UPDATE 1-Schwab executives see rate improvements; drop "Talk to Chuck"

Fri Jul 26, 2013 4:57pm EDT

By Jed Horowitz

NEW YORK, July 26 (Reuters) - Brokerage giant Charles Schwab Corp on Friday gave a cautiously upbeat assessment of client confidence and the outlook for interest rates, but warned investors against over confidence about its near-term outlook

"Things are generally better than worse," investor relations head Rich Fowler told analysts and investors at Schwab's summer "business update" held just 10 days after the company reported a disappointing 7 percent fall in its second-quarter profit.

However, he and the company's chief financial officer said the San Franciso-based discount brokerage pioneer still faces the economic realities of unusually low rates and higher compensation expenses related to growing sales of fee-based "advice" accounts.

The company's evolution from a discount broker reliant on trading commissions to a full-service firm selling fee-based products directly and through independent advisers is smart but difficult, executives said.

Building stronger trust among investors so they will allow Schwab-connected advisers to manage their money "is an extraordinarily challenging undertaking" but sensible because trading revenue is becoming more commoditized and less stable than fee revenue, Chief Executive Walt Bettinger said.

The most prominent sign of the shift was the decision to drop the company's long-time "Talk to Chuck" ad campaign featuring the company's septuagenarian founder. Last month, Schwab rolled out what Bettinger called a "more inclusive" campaign branded "Own Your Tomorrow," aimed at attracting customers from competitors.

"'Talk to Chuck' was a highly retail-driven program" that is hard to sell when the firm is trying to promote sale of stocks, bonds and other products through independent advisers who promote themselves to wealthy investors, Bettinger said.

He also said Schwab is making progress in gaining market share from wirehouses, large full-service brokerage firms such as Morgan Stanley and Merrill Lynch. "That's where the assets are," he said.

Fowler noted that the company doesn't change something as successful as the "Talk to Chuck" campaign on a whim.

Trading activity grew in the second quarter but is below the firm's early 2013 forecast and will probably be $100 million short of those expectations. Trading revenue has plummeted from about 60 percent of Schwab's total revenue 15 years ago to 17 percent in the just-ended quarter. In several years, it should be down to 10 percent, Bettinger said.

The firm's total asset management fees, on the other hand, hit $572 million in the second quarter, compared with $235 million of trading revenue and $473 million of net interest revenue. About 430,000 of Schwab's 6.2 million retail brokerage clients pay fees for advised products.

The focus on "interest-rate Bingo" is diminishing, Fowler said, referring to the extreme sensitivity of discount brokers profits and stock prices to short-term interest rates. The stocks rise much quicker than the broader market when policymakers hint that rates will go up.

Schwab is still waiving fees on money-market accounts to prevent clients from losing money on their investments. It bypassed $157 million of such fees in the second quarter.

The good news is that for the first time in years, it said on the call that it is reinvesting assets at rates that are equal to or a bit higher than ones that have matured.

Christopher Harris, an analyst at Wells Fargo Securities, flashed a note to clients during the call to underscore the importance of Schwab saying net interest margin will remain essentially flat for the rest of the year rather than fall.

"This is the first time this has occurred since 2007 and is very helpful" to build interest profit margins, Harris wrote. Schwab competitors TD Ameritrade Holdings and E*Trade Financial Corp also said on recent earnings calls that they are rolling over maturing investments at equal or better rates.

At the end of the four-hour investor day presentation, CFO Joe Martinetto said the day was not meant to "talk down" analyst expectations but to assure that they are aligned with Schwab's view that "financial headwinds are starting to abate."

Shares of the 40-year-old firm, which fell 4 percent after reporting higher-than-expected second-quarter expenses last week , closed down .72 percent at $22.12.Year-to-date, shares of Schwab and its discount brokerage competitors are up around 50 percent.

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