ETrade growth plan sends mixed messages

ETrade Financial Corp. is putting a positive spin on a disappointing fourth-quarter earnings report by highlighting increased trading volume and an aggressive campaign to recruit registered investment advisers away from the pending merger between Charles Schwab Corp. and TD Ameritrade Holding Corp.

Like the host of other brokerage platforms that announced the elimination of trading commissions late last year, ETrade’s earnings took a hit.

For the quarter ending Dec. 31, its earnings per share were down 20.8%, revenues were down 7.6%, and net income was down 36.3%.

Much of the drop in revenues and income is being attributed to the elimination of online trading commissions, which had represented 11% of the company’s total revenue stream.

But, as was the case for TD Ameritrade and other companies that recently cut commissions, the removal of trading friction resulted in a spike in trading activity.

In ETrade’s case, daily average trading volume in the fourth quarter was up 21% from the prior quarter.

During the company's earnings call with analysts Thursday evening, ETrade Chief Executive Michael Pizzi said the spike in trading activity has carried into January, with daily trading volume this month up 35% from the fourth quarter.

In terms of what lies ahead for ETrade in 2020, Mr. Pizzi said the company expects to capture RIAs looking for a new home as a result of Schwab’s pending $26 billion acquisition of TD Ameritrade.

“Even with the best executed combinations, all customers will not be satisfied with their experience being chosen for them, and we aim to win every dissatisfied relationship that comes out of the Ameritrade-Schwab transaction,” he said. “The team is highly focused on this near-term opportunity, and we are deploying incremental resources across sales and marketing. This extends across retail, where the opportunity is significant, right into the institutional channel, where the potential is arguably even greater.”

With promises to “not constrain ourselves when it comes to investing in growth,” Mr. Pizzi illustrated an optimistic and aggressive growth trajectory.

“Huge transactions like these lead to significant assets in motion. And we will serve as the alternative for those who fear they could get lost in the shuffle in a mega company where personalized service is not a priority for all customer tiers,” he said. “We will lean into this opportunity with the firepower of ETrade's iconic brand, our industry-leading platform and our best-in-class service teams to firmly plant our flag as the choice for the digitally inclined and perhaps disaffected trader, investor or adviser.”

To Pauline Bell, equity analyst at CFRA, Mr. Pizzi’s references to things like planting a flag “sounded a bit like propaganda,” but she views that as part of a larger ETrade strategy.

“They are trying to sell the message that they’ve grown their business, and they’re probably trying to entice larger firms to acquire them,” she said. “I don’t think they will be acquired this year, but there’s a possibility that could happen next year, and they will do as much as possible to make themselves look more appealing.”

Potential buyers, Ms. Bell said, could include a wirehouse looking to move deeper into the retail market or even Schwab once it fully absorbs TD.