Schwab Sees1Q Profit Drop; Numbers Of New Advisors Rise

(Dow Jones) Charles Schwab Corp.'s first-quarter profit plunged by nearly a half from a year ago, as low interest rates and a trading-revenue decline of nearly one-fifth weighed on results at the discount brokerage.

Schwab, meeting its own forecast, waived $125 million in fees on its money market funds, cutting into its asset management and administration fees, which dropped by 16% from a year ago. With continued low rates, Schwab has waived those fees so that clients' returns don't turn negative.

However, the San Francisco company's Chairman and Founder Charles Schwab noted the "worst of the environmental pressure on our revenues is now behind us."

Reflecting that statement, Schwab Chief Financial Officer Joe Martinetto said the $125 million "should be the high-water mark for money market fund fee waivers."

Schwab waived $224 million in such fees in 2009, but didn't offer a forecast for the remainder of 2010.

Schwab also said it continues to attract financial advisors from wirehouses, or major brokerages, interested in setting up their own shops and using the firm's custodial services.

While the company didn't release specific advisor metrics, a Schwab spokesman said "the average size of advisors coming to Schwab is significantly larger than in previous quarters. In addition, interest from advisors who want to join existing registered investment advisor firms is extremely high."

Schwab said net interest revenue climbed to $326 million, up 7% from a year ago and 7% from the fourth quarter, attributing the gains to short-term rates that stopped declining in January and early February.

While the company plans to sweep some client balances from money market funds to its bank, Martinetto said such a measure isn't going to happen until at least late in the second quarter, but won't have a material impact until the third quarter.

Schwab, the largest discount broker by market capitalization, reported earnings of $119 million, or 10 cents a share, down from $218 million, or 19 cents, a year earlier. Revenue dropped 12% to $978 million.

Analysts polled by Thomson Reuters had forecast earnings of 11 cents on $982 million in revenue.

Shares of Schwab fell 12 cents to $19.23 in recent trading. The stock has climbed about 6.5% over the past year.

With a rise in the equity markets, Schwab's total client assets rose to $1.49 trillion, as the company added $23 billion in net new assets in the quarter. That figure, however, is down 8% from a year ago.

Overall trading revenue fell by 19% from a year ago. Trading fell from the high levels of early 2009 when volatility was high and the market reached its March lows. Daily average revenue trades, or DARTs, fell by 9% from a year ago to 275,700, but was up 4% from the fourth quarter.

Martinetto declined to offer a forecast on trading volumes, but noted that the first quarter of 2009 was a "very active trading quarter."

Net new accounts for the quarter totaled 52,000, up 20% from a year earlier. Total accounts were 5.4 million as of March 31, up 3%.

Schwab took an $11 million pretax charge in the quarter related to pending litigation involving the Schwab YieldPlus Fund, an ultra-short bond fund. The fund was hit with class-action lawsuits as returns sunk deep into negative double-digits due to its basket of mortgage-backed securities.

The $11 million figure relates to a summary judgement ruling of liability in respect to plaintiffs' California state law claim. The company is also facing a May 10 trial related to federal securities law claims and has been in discussions with the U.S. Securities and Exchange Commission over a potential settlement of civil charges relating to the bond fund.

Martinetto declined to comment further on the issue.