Chas. Schwab to Bolster Growth

On June 25, 2009, Charles Schwab Corporation (SCHW - Analyst Report), the largest independent investment advisor in the U.S., disclosed a series of new initiatives that will help the company grow significantly by managing costs and improving their efficiency.

SCHW's client-advisor relationship has been facing significant dilemmas due to the ongoing troubled market condition. And, as there is a need for greater efficiency in their businesses, the current clients require more involvement from their advisors.

To make the best of this situation, SCHW announced a series of steps to support advisors in the current environment. This will translate into significant benefits since SCHW is the leading provider of custodial, operational and trading support for more than 6,000 independent fee-based investment advisory firms.

The steps announced by SCHW are as follows:

1) Beginning in July 2009, SCHW will waive commissions on electronic equity trades and reimburse transfer of account fees charged by contra brokers for up to one year for new-to-Schwab clients of independent investment advisors who open accounts by the end of the year.

2) Schwab Performance Technologies will waive the next year's maintenance fees for its portfolio management software PortfolioCenter for any advisory firm that custodies client assets with Schwab Advisor Services and licenses PortfolioCenter through Schwab. More than 2,200 of Schwab's advisor clients currently use PortfolioCenter.

3) SCHW is investing in an array of new service and technology projects that will begin to benefit advisors by the end of 2009.

There were also a number of other longer-range technology enhancements in the works. According to SCHW's 2009 RIA Benchmarking Study, 84% of advisors expect to grow aggressively or moderately over the next five years. However, after several years of 20% annual gains, revenue per client is expected to fall 25% from its peak.

The new initiatives will be more acceptable to investors who seek a change from large firms, since these are the ones most affected by current financial challenges.

SCHW currently trades at a 41% premium to the median of its peer group -- AMTD - Snapshot Report, ETFC - Snapshot Report and NMR - Snapshot Report. On a price-to-book basis, the shares trade at a 132% premium to the peer median. Both the P/E and the P/B are at the expensive end of our own comfort range.

However, we think that SCHW deserves to trade at a premium to its peers, based on its excellent asset growth, stable revenue stream, sound credit rating, and steadily expanding margins. As such, we maintain our Hold recommendation on the shares of SCHW.