Growing concerns over the state of the U.S. economy have deterred investor confidence, negatively impacting brokerage firms like E*TRADE Financial (NASDAQ:ETFC), Charles Schwab (NYSE:SCHW) and Ameritrade (NYSE:AMTD). The rising national debt, which recently passed a whopping $16 trillion, is one of the biggest factors affecting the country’s morale in addition to the high rate of unemployment and the sluggish economic recovery. Industry experts estimate that if left unchecked, the debt could rise substantially in the next few years.  Below is a comparative study of the latest metrics announced by some of the brokerage companies.
- Low Volumes, Yields Weigh On E-Trade’s Q4 Results
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- Trade Volumes Remain Muted in November For E*Trade Financial
- E*Trade Experiences Mixed Trade Volumes in October
- E*Trade Q3 Results: Limited Revenue Capture From Trades, Low Yields Hinder Growth
- E*Trade Earnings Preview: Trade Volumes Rise In Q3 After A Slow First Half
Schwab’s Daily Average Revenue Trades (DARTs) were flat between June and July, indicating unsatisfactory trading activity during the month.  Client daily average trades fell 2% year-on-year to 396,100. The statistic for Ameritrade was even poorer as average daily client trades fell 9% year-on-year to 332,000 for July 2012.  E*TRADE also reported an 11% fall in DARTs reaching 144,023; this metric was, however, an improvement over the number reported in June. 
We expect a short-term boost in this year’s DARTs following the November elections, although volumes will remain relatively suppressed in the coming years. We currently forecast a gradual recovery in average number of annual trades per E*TRADE account as the global economy recovers in the next few years. Trading commissions account for 20% of our $8 price estimate for E*TRADE’s stock.
Despite the slump in trading activity, all the three firms observed healthy growth in total brokerage accounts. E*TRADE reported a 4% year-on-year increase in brokerage accounts reaching a total of 2.76 million. The account attrition rate fell to an all-time franchise low of 8.4%; Ameritrade also observed similar growth.
Schwab opened 62,000 new brokerage accounts in July, 11% more compared to the same period last year. Total active brokerage accounts reached 8.72 million, up 7% from 2011. A major contributor to this growth was the popularity of the corporate retirement plan. Participants in the plan increased 7% y-o-y to reach 1,537 million. A recent survey by the company revealed that 73% of the employers across the U.S. provide a retirement plan for their employees. This number has grown from 68% in 2010.  The percentage of employers who automatically enroll their employees for retirement plans has grown from 5% in 2005 to 42% in 2011. Like E*TRADE, Charles Schwab derives around 17% of its $14 value from trading commissions.
Retirement Concerns Fuel Growth In Assets
Client assets under management maintained a healthy growth rate. E*TRADE reported a 6% year-on-year growth in total customer assets for July. The annual growth rate observed by Ameritrade was 9%, whereas Schwab’s client assets grew 11% year-on-year to $1.82 trillion. Going forward, we expect the brokerage firms to continue to consolidate client assets under management. Net interest on client balances accounts for 53% of our $18 price estimate for Ameritrade’s stock, which is in-line with the current market price.
You can gauge the effect of a change in forecasts by modifying the charts above.Notes:
- NYSE Euronext Chief Calls On U.S. Policy Makers to Address Debt, Wall Street Journal, 27th August, 2012 [↩]
- SCHWAB REPORTS MONTHLY ACTIVITY HIGHLIGHTS, Press Release [↩]
- TD Ameritrade Reports Monthly Metrics, Press Release [↩]
- E*TRADE Financial Corporation Reports Monthly Activity for July 2012, Press Release [↩]
- Charles Schwab Corp : More Employers Add 401(k) Match, Advice and Automatic Features to Drive Participation and Savings, Says Schwab Data, 4-Traders, 27th August, 2012 [↩]