July 26, 2013 / 6:36 PM / in 5 years

Schwab executives talk down expectations, drop "Talk to Chuck"

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 overconfidence 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 ten 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 dramatic sign of the shift was the decision to drop the company’s long-time “Talk to Chuck” ad campaign featuring the company’s founder. Last month, Schwab rolled out what he 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.

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

The focus on “interest-rate Bingo” is diminishing, Fowler said, but Schwab is still waiving client fees on money-market investments to prevent them from losing money and just beginning to emerge from problems of investing maturing investments at lower rates. It waived about $157 million in the second quarter.

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

As competitors TD Ameritrade Holdings and E*Trade Financial Corp said on recent earnings calls, Schwab is no longer rolling over maturing investments at lower rates but at essentially equal rates to those rolling off. “This is the first time this has occurred since 2007 and is very helpful” to build interest profit margins, Harris wrote.

Shares of the 40-year-old firm, which fell 4 percent after reporting higher-than-expected second-quarter expenses last week , were off 1.6 percent in early afternoon trading at $21.92. Year-to-date, shares of Schwab and its discount brokerage competitors are up around 50 percent.

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