When E-Trade Group Inc. wanted to draw attention to its mortgage offerings last month, it turned to a product other U.S. lenders had shied away from - the portable mortgage - as a way to differentiate itself in a sea of competitors.
Now, looking to capture a bit of the same spark with an innovation in asset management, E-Trade has announced it will take the equally unusual step of rebating half of the distribution and service fees its mutual fund customers pay.
"We want to be more of a player," said R. Jarrett Lilien, the president and chief operating officer of the Menlo Park, Calif., company in a telephone interview Thursday. "If you really want to make an impact, you must do something different - you can't stick with a me-too approach. We think this will have a big impact in our brokerage operations."
It is part of a pattern at E-Trade, which by all accounts has left its days as a pure-play discount brokerage far behind.
"E-Trade is leading the way for diversified financial services firms," said Richard H. Repetto, an analyst at National Bank of Canada's Putnam Lovell NBF Securities Inc. in New York. "They are ahead of Schwab due to new products like Mortgage on the Move and now the rebated mutual funds, which I really like."
E-Trade expects to begin rebating the fees on a semiannual basis by yearend, according to a company statement. Mr. Lilien said he expects this move to attract new customers and compel current customers to invest more of their assets with the company. E-Trade is working with other mutual fund underwriters and distributors to make sure the plan is ready to go by the end of the year, he said.
Each year broker/dealers charge fees that amount to as much as 0.4% of the assets under their management. This can total billions of dollars industrywide, E-Trade said.
The company sells nearly 3,000 funds, and all customers of these funds will be eligible. It is betting that the rebates will be more than offset by business the offer generates.
Late Thursday, House Financial Services Committee Chairman Michael G. Oxley, R-Ohio, issued a statement praising E-Trade's move:
"E-Trade Financial should be commended for leading the industry in reducing mutual fund fees," the statement said. "Recent GAO studies released by the Financial Services Committee show that fees in large equity funds have been trending upward for several years, and mutual fund investors are reaching to find real value and real returns in spite of fees, expenses, and taxes.
"All investors are working to regain ground that was lost during the recent market downturn. The mutual fund fee reductions announced today by E-Trade will surely help E-Trade clients in those efforts."
Mr. Lilien said E-Trade's future looks good. The company is cutting back-office costs and preparing for the inevitable slowdown in mortgage volume, he said.
"We know our [revenue] mix depends on the market," Mr. Lilien said. "When it's hot, brokerage will lead; when it's cold, banking and lending will lead." E-Trade would like to function as a brokerage-driven company that also offers banking as "a hugely important part of the package" to differentiate itself from competitors, he said.
The recent marketing moves are just a couple of the ways E-Trade is innovating. Another was an initiative begun last October, in which it allowed real-time electronic transfer of funds from any bank into an E-Trade brokerage account, with funds available immediately for trading. The company was also a relatively early adopter of Linux and began converting many of the back-office systems for its Web offerings to that operating system as far back as 2001.
E-Trade's current management team took over early this year. Cost cuts it announced included closing the E-Trade's New York customer center and 43 others and discontinuing unprofitable products and services.
In the second-quarter report the company issued Wednesday it said it had taken a $76 million restructuring and exit charge for those moves. A restructuring charge of $45 million and a $7 million litigation reserve will remain on the balance sheets in the third quarter, it said.
Mitchell H. Caplan, E-Trade's chief executive officer, said in a conference call Wednesday that favorable market conditions - such as the public's return to the stock market and low interest rates - helped boost second-quarter results.
Only five quarters ago the company posted a net loss of $270 million. For this year's second quarter it posted net income of $50 million (versus $39 million a year earlier) on $381 million of net revenue (versus $316 million). Per-share earnings of 14 cents met analyst expectations and were 3 cents higher than in the first quarter.
Management raised its earnings guidance for the full year to 52 to 57 cents, from 45 to 55 cents.
Customers used E-Trade for 41% more transactions a day in the second quarter than the first - 42% more for the most active customers - the company said. This brought brokerage revenues to $222 million, 3.5% more than in the year-earlier quarter.
Low interest rates fueled a record $2.9 billion in direct retail mortgage originations, 16% more than in the first quarter. Another $1.7 million was in the pipeline at midyear, 42% more than on March 31, the company said.
Net revenues of E-Trade's banking unit rose 57% from a year earlier, to $158 million.
E-Trade is gaining "good forward traction" and gradualness makes its growth more sustainable than that of some peers, said Charlotte A. Chamberlain, an analyst at Jefferies & Co.
But about 90% of E-Trade's lending is at fixed rates, and Ms. Chamberlain said she would like to see more of a mix of fixed and adjustable rates.
