releases its first monthly activity report since the NASDQ dropped below 2000. Current market conditions and well-publicized expense cutbacks have gotten many both in and out of the firm to speculate on the substance of tomorrow's announcement.
Rumors flowing up and down the halls at Schwab have predicted that there will be 2,500 to 4,000 fewer peers reporting to work in the near future. The firm will not comment on the report prior to its release tomorrow morning. For nearly two decades, Schwab has avoided taking such a drastic step as lay-offs. MutualFundWires's opinion is that Schwab will continue to avoid taking this action as long as possible but may implement another belt-tightening scheme or possibly take steps to raise revenues.
Why should fund leaders care? Schwab has a reputation as a responsive, forward-thinking firm, so it represents the canary in the financial services coalmine. Trends observed and responded to by Schwab are likely to be echoed throughout the country, as has already been demonstrated in the current cycle.
Reuters recently reported that both TD Waterhouse
have instituted staff-reduction measures in response to the decline in trade volume. It would not be surprising if details on daily average trades in Schwab's activity report will reveal a similar decline. Furthermore, such a trend could be particularly detrimental to business during the month prior to April 15, traditionally booming with IRA openings.
However, the San Francisco firm has so far avoided lay-offs, instead opting for just about every other cost-cutting measure. Schwab has cut salaries, delayed raises, instituted a hiring freeze, curtailed expense accounts, encouraged employees to take vacations, cut advertising, cancelled a Las Vegas meeting for branch managers, and paid out first quarter bonuses in options instead of cash for senior employees. What's left?
Not a lot, but two possible options include either a program to encourage early retirement or not renewing the contracts of contract workers. Both of these, while not technically lay-offs, would still serve to reduce Schwab's payroll. However, retirement incentives would be unlikely to have an appreciable effect at a firm staffed with such relatively young employees.
One business unit that is extremely unlikely to be affected by any staffing changes will be Schwab Retirement Plan Services. The unit, which handles third-party and bundled 401(k) products, is even adding staff as it recently moved into its spacious new digs outside of Cleveland.
Turning to the revenue side of the income statement, in a rather obvious maneuver, Schwab could simply raise its brokerage fees. However, such a strategy would be too apparent to clients, especially as they may be more mindful of cost in a lean economy. Furthermore, as David Pottruck very well knows, raising prices in a market which lacks demand has never worked for anyone else.
From our view, Schwab could explore the possibility of raising revenues by hiking fees for funds at OneSource. Although murmurs of such a move have circulated the fund industry, Schwab officials deny that it plans on raising its fees in the near future.
Despite the denials, such a move would make a lot of sense. Clearly, Schwab now has the brand, distribution, and clout to have significant control over sales in a large segment of the mutual fund industry. If Schwab decides to raise its prices, the funds are just going to have to pony up. The cost of marketing funds outside of Schwab is so high that OneSource fees would have to absolutely skyrocket for it to make economic sense for funds to drop Schwab. Even Janus, having shown its second face as the fallen god of tech stocks, may find itself having to give in to the firm's demands.
If the current financial climate forces Schwab to closely examine its position in the short-term, the firm may realize exactly how much power it's accumulated in the bull market over the long-term. What are we saying to the funds? Schwab has been walking softly but may soon realize the size of its stick.
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