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Charles Schwab Efficiently Manages Expense and Hence Margins

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Sep. 20 2015, Updated 9:04 a.m. ET

Expense management

Charles Schwab (SCHW) reported an operating expense excluding interest of $999 million, compared to $1,042 million in the previous quarter and $957 million in the prior year’s quarter. The company is focusing on expense discipline, combined with scale and innovation in order to maintain margins and gather new assets. Its major expenses include compensation and benefits, professional services, and occupancy and equipment.

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Maintaining margins

Charles Schwab is focusing on improving value for clients and profitability for stakeholders. Its total expense as a percentage of average client assets has fallen at a faster pace over the last decade as compared to revenue as a percentage of average client assets. The expenses as a percentage of average client assets have decreased to 17% in 2014 from 32% in 2004, whereas revenues as a percentage of average client assets have declined to 25% in 2014 from 39% in 2004. This has resulted in a pretax profit margin of 35% in the recent quarters as compared to 16% in 2004.

Overall, the industry is facing some margin pressures due to pricing pressures from greater competition as well as an increase in compensation expenses to push for more retail assets. Considering the technology- and advisory-focused solutions offered by Charles Schwab, operating margins around 40% can be healthy for maintaining investments as well as profit distribution.

Here’s how a few of the firm’s peers in the brokerage industry fared in terms of operating margin:

  • Interactive Brokers’s (IBKR) operating margin was 45.37%.
  • TD Ameritrade’s (AMTD) operating margin was 41.07%.
  • E*TRADE’s (ETFC) operating margin was 30.98%.

Together, these companies form 10.80% of the iShares U.S. Broker-Dealers ETF (IAI).

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