Assets up but revenue down for Schwab, TD Ameritrade

They've got the assets. Now if only they could build revenue. The Charles Schwab Corp. and TD Ameritrade Holding Corp. suffer the same malady: Assets are growing nicely; to record levels, in fact. But the companies can't budge the top line to save their shareholders' lives. Low interest rates and unenthusiastic do-it-yourself investors are to blame. Schwab yesterday reported first-quarter net income of $195 million, down 20% compared with a year ago, when the company earned $243 million. At the same time, total assets at the company reached a record $1.83 trillion. TD Ameritrade reported today that its net income also was off 20% from a year ago, while assets reached a record $452 billion. Schwab holds $736 billion in custody for independent advisers. At TD Ameritrade, advisers control about 40% of the total, or around $180 billion. Those RIA custody units are doing well, the companies said. Overall, “we're still growing [assets] at an 11% rate,” Fred Tomczyk, president and chief executive officer of TD Ameritrade Holding Corp., said in an interview. In fiscal year 2011, ended Sept. 30, the company brought in a record $41 billion, and Mr. Tomczyk said that pace should continue. He expects TD to gain $38 billion to $42 billion in net new assets this year. Schwab said its total “core” net new assets during the latest quarter were $26.9 billion, the highest since the first quarter of 2008. (That core figure does not include a one-time $12 billion inflow from a clearing client.) Until all those assets start producing more revenue, though, both companies are being forced to watch expenses. While revenue has remained flat, expenses have ticked up. “We plan to keep the level of expenses, excluding advertising, flat to down” in future quarters, Mr. Tomczyk said. Schwab is “carefully balancing our spending against environmental conditions,” chief financial officer said Joe Martinetto in a statement, noting that the company's expenses grew just 2% from the fourth quarter. Schwab has been particularly hard hit by losses from waiving fees on proprietary money market funds to avoid negative returns for fund shareholders. Mr. Tomczyk, pointing to statements by the Federal Reserve, doesn't expect to see higher short-term rates for another 12 to 18 months. Longer rates could drift higher, which would help, he said. TD Ameritrade and other brokerage firms “have substantial earnings power built into our businesses … when interest rates start to move,” Mr. Tomczyk said. “We're the most interest-sensitive industry in the market right now.”