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 Joseph Martinetto.
"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 forecast.
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 in 2012.
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 share.
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 this year.
(The story 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.)
(Additional reporting By John McCrank; Editing by Andrew Hay)