By Jed Horowitz
NEW YORK, July 26 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
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
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.