E*Trade Financial Corp. is revising its spending plans upward to seize opportunities created by the pending merger of its larger rivals and by the industry trend toward zero commissions, its chief executive said.
“We will not constrain ourselves when it comes to investing for growth,” Michael Pizzi told analysts after the discount brokerage firm reported a 36% drop in fourth-quarter profit on Thursday evening. “We recognize the opportunity created in the marketplace by the proposed Ameritrade/Schwab merger.”
E*Trade competes with Charles Schwab Corp. and TD Ameritrade Holdings in its direct-to-client discount brokerage business and has restarted a push to service clients of independent advisors by building an RIA custody platform, a business pioneered by Schwab and embraced strongly by TD Ameritrade.
Schwab’s’ planned $26-billion purchase has frayed the nerves of smaller advisors serviced by TD Ameritrade.
E*Trade is “diligently working to integrate our RIA offering to connect third-party advisors to our back and middle office by summer” in order to help them service wealthy clients referred from the firm’s retail investor division, said Pizzi, who was elevated to CEO last summer.
“Even more timely, it allows us to present a custody alternative for advisors who are unhappy with the proposed merger of our peers,” he said. “We see clear opportunity here as evidenced by the number of RIAs that have reached out to us.”
E*Trade increased its expense guidance by about $100 million for 2020 to take advantage of “the meaningful shifts in the industry,” which also include commission reductions announced by every major discount firm at the end of 2019.
“The firm originally expected to reduce advertising/marketing ‘substantially’ into 2020 following the cut to zero commissions, but given a clear opportunity to accelerate growth, marketing spend this year is now expected” to near last year’s $196 million, analyst Devin Ryan of JMP Securities wrote in a report on Friday.
Pizzi did not put numbers on the opportunity to seize Schwab-TD Ameritrade customers, but said that 4% attrition is likely in even the best-managed mergers. Schwab last month hired Tom Bradley, who spent most of his career building TD Ameritrade’s RIA custody business, in an attempt to keep defections low.
“Certainly you can look at other ones that didn’t go so well and those [attrition] numbers can go quite higher,” Pizzi said on the analysts’ call. “We are the branded alternative in the marketplace with one of the most iconic brands in the space.”
He did not detail spending priorities, but said that in addition to improving RIA-servicing technology, the company will broaden its strong corporate stock plan administration business with “financial wellness” services and enhance its retail digital capabilities.
E*Trade, which also operates an online bank, expects to add about 40 financial consultants this year to bring its retail brokerage force to about 450, Pizzi said.
The company signaled its intentions to grow its RIA business by buying Trust Company of America in 2018. Its base of 230 advisory firms with $20 billion in client assets is well below the more than 7,000 RIA firms serviced by Schwab and by TD Ameritrade.
Pizzi did not address speculation by some analysts and investors that the Schwab-TD Ameritrade merger puts E*Trade itself into play.
E*Trade’s fourth-quarter profit plunged 36% to $172 million, or 76 cents a share, missing analysts’ consensus estimate of 81 cents per share. Despite the miss, several analysts on Friday raised price targets for the firm.
Shares of E*Trade were down 2.56%, or $1.18, at $44.89 in afternoon trading on Friday.
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