades.

Traditional portfolio management isn’t free, and Schwab makes as much as 1.35% per annum for these accounts.

Miscellaneous Fees

Besides trading costs, Schwab also has various fees that can be incurred while holding an account. For example, sending a wire costs $25, and a cashier’s check is $10. A 529 Education Savings Plan at Schwab costs anywhere from 0.25% to 1.00% per year.

The Banking Side

Schwab’s bank accounts don’t have a lot of fees. But this policy attracts many customers, and Schwab uses a percentage of their money in its fractional reserve lending practices. For example, Schwab offers mortgages with its deposits.

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