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Industry Spotlight > Broker Dealers

Could Schwab Be Next With 'Free' Funds?

By Janet Levaux

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Charles Schwab reported solid third-quarter earnings recently, meeting analysts’ expectations with a 49% jump in net income to $923 million, or $0.65 per share. Revenue grew 19% year over year to $2.58 billion.

But on a call to discuss the earnings, it was the firm’s talk of rolling out a “free” fund that got CEO Walt Bettinger a grilling from equity analysts.

According to the CEO, “We know that there’s at least one competitor with a ‘free or at least zero operating expense ratio fund’ out there. And we’ll continue to study it and watch carefully how clients feel about something that is categorized as free.”

Bettinger cautioned that the firm is “very careful” in looking at how clients feel about such a product.

Rival Fidelity made its ZERO Total Market Index Fund (FZROX) and ZERO International Index Fund (FZILX) available to retail investors for no fee and no minimum investment on Aug. 3.

Analysts with Credit Suisse said in note on Friday that Schwab “could replicate this strategy [from a competitor] in the short term.”

It may, for instance, launch a zero-fee, self-indexed “beta” ETF that could be purchased by its retail customers.

The firm has index products that charge 3 basis points, but “there is value on the marketing front by advertising a zero-fee product to new clients, which could help improve Schwab’s organic growth,” according to Craig Siegenthaler and his colleagues.

Meanwhile, the Credit Suisse team lowered its full-year earnings per share estimates for 2019/2020 to $2.89/$3.30 (from $2.92/$3.50). “Key risks include a pause in interest rate hikes and additional pressure to client cash balances,” it explained.

More Q3 Results

Schwab’s pretax profit margin rose to 47.3% Q3’18 vs. 45.5% in Q2’18 and 43.6% in Q3’17.

“Each of our two primary businesses [Retail and Advisor Services] helped propel total company core net new assets to $53.5 billion, a third-quarter record,” Bettinger said in a statement.

Bettinger and other executives highlighted the following items in their third-quarter earnings release and during their conference call with equity analysts last week:

  • Advisor Services attracted 173 RIA teams year to date in 2018, topping all pre-2017 annual totals.
  • Total client assets grew 12% from last year to $3.56 trillion; this includes $1.69 trillion of assets tied to ongoing advice, up 14% from a year go.
  • Average assets held in Schwab Intelligent Portfolios (the firm’s robo-advisor) and other advice-solutions products were $299.5 billion in Q3’18 vs. $257.6 billion in Q3’17.  
  • Net asset flows into Advisor Services were $25.7 billion in Q3’18 vs. $30.2 billion in the prior quarter and $28.2 billion a year ago.

— Related on ThinkAdvisor:

Janet Levaux

@Think_JanetL

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