) last summer, Chuck Schwab predicted consolidation in the discount brokerage industry. So, it came as little surprise to him to hear that E*Trade Financial Corp. (ET
) approached Ameritrade Holdings (AMTD
) on May 6 about a possible takeover (see BW Online, 5/11/05, "Can E*Trade Net Its Rival?").
Schwab itself has been the subject of speculation about various combinations ever since the company's board ousted CEO David Pottruck last year and the founder returned to set the company back on course. But Mr. Schwab says this is one round of mergers his company will sit out. Schwab spoke with BusinessWeek correspondent Justin Hibbard on May 10. Following are edited excerpts of their conversation:
Q: You've said since last year that you expected to see consolidation in your industry. Why?
A: In terms of transactions, there's probably excess capacity. But the competition now is for client relationships, meaning dollars of assets held by customers. The trading part has become so commoditized.
Frankly, the whole discount [brokerage] area is pretty much at parity. If you trade 600 times a year -- and I don't know anyone who trades that much -- you can get very low pricing, $7 or $6 a trade. But for the most part, we're in the area of $9 to $12 dollars for someone who trades on a normal basis. About 95% of investors trade in the area of 6 to 10 times a year. That's where the assets lie. It's the personal relationships -- that is, how are you going to compete for more and more of the client's relationships?
Q: Will Schwab participate in the consolidation?
A: In the combination of Ameritrade and E*Trade, if that were to come about, they would end up having in combination about 16% of the Schwab client asset base. We're about $1.1 trillion [in assets] now. They would be 16% of our size in assets. So we have come to the conclusion that, at least at this point in time, we're not interested in doing any consolidation acquisitions. We don't think it would be an economic value-added proposition for us.
Q: If it makes sense for E*Trade and Ameritrade, why not for Schwab?
A: Because of the commoditization that has gone on in terms of price reductions and all that, transactions at Schwab represent only about 18% or 20% of our business. The other 80% happens to be with our relationships, advised offers, and so forth.
For firms that are highly dependent on transactions in a fast commoditization of the business, these are almost marriages of necessity -- because the opportunity for growth is limited. Only 2% to 5% of the investing public is active traders.
If you're focusing on that market, it's probably better to get two firms that are focused on that business together to make a bigger one. Schwab is focused on the larger market. Yes, we have our active-trader area, and we do very well in that area, but we probably have $200 billion of our assets in the active-trader space and $800 billion or $900 billion in our traditional investor space. When you put those two companies [E*Trade and Ameritrade] together, they'll end up with about $170 billion in assets. So we just don't think competing for a consolidation play makes a value-added proposition for us.
Q: Where does growth come from in Schwab's future?
A: We're finding that our advised offers, our advised relationships with clients, is expanding, and that's where we think our future is. The key numbers I look at are two important measurements. One is dollars of assets we attract every month at Schwab. In the first quarter, we attracted some $16 billion in net new assets, client relationships.
Secondly, I look at our revenue per dollar of assets. That's the number that has been going somewhat sideways because of the [commission] price reductions we put in place for our [trading] transactions [during the first quarter].
If you look at all the other categories, whether it's mutual fund management fees, advised offers, U.S. Trust, all had nice increases in the first quarter over a year ago. The one place that was negative was self-induced because we took the pricing decreases. Price reduction year to year is about a 45% reduction, the consequence of which was that our revenues went sideways on a comparative basis year over year.
Q: This week, you hired a new CEO at U.S. Trust, Peter Scaturro. What changes can we expect at U.S. Trust?
A: I'm looking for a little higher growth and development of further client relationships. Since I'm a very large client of U.S. Trust, I have some ideas about that. Also, Schwab refers about 20% to 25% of net new business to U.S. Trust, so we can help them increase their growth rates.