Charles Schwab's move last year to lower the minimum amount to invest in funds or exchange-traded funds (ETFs) has resulted in more smaller investors coming on board as well as an increase in assets coming from smaller retirement plans.
In an interview with InvestmentNews, Jonathan de St. Paer, senior vice president and head of strategy at Charles Schwab Investment Management, said that the assets under management for investors with balances between $50,000 and $100,000 grew to $964 million over the past 12 months. That's up from $593 million. Inflows into mutual funds from this group of investors increased to $249 million from $48.5 million, while inflows into ETFs increased to $714.9 million from $544.9 million. The executive said that, once The Charles Schwab Corporation (SCHW) lowered the minimum investment level, it saw growth that he characterized as "pretty rapid."
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While mutual funds and ETFs are supposed to be a way for retail investors to obtain broad exposure to stocks and bonds, directly purchasing fund shares in the past required a sizeable upfront investment if you were not participating in a company-sponsored retirement plan. InvestmentNews noted that the minimum initial investment for the Vanguard Total Stock Market Index fund is $3,000, while Fidelity requires a $2,500 initial investment to get into the Total Market Index Fund. Robo-advisors are trying to change that, enabling regular investors to start investing for as low as $50. Charles Schwab has long been a leader in low-cost investing, slashing the commissions on ETFs and other trading products.
While fund companies complain that it's too expensive to work with smaller investors, St. Paer told InvestmentNews that the internet has not only leveled the playing field for investors but also makes it cheaper to service them. Rewind 20 years, and fund companies had to mail out big prospectuses and send out material that was costly. The internet has streamlined all that. "The world has gotten more efficient, but share class structure has not caught up," he said in the report.
In addition to seeing smaller investor balances increase, Schwab's lower minimum investment threshold is resonating with smaller retirement plans. Peter Jones, a pension consultant at Wellington Consulting Services, told InvestmentNews that Schwab's funds are now more attractive for small pension plans, noting that plan sponsors are looking to get the lowest possible cost for funds. "Those small account minimums are just golden," Jones said in the report. "[Participants] are like kids in a candy store."