April 16, 2010

Schwab Earnings Drop 45%, but Advisor Business Strong

Cut in trading fees fueled dismal results; $624 billion AUM at Advisor Services

Taking a beating from its decision to cut its trading fees, Charles Schwab Corp. said Thursday, April 15, that first-quarter profit fell 45% over the same quarter in 2009. But the fee reduction carried a silver-lining, as new accounts and assets under management rose for the quarter.

However, client assets in Schwab Advisor Services, the company's RIA custodian business, rose 37% from Q1 2009 (and 4% from Q4 2009) to $624 billion. The advisor business also showed remarkable results in net new assets: they were up 53% over the prior year's first quarter, and 14% over fourth-quarter 2009 net new assets. In fact, Schwab Advisor Services as of March 31, 2010, had more client assets than Schwab's retail business, Schwab Investor Services, which as of quarter end had $604 billion in client assets.

Schwab earned $119 million, or 10 cents per share, during the first quarter of 2010, down from $218 million, or 19 cents per share, a year ago. Revenue was also off, falling 12% from the year-ago quarter to $978 million. Schwab reported that interest rates that are near zero forced it to waive $125 million in money market fees.

Schwab reduced its commission for online equity and non-Schwab ETF trades to a flat fee of $8.95. As a result, its trade revenue fell 6%, to $415 million, from the same period last year.

But the lower fees were a hit with customers, as new accounts outpaced lost accounts by 52,000, a 20% rise over last year's quarter. Schwab said it had a total of about 5.4 million accounts as of March 31, which is 3% more than it did at last year. Schwab's profit in advisor services also grew strongly, jumping 53%, to $14.7 million, above the same period last year. Also, assets under management hit a record for Schwab, rising 36%, to $1.49 trillion over last year's first quarter.

Brian Kazanchy, chair of the Investment Committee of Regent Atlantic Capital, a wealth management firm in Morristown, New Jersey, was relatively bullish about Schwab's future, saying, "The tough environment, along with low interest rates and the fee waivers, certainly hurt them. But one bright spot is assets under management, which are rising. So I think as interest rates climb and the effects of the fee waivers wear off, things will clear up down the road."

Read the full text of Schwab's earnings report.

Read views on the economy by Liz Ann Sonders and Brad Sorensen from the archives of InvestmentAdvisor.com.

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