Advice Model Keeps Schwab On Its Toes In Wild Market Swings
August 17 2011 - 3:12PM
Dow Jones News
When the stock market was gyrating wildly last week, Charles
Schwab Corp. (SCHW) Chief Executive Walt Bettinger says, clients
didn't just trade stocks in huge volumes. They wanted, in the words
of the company's advertisement, to "talk to Chuck."
Clients were calling the company and asking for advice,
Bettinger says, which "validates the evolution of the firm" from a
place where investors just trade individual stocks, to one where
they can complete banking transactions, trade options, and receive
investment advice.
Schwab offers fee-based advice from financial advisers and
manages portfolios of mutual funds and exchange-traded funds, in
which clients pay the company a fee for its services. In general,
fees offer a more stable source of income than commissions on
trades, which can ebb and flow.
But Schwab has been covered by a dark cloud for more than two
years: rock bottom interest rates, which have cut into its profits.
Schwab has slashed the fees its roughly $150 billion in
money-market funds pay to the company.
Low rates mean Schwab must waive fees for fund shareholders to
receive any returns. The company has said waivers for the rest of
this year might reach $150 million a quarter. Relief for Schwab
might not come for a while as the U.S. Federal Reserve has said it
plans to keep rates close to zero for another two years, longer
than previously expected.
Those fee waivers at Schwab are a big part of the reason shares
of the company have fallen 52% to $12.46 in Wednesday afternoon
trading since Oct. 1, 2008, Bettinger's first day on the job, in
the midst of the financial crisis. Rivals TD Ameritrade Holding
Corp. (AMTD) and E*Trade Financial Corp. (ETFC) fell by 10% and
58%, respectively, over the same period, while the Dow Jones
Industrial Average has risen by 4.6%.
Beyond the overhang of low rates and their consequences, Schwab
also elected to raise capital in January 2010 to support deposit
growth in its bank and agreed to settlements with regulators over
the YieldPlus fund, an ultrashort bond fund, which blew up during
the market collapse, said Sandler O'Neill & Partners analyst
Richard Repetto.
In an interview, Bettinger said the "ultra-low rate environment
punishes our financial results," but he said a 1% increase in the
federal-funds rate would boost the company's revenue by more than
$1 billion a year.
"When you lead a company, you deal with the hand you are dealt,"
and "work within it," he said.
While Chairman and Founder Charles Schwab is still very much the
face of the San Francisco company and the focus of its well-known
"talk to Chuck" TV commercials, Bettinger has accelerated the
company's push away from its trading roots to an advisory
model.
Bettinger, a 15-year Schwab veteran, joined the company after it
acquired his firm, a provider of retirement plan services, in
1995.
Now more than half of the roughly $1.7 trillion in client assets
at Schwab are under some form of fee-based relationship, up from
roughly 30% 10 years ago. The company is much less reliant on
trading, which now accounts for less than one-fifth of its
quarterly revenue, well below the 35% level in 2001 and the roughly
40% level of TD Ameritrade and E*Trade today.
Trading stocks for $8, $9, or $10 [per trade] is "not a path for
success for 99.9% of Americans," Bettinger said.
Despite the emphasis on fees, Schwab still can get a kick from a
rise in trading commissions. On Aug. 8, Schwab processed more than
one million trades, posting one of the biggest trading days in its
history as the Dow fell more than 600 points.
Schwab also handled on average more than double its typical
late-summer call volume and website traffic last week, Bettinger
said.
During his tenure, Schwab agreed to buy options brokerage
optionsXpress Holdings Inc. (OXPS), a deal still pending.
One deal apparently not in the works is a potential bid for
rival E*Trade, which recently hired Goldman Sachs Group Inc. (GS)
to review its strategic alternatives following pressure from its
largest shareholder, Citadel LLC.
Bettinger said Schwab has "no awareness that E*Trade is for
sale."
When asked if the company could potentially allow a rival such
as TD Ameritrade to make an offer for E*Trade, he said, "we plan in
advance for any moves that competitors might make with appropriate
responses if we consider a given move requires a response."
Such moves could include advertising to E*Trade's clients or
altering its own commission fees.
-By Brett Philbin, Dow Jones Newswires; 212-416-2173;
brett.philbin@dowjones.com
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