Sharebuilder, back in the early 2000s, had a great premise. For a fee of $4 per trade, you could build up an investment position in a stock over time. If you wanted to own, say, $10,000 in Berkshire Hathaway stock, you could launch a plan to buy $500 per month through Sharebuilder for twenty months, and then, you could get there.
At a time when other discount brokerage houses were charging $8-$10 per trade, including Schwab, E-Trade, Fidelity, and TD Ameritrade, Sharebuilder had a clearly defined target market–it provided a lower price for those who wanted to build an investment gradually and wanted to keep fees low.
And being lower cost worked. Rose Blumkin, the founder of the Nebraska Furniture Mart, used to say: “If you charge lower prices, customers will go to the bottom of the river to find you.” It created this unusual circumstance, where, throughout the 2000s, investment outlets like CNBC, the Wall Street Journal, and Barron’s would mock Sharebuilder, treating it as an almost immature gimmick. Meanwhile, at the same time, you had scores of professionals, small-business owners, and middle-class investors dutifully opening a Sharebuilder account and acquiring stock in great businesses for a mere $4 per month. The SIPC insurance coverage was there, and there was no legal distinction between having your shares of Coca-Cola held through Sharebuilder than, say, being stored away in the most exclusive vault at the Northern Trust building in Chicago, so people followed the value.
Unfortunately, most of these online brokerages that charge low fees, whether it be Sharebuilder or Loyal3, are built with the “Amazon business model” in mind–namely, acquire a critical mass of business due to lower prices that earn no profit, and then once you’ve gotten that book of business on hand, start rolling out the price increases and hope that the attrition rate is low.
In 2011, Sharebuilder, which was a subsidiary of ING Direct (which was part of ING Group), was sold to Capital One, which promptly renamed Sharebuilder “Capital One Sharebuilder” and then later just Capital One Investing.
Then, something happened. While the major discount brokerage houses were lowering their fees, such that it now only costs $4.95 per trade at Schwab, Fidelity, or E-Trade, Sharebuilder decided to hike its prices under the new rebranded ownership of Capital One. Now, it costs $6.95 per trade at Capital One, and some of the servicing rates are truly obnoxious (if you want to transfer money from, say, your Capital One Investing account to your checking account, you must pay a $30 fee for funds wired out, and if you want to close your account, you’ll have to pay a $75 fee). Berkshire Hathaway Vice Chairman once said that the worst countries try to make it difficult to leave, and perhaps a corollary applies to business relationships as well.
In my view, this was a disaster. While all of the higher-pedigrees options were getting cheaper, Capital One started hiking its fees. While I will concede that Capital One has a more established brand name than Sharebuilder did, the point is that the old Sharebuilder not only survived but prospered with a lower reputation than its peers because it gave the same basic service at a lower cost. Now, the value proposition is reversed. The brands with higher reputations, namely Schwab, E-Trade, and Fidelity, now charge lower fees than Capital One Investing, which has a nascent at best reputation as an investment house.
There is almost no reason for an investor to use Capital One Investing’s services now, and it is basically surviving on the legacy assets that it built from the old Sharebuilder. Eventually, in an effort to boost profits, it will continue to raise the rates, and the gap between Capital One and its peers will widen even further.
I reviewed the Capital One Investing service fee log and I only found one basis for why I would could conceive of a scenario where I would use Capital One Investing. Namely, Capital One charges $0 in fees if you purchase from a selection of 1,000 mutual funds that are a part of its network partnership. One of the funds included is the Vanguard Wellington Fund, which has existed since the Great Depression and is possibly the best-long term mutual fund investment on a risk-adjusted basis because it owns nothing but high-grade government bonds and blue-chip stocks and has delivered over 8% returns for almost a century. I could see someone opening up a Capital One account to purchase a fund like that. But even that, the history of Sharebuilder is one of constant ownership changing and fee adjustments, that I am not sure I would comfortable making a long-term plan around using it as a brokerage service anymore.
I don’t know what place the old Sharebuilder has in the investment world any more. When it first rolled out, it had a cost advantage compared to its peers that made it easy for investors to overlook its lack of a historical reputation in the investment community because the money talked. But now, that is not the case. The investment houses with better reputations now charge lower fees per trade, and the only competitive advantage for Capital One investors is the panel of 1,000 no-load mutual funds that can be purchased with no fees.
But I don’t think that inducement is enough. If current management wants to restore Capital One to the old glories that precipitated Sharebuilder’s rise, it should launch something like $2 trades or a $10 monthly fee to purchase an unlimited number of stocks subject to a maximum of $10,000 per month. It captured the investment community’s attention with lower costs and should amend its policies accordingly if it wants to recapture the initial appeal that brought the so-called mom and pop investors to the discount brokerage in the first place.