(Corrects to say Schwab is aiming ads at more affluent
investors and hopes to pay staff at least 85 percent of their
achieved bonus targets this year)
* Schwab executives say they are spending for the future
* Low rates and tepid trading still limit revenue
* Assets flowing in at hot pace, but investors still shy
By Jed Horowitz
Feb 7 After a year of cost-cutting and missed
revenue targets, Charles Schwab Corp plans to spend
more on marketing, technology and compensation in 2013 on
expectations of modest income growth.
Chief Executive Walter Bettinger said Schwab, the largest
online broker, is deliberately sacrificing some profit this year
in order to compete more strongly against online rivals and
other financial services providers.
Schwab has hired a new advertising agency and lifted its
2013 marketing and advertising budget, the lifeblood of new
accounts and new assets for online brokers. The focus will be on
attracting more-affluent investors than have typically traded
through Schwab, Bettinger said.
"We felt that the right long-term strategy is to continue to
apply incremental pressure to the marketplace," he told analysts
Thursday at a "business update" meeting in San Francisco.
Cash has been flowing into Schwab and other brokerages as
investors sold homes and cashed out investments late last year
in anticipation of higher taxes. They are investing in fee-based
products such as exchange-traded funds rather than in trading.
Schwab, with a market capitalization of $21.4 billion, has
had trouble finding ways to invest the idle cash with interest
rates so low. It will use the new assets "to drive the growth of
the franchise for the long run," said Chief Financial Officer
"In a year where we think revenues will be up across the
board we are investing in things we have talked about for
years," Martinetto told analysts.
He said an exception to this was the firm's huge stable of
money-market funds, where low rates have forced it to waive fees
of about $150 million a quarter for several years, from the
Looking inward, Martinetto said Schwab has for too many
years deprived executives and others in its corporate pay plans
of the full bonuses they qualified for. This year, if revenue
grows at expected rates, Schwab aims to pay out 85 percent of
the target bonus amounts it has set and graduate to 100 percent
bonus payouts in 2014.
"People deserve to be paid fairly," Martinetto said, without
directly discussing employee morale. "We need to make progress
to paying better."
Schwab's masses of salespeople also are being given what
executives describe as a simplified pay plan that will reward
them for steering clients to fee-based advice products and for
gathering more of their assets.
The brokerage giant also expects to spend $200 million on
technology and program projects this year, up from $160 million
MODEST 2013 PROFITS
Schwab has become much less dependent on client trading in
recent years and is building many more fee-based products,
including a new no-commission product for selling
exchange-traded funds, the company said Thursday.
The company and its rivals continue to be challenged by
rock-bottom interest rates that hurt their returns on investing
clients' money and by investor apathy toward buying stocks.
Schwab has said that its net interest margin, which fell
below 1.5 percent last quarter from a peak of 4.76 percent at
the end of 2007, will rise by .60 percent for every 1 percent
bump up in the Federal Reserve's key funds rate. The Federal
Reserve has signaled, however, that it will not begin raising
short-term rates until 2015.
Executives on Thursday outlined a modest profit picture for
2013. If rates remain low, client commission trades rise about
15 percent and the S&P 500 is up 6.5 percent this year,
Schwab's revenue could grow by up to 10 percent and earnings per
share could be in the mid-70-cent range, they said. In 2012,
earnings fell one percent from a year earlier to 70 cents a
Schwab missed its forecast last year because revenue grew by
half of what it expected as investors failed to buy securities
and rates fell even lower than expected, Martinetto said. Schwab
responded by lowering spending plans, and would have to do the
same this year if revenue proves worse than expected, he said.
UBS analyst Alex Kramm earlier this week downgraded Schwab's
stock to neutral from buy, saying shares are overvalued.
In a note to clients on Thursday, Kramm said Schwab "laid
out a decent case for top-line acceleration this year, but we
are not convinced about 10 percent revenue growth and see
expenses moving decently higher."
Investors have recently bid up Schwab's stock price on
indications investors are getting more excited about investing
in stocks and signs longer-term interest rates are rising.
Kramm said the rate moves will not materially improve
Schwab's fundamentals and it is too early to say small investors
are ready to take more risk.
Shares of Schwab closed up 1.9 percent on Thursday to
$17.11, a 52-week closing high, and are up more than 15 percent
(Additional reporting By John McCrank; Editing by Andrew Hay)