Schwab Clients Complain of Obscure Fee

Clients of Charles Schwab & Co. are complaining that the firm tried to dupe them into paying fees for services they used to receive free.

Marc Hoffman of Louisville, Ky., who along with family members holds brokerage accounts with the San Francisco firm, said he was automatically enrolled in a new account called Personal Investor Signature Services, launched in February in a restructuring of Schwab offerings.

“Buried in about the 20th sentence of the accompanying letter was one single line reading, ‘There will be a quarterly fee for this service,’ ” Hoffman said. “I’m sure millions of account holders, who throw the material in the garbage, will pay the fees for years without noticing, because to avoid the fees, you must actively opt out, as opposed to opt in.”

Hoffman said the fees in his case would run to about $100 a year.

Schwab spokesman Morrison Shafroth acknowledged that the fees, affecting about 500,000 accounts, had drawn customer complaints, though he declined to say how many. But he said there was no attempt on Schwab’s part to deceive clients or conceal the fact that the new fee structure had been introduced.

“We will reverse any fees for clients who got a service that they didn’t want,” he said. “If they are not happy, we want to hear from them.”

Consumer advocates said the new fee structure was introduced in letters heralding Schwab’s commitment to better service and making only passing reference to new fees.

“It seems to be a deliberate attempt to mislead,” said Ken McEldowney, executive director of Consumer Action, a nonprofit organization based in San Francisco. “The letter is written in such a way as to say, ‘Not to worry.’ ”

McEldowney added that financial services firms as a whole get poor marks for how they introduce price changes. Many banks and credit card companies have taken to disclosing new and increased fees in statement stuffers that customers often toss without reading, he said.

“It’s always that rates are going up; fees are going up; bills are going up,” McEldowney said. “Even if a consumer initially signed up understanding all the rates, fees and conditions, you may be surprised if you don’t read every statement stuffer.

“If there are going to be significant changes in an account, there ought to be informed consent,” he said.

Financial services companies collected more than $200 billion in fees last year alone, noted Gail Hillebrand, senior counsel with Consumers Union in San Francisco.

“Fee revenue has become a much more important piece of the profit stream in financial services,” Hillebrand said. “The risk of being hit with new fees, unexpected fees and fees added after you opened your account is growing.”

Like Hoffman, the other individuals enrolled in the Signature product had been using so-called Independent Investing Foundational services in the past. It’s free to anyone with a $50,000 balance or who has made at least eight trades each year on which commissions are paid.

The Signature product is free only to those with balances of at least $500,000 or who have at least 24 commissioned trades a year, according to Schwab. All others pay a quarterly fee based on the balance in their account. The lower the balance, the higher the fee.

People with less than $50,000 in Schwab accounts pay $70 every three months, or $280 a year. Those with $50,000 to $250,000 invested pay $160 a year. Clients with $250,000 to $500,000 pay $100 a year.

The reason Schwab structured the fees as it did is that affected account holders had been using premium research resources, which are no longer available with standard accounts, Shafroth said.

He added that the Signature account provides a $5 trading discount on the first dozen trades done each year, which would effectively reduce the cost of the account by $60 annually for anyone who trades actively.

For Hoffman, the solution to his fee problem was easy. He had Schwab move his money back into the standard account. His wife and parents, who also have Schwab accounts that Hoffman manages on their behalf, did the same.