Charles Schwab's asset-focused business stumbles

NEW YORK (Reuters) - Charles Schwab Corp's (SCHW.O) third-quarter profit beat expectations, but shares of the largest U.S. online brokerage slipped in a tumbling market on Wednesday as investors worried about a declining stable of assets under management.

The revenue Schwab derives from assets was hit by recent market turmoil. However, the company still managed to add new client assets, and the market turmoil also boosted a key trading measure in September.

The company's stock was down 1 percent, outperforming its two closest peers. The shares dropped 10 percent on Tuesday.

Because Schwab's business model relies more heavily than its rivals on asset management, worries persist that its managed assets will drop further along with the market.

"If market valuations continue to decline further it's tough for us to overcome that in short run, but we believe we will continue to see an increasing trend in client assets," Joe Martinetto, the chief financial officer, said in an interview.

Analysts point out that Schwab's strategy is likely more stable than that of TD Ameritrade (AMTD.O) or E*Trade Financial (ETFC.O) in the long run, when markets recover and trading returns to normal levels.

"Right now Schwab is suffering the pain of the market because of their revenue model," said Adam Honore, senior analyst at Aite Group. "But they're still opening new accounts and bringing in assets."

In the period ended September 30, Schwab's fees from asset management and administration dipped 2 percent. Client assets at the quarter's end were down 9 percent from a year earlier.

The company, which provides online brokerage services, banking and financial advice, attracted some $24 billion in net new client assets, less than the previous two quarters.

EARNINGS BEAT THE STREET

Schwab earned $304 million, or 26 cents a share, in the third quarter. On average, analysts polled by Reuters Estimates expected the San Francisco-based company to earn 23 cents a share.

Charles Schwab, the company's founder and current chairman, said in a statement that current market conditions "are as difficult as I have seen in my career and ... test anyone's resolve and confidence."

The volatile markets through September 30 were reflected in Schwab's daily average revenue trades, or the key DARTS figure, which jumped 50 percent in September after an unusually slow August.

In October, levels "are definitely up pretty dramatically," Martinetto told Reuters.

Late last month, Schwab warned of a $73 million pretax charge in the quarter related to its exposure to Lehman Brothers (LEHMQ.PK) and Washington Mutual WMPDC.UL debt.

The results also included an $8 million charge related to a lawsuit centered on its ultra-short YieldPlus bond funds. The suit, filed this year, claims the company misled investors or omitted information in marketing the funds, which were exposed to subprime mortgages.

Schwab shares have remained relatively stable amid the volatility in financial stocks. They are off 17.8 percent so far this year compared to a 43 percent drop in the S&P Financial .GSPF index.

The shares were down 1 cent at $20.96 on the Nasdaq.

(Editing by Brian Moss and John Wallace)