Originally created 05/03/04

Ameritrade aims for long-term investors



OMAHA, Neb. -- Gone are the television ads featuring Stuart, a frenetic, spike-haired hipster counseling his staid boss about how to buy stocks over the Internet.

Ameritrade Holding Corp. and other online brokerages have grown from 1990s upstarts to stock market mainstays, offering research and investment tools, and not just the convenience of the Web, to sell themselves.

"At one time it was 'you're going to use the Internet and you're going to do a trade for eight bucks," Ameritrade chief executive Joe Moglia said. "Today it is, 'you have financial goals that we want to help you reach."'

Although it was hit hard when the high-tech stock bubble burst, Ameritrade is now posting record earnings, having expanded through the acquisition of Datek Online Holding Corp. and other online brokerages. It also restructured, eliminating hundreds of jobs since 2000.

In the first six months of fiscal 2004, the company had net income of $153 million, or 35 cents a share, a huge increase over last year's first half earnings of $32 million, or 7 cents a share. Over the last four quarters, Ameritrade has made more money than in its 28-year history combined.

Its stock price is in the mid $13 range, down from its 52-week high of $17.66, but well above its 52-week low of $4.88.

Ameritrade thrives even though it does not provide investment advice. Charging $10.99 a trade, it offers customers free and fee-based stock market tools that include real-time stock quotes, company profiles and earnings estimates.

The company leads the industry in trades per day, averaging about 212,000 in its second quarter. That compares with an average 178,000 trades per day in the same period at rival Charles Schwab Corp. and 103,052 at E-Trade Financial Corp.

"We are really a transaction processing machine," Moglia said.

However, Ameritrade's $72 billion in customer accounts trails industry leader Schwab's $996 billion in client assets and E-Trade Financial Corp.'s $75.2 billion. And so it's looking to attract more money from long-term investors with fee-based financial planning tools that are designed to compete with mutual fund companies.

The tools, which Ameritrade calls portfolio allocation programs, will be offered starting this fall and help investors create portfolios around exchange-traded funds, baskets of stocks and bonds that trade like stocks and track indexes like the Standard & Poor's 500. Questions provided on a Web site will help customers decide what mix of stocks and bonds best match their investment goals and be given options based on their answers.

Investors can choose the amount of risk they are willing to take for the potential rewards, but they won't have to pay mutual fund companies to manage their money for them, Moglia said.

Offering such financial planning tools is the right move for Ameritrade, which unlike Schwab and E-Trade is not in other lines of business such as banking, home mortgages or brokerage advice, said analyst Matthew Snowling of Friedman, Billings, Ramsey & Co. in Arlington, Va.

"It's a relatively low-risk strategy," Snowling said. "It's all technology based, so expenses are few."

The exchange-traded funds tools should allow Ameritrade to keep its costs down, maintain its market of self-directed investors and have them invest more of their money through the company, Snowling said.

Founded in 1975 by J. Joe Ricketts, Ameritrade was among the first companies to handle stock purchases without offering advice. Taking advantage of technology, Ricketts in 1988 offered automated trades over touch-tone telephones. In 1995, Ameritrade turned to the Internet.

The company's growth exploded after it began offering rates as low as $8 a trade in 1997. Cutting deeply into profits, Ameritrade spent close to $1 billion on technology and advertising to attract and retain customers.

Other brokerage companies were doing the same as the stock market bounded higher, Snowling said.

"It was almost like a big land grab," he said. "Back then, you grab a lot of customers, do whatever you need to, even if you're not making money."

When high-tech stocks started crashing in the summer of 2000, Ameritrade suffered with the rest. Its stock, which had peaked at $57.75 in April 1999, closed at $3.11 on July 22, 2002.

By 2000, Ricketts, then 58, said he was ready to step down as chief executive but remain as chairman to spend more time with his family. Tom Lewis, hired as co-chief executive officer the previous year, took over day-to-day operations in May 2000, then unexpectedly resigned that August. In March 2001, Ricketts hired Moglia, who had been in charge of services to small investors at Merrill Lynch & Co.

Moglia was a key to Ameritrade surviving the burst of the high-tech bubble and the three-year bear market on Wall Street, said analyst Richard Herr of Keefe, Bruyette & Woods Inc. in New York. "He restructured the company and rationalized the cost structure," Herr said.

The stock market slump lasted from March 2000 to March 2003. "That three-year period was as horrific as we've seen in the markets in the last three decades," Moglia said. "The technology sector of the market and the online brokerage sector had been battered down. But I looked at that as an opportunity."

The key was positioning Ameritrade to take advantage when the markets recovered, Moglia said.

In June 2001, he organized Ameritrade around services to individual investors and institutions like banks, investment advisers and independent stock brokers. He cut jobs, from 2,680 in December 2000 to 1,800 this year. Small offices in Australia, South Korea and Germany were eliminated and other savings were found across the company, Moglia said.

Ameritrade acquired or merged with five companies since 2001. Ameritrade's acquisitions included National Discount Brokers Corp. in September 2001 and the key merger a year later with Datek.

About 200 companies had an online brokerage presence in the United States in 2001. Now there are about 110, Moglia said, adding that more consolidation is expected and Ameritrade wants to be part of it.

With Datek, Ameritrade added more than 800,000 accounts and $11 billion in client assets.

"The fundamental change is Datek," Snowling said. "It was the best of breed in both companies that created a better, stronger Ameritrade."

On the Net:

Ameritrade Holding Corp.: www.amtd.com