Schwab RIAs doubled cash positions; hundreds laid off

Registered investment advisers who custody client assets with Charles Schwab have made a strong push into cash, the company’s chief executive, Walt Bettinger, said in a conference call with analysts today.
Additionally, to combat falling asset management fees, net interest revenue, losses in its Alt-A mortgage-backed securities portfolio and declining equity trades, The Charles Schwab Corp. is continuing with a previously announced program to cut expenses 7% to 8%.
The chief financial officer, Joe Martinetto, said the cuts will include layoffs of 500 to 600 employees.
He said this was a relatively small number that doesn’t include consultants and other contract workers. Schwab had earlier announced layoffs of more than 100 senior managers.
The amount of RIA client assets in cash at the end of 2008 almost doubled to 20% as investors fled the equities markets, Mr. Bettinger said.
The “head winds” for Schwab’s financial results are intensifying as interest rates remain low and equity markets continue to flow, he said.
Schwab last week announced that it has waived some fees on its U.S. Treasury Money Fund, which holds more than $30 billion and is used by many RIAs and investors as a sweep account. Waiving fees, of course, hurts Schwab’s bottom line.
Mr. Bettinger said the San Francisco-based company’s ability to maintain strong interest-rate spreads between money it pays out and money it earns declined dramatically once the federal funds rate fell below 2%.
Rates are expected to remain below that for much of the coming year, he said.
Mr. Martinetto said the company is backing off earlier forecasts that net income in 2009 will suffer only single-digit declines.
He did not give specific numbers but said that if the market remains flat, revenue could fall 20% and pretax profit margins could fall from around 40% last year to “at least 30%.”
Schwab would waive about $200 million of money market fees in that environment, Mr. Martinetto said.
The expense reductions will also come from real estate consolidation.
Schwab will reduce the size of its headquarters to two buildings by yearend from four presently, Mr. Bettinger said.
The company forecast that expenses related to severance and other expense cuts will total about $100 million in 2009.
He said expense cuts won’t affect Schwab’s plans to continue investing in long-term strategic initiatives, including “the evolving investment advisory space” and investments in technology and risk management.
Schwab plans to “remain competitive” with rivals in pricing online trades, Mr. Bettinger said.
Mr. Martinetto said waivers on money-market fees are likely to increase as the year progresses, and also said that Schwab is losing some market share to newly chartered bank holding companies that are paying higher-than-average rates on their money market funds to attract new business.
The executive did not name the banks.
Companies such as American Express Co., The Goldman Sachs Group and Morgan Stanley, all based in New York, converted to bank holding companies late last year to take advantage of liberalized government funding programs.
Shares of Schwab were off 10.7%, or $1.70 per share, at $14.26, as the conference call was taking place.

Related Topics: Charles Schwab Institutional