DRIP Investor - Response to the BUYandHOLD price increase  

Addressing the issue of BUYandHOLD's new pricing structure, this is a response from Chuck Carlson that was posted in the message board section of our subscriber area. 

I seem to be taking quite a bit of hits on this new BUYandHOLD pricing scheme, so let me address a few points. I'm sure whatever I tell you is not going to sit well, but here is the truth:

   BUYandHOLD is doing its best to provide a service that meets the needs of investors but also provides a path to profitability for the firm and its investors. This is no small feat. Servicing small investors is very, very expensive, especially when these small investors do very little activity. The business model of BUYandHOLD is built around an extremely large critical mass of investors investing on a regular basis. That's the only way offering trades at such small fees works. Unfortunately, servicing very small accounts (in terms of dollars) that do very little trading activity (many do nothing) costs a lot of money.

   The reasons for the changes in pricing structure were primarily driven by the "new world" out there for venture-financed firms. I believe that the old pricing scheme would have worked given more time. However, companies such as BUYandHOLD have found it difficult getting the time to build a critical mass of people that would have allowed it to become profitable. Venture investors are becoming more demanding and increasingly impatient in funding business models that require time to come to fruition. Thus, the company was forced to make changes that helped make the revenue stream more predictable. Believe me, these moves have been discussed and re-discussed.

   The thinking under the current pricing scheme is that if someone trades just twice per month in an account, the fee per trade is just $3.50. That is still a very good deal relative to the brokerage competition. Furthermore, that means you are buying stock for only two accounts that month. (Remember, under the pricing scheme, the first two trades are provided with the $6.95 fee). Obviously, for someone who is buying only once per quarter, or something like that, the fee structure will be difficult. But for a typical DRIP-type investor who is investing several times per month, I see this still as a cost-effective way to invest.

   I've never suggested that BUYandHOLD should replace DRIP investing. Indeed, I still have many of my DRIPs. The intent -- and I think this is still quite valid -- was to provide yet another option for the individual investor to have to buy stocks. I've always maintained that if you found a better option to buy a stock than BUYandHOLD, by all means use that. I've never suggested that BUYandHOLD should be the end all.

   In some ways, I resent the notion that we are trying to take advantage of the small investor. Even with this pricing scheme, BUYandHOLD is still better in terms of fees than what's out there, if you consider all the options and frequency of purchases (3 times per day) and the fee on the sell side. Was it a better deal when the trades were just $1.99? Certainly. But running any business requires a balance between meeting the needs of the customer and meeting the needs of the business. We saw this very clearly with all the dot coms that "gave away the store" in terms of free stuff -- great for the consumer -- only to dry up and whither away because "free" is not a lasting business model.

Bottom Line: If everyone investing at B&H would have actually invested on a quasi-regular basis (say once per month), none of these changes probably would have been needed. The simple fact was, however, that accounts were opened, but many people rarely traded. Yet, the servicing costs on those "inactive" accounts were killing the firm. This move will assuredly eliminate a lot of people who now don't want to pay for basically doing nothing. Hopefully, the people who were actually using the site on a regular basis should still see the value.

Again, I know this all looks like a "bait and switch." But the world changes, and companies -- particularly those that are still working toward profitability and have venture investors who have certain requirements and agendas -- are forced to respond to changing market conditions. The changes in the pricing scheme are a response to the "new world order" out there.

Charles Carlson, CFA
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