Schwab beats estimates, and online brokers could get hot

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The fortunes of U.S. online brokerages may rise this year, even if investor portfolios do not.

Today, Charles Schwab Corp. (SCHW), the largest independent brokerage by client assets, was the first online brokerage to report earnings for the first quarter, posting a profit loss of 29 percent over the first three months of the year. Net income fell from $305 million, or 26 cents a share, to $218 million, or 19 cents a share -- a substantial loss, but better than the 16 cents a share average forecast by 14 analysts surveyed by Bloomberg.

Coming in ahead of analysts forecasts might be a sign that Schwab will continue to enjoy the confidence of Wall Street as investors search for ways to jumpstart the sagging performance of their retirement accounts. Bloomberg reported that the company said it attracted $25 billion in net new assets and opened 207,000 new accounts during the quarter -- robust numbers during one of the most difficult investing environments in years. This suggests that Schwab may have picked up key financial advisors let go by other firms who are bringing clients with them, and has been successful using its new ad campaign to lure disgruntled clients from other brokerages.

"Even though Schwab's earnings power has been reduced, the company's clients continue to bring new assets to the firm and trading activity has been better than expected," wrote Michael Vinciquerra, an analyst at BMO Capital Markets, in a report on April 6.

Schwab and its competitors, TD Ameritrade Holding Corp. and E-Trade Financial Corp., which report earnings later this month, are also benefiting from the millions of workers who have lost their jobs and are exercising the option of moving their 401(k) account to an independent brokerage. With millions more layoff expected this year, the likelihood that angry displaced workers will move their money to independent brokerages has increased significantly, supplying these firms with a potentially substantial source of new assets. Also, as these firms gain new clients, the revenue they produce from trading activity and interest fees will rise, boosting their bottom line.

Investors have already picked up on what this trend could mean for these companies in the near term. The stock prices of all three firms have increased in recent months. Today, shares of Charles Schwab rose more than two percent on the news that it's earnings beat expectations. Bloomberg reports that since the beginning of the year, shares of TD Ameritade have risen 6.4 percent and shares of E-Trade have surged 63 percent.

Investors can only hope that their portfolios will enjoy similar increases in the months to come.
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