Despite markets, Schwab focuses on long-term growth

Revenue at The Charles Schwab Corp. is likely to plummet this year in the face of dismal equity markets and tightening interest rate spreads, but firm executives said that they will keep investing in technology, risk management and “very strategic” growth areas such as the independent-adviser market.

“The greatest threat to our long-term growth is if we make compromises” in servicing clients, Schwab president and chief executive Walt Bettinger said during a conference call last week in which the company laid out cost-cutting initiatives to help it weather expectations of a rough 2009.

San Francisco-based Schwab ended 2008 with $477.2 billion of assets from clients of registered investment advisers, cementing its hold as the biggest RIA custodian but down 18% from a year earlier as portfolio values sunk. Net new assets on Schwab’s RIA platform continued to roll in at a faster pace than into its retail-brokerage coffers, though new RIA assets in the fourth quarter of 2008 fell 17% from the third quarter to $11.7 billion, while new retail-channel assets grew 11% to $8.1 billion.

Mr. Bettinger, a corporate- retirement-services expert who took the CEO reins from firm founder Charles Schwab last fall, said that the company will lay off 500 to 600 of its employees this quarter as part of a broad plan to shave expenses by 7% to 8% throughout the year. The company employed 13,400 people as of Dec. 31 and had $3.12 billion of non-interest expenses last year.

Additional people will be fired if conditions continue to deteriorate, said Joe Martinetto, Schwab’s chief financial officer. The new layoffs supplement the firing of more than 100 managers and executives announced late last year.

Schwab’s restructuring expenses, which also will include payments for moving out of two of its four buildings in San Francisco, is likely to cost $100 million this year, the CFO said.

The company didn’t offer details about where the cuts will be concentrated.

Mr. Bettinger late last year combined the firm’s RIA business with its retirement services unit under executive vice president James McCool.

Charles Goldman, the former head of Schwab’s RIA business, now runs the RIA and correspondent clearing platforms at Fidelity Investments in Boston.

In order to maintain customer loyalty, Schwab will continue to make tough decisions such as reducing or waiving fees on money market funds, keeping online commission rates competitive and investing in new technology, Mr. Bettinger said.

He said that Schwab has learned from history that it doesn’t pay to cut corners in servicing customers.

“In the past, they’ve tried to do that, and it bit them,” said Frank Armstrong, chief executive of Investor Solutions, an RIA firm in Miami with $375 million in assets under management. During the technology bubble of the late 1990s, Schwab diverted budgets from its institutional businesses to encourage online trading, leading him and other RIAs to move some assets to rival custodians, he said.

Mr. Bettinger last week said that the independent RIA market remains “strong,” stimulated in part by defections of brokers from full-service firms. Schwab added $13 billion of new assets from former brokers last year.

The chaos at big brokers such as Merrill Lynch & Co. Inc., Morgan Stanley and Smith Barney continues to drive producers to explore their options as independent advisers, but Mr. Bettinger cautioned that Schwab doesn’t expect a tsunami of new assets from breakaway brokers.

“It’s a big business decision,” he said of the move toward independence. “We don’t think this is some massive transformation in which some huge percentage of brokers decide to leave investment firms.”

Mr. Bettinger also criticized rivals that took advantage of liberalized government funding programs by adopting bank charters last year. Some are now chasing client deposits with “very high yields” on certificates of deposit and other bank products, he said, noting that they are being subsidized by taxpayer dollars.

Mr. Bettinger didn’t name the competitors. American Express Co., The Goldman Sachs Group Inc. and Morgan Stanley are among the firms that are now bank holding companies.

He said that if the raids continue and rates remain low, Schwab may have to respond to the rate challenge.

E-mail Jed Horowitz at [email protected].