"However beautiful the strategy, you should occasionally look at the results." -- Winston Churchill.
With Churchill's great advice in mind, what can we say about E*Trade's (NASDAQ: ETFC ) strategy, and how well the company has executed it?
Crack open E*Trade's annual report, and you'll notice a nifty section labeled "Strategy." While every company has a strategy -- or, at least, hopefully it does – not every company explicitly outlines it in their annual report. But E*Trade kindly does that for its investors.
Let's dig in to see how E*Trade plans to attack the opportunities -- and challenges -- its business will face in the quarters and years ahead.
Building the balance sheet
Skip down E*Trade's annual report to the "Company Financial Metrics" section, and check out E*Trade's tier 1 common ratio -- a key capital ratio, and an indicator of a bank's financial strength.
The company's tier 1 common ratio of 10.3% -- as of 2012 -- doesn't look stellar compared to Charles Schwab's 20%, but when we consider that top-notch regional bank U.S. Bancorp (NYSE: USB ) has a ratio of 10.8%, it doesn't seem quite as concerning. Additionally, there has been significant improvement of late; according to E*Trade's most recent quarterly report, the tier 1 common ratio is up two percentage points to 12.2%.
Measurable progress is what we're looking for, and it's a great sign for E*Trade's financial future. Of course, reducing risk is just one piece of the puzzle, as E*Trade still has plenty on the to-do list to remain competitive with brokerages powerhouses like Charles Schwab (NYSE: SCHW ) and TD Ameritrade (NYSE: AMTD ) .
Improving market position
DARTs -- or daily average revenue trades -- are a key measure for E*Trade's business. The more customers, the more DARTs, the more money flowing in -- pretty simple, right? Therefore, at the risk of oversimplifying things, for E*Trade to improve its market position, it needs to:
- Accelerate customer growth.
- Retain current customers.
As of 2012, E*Trade had 2.9 million brokerage accounts -- up 4% from 2011. By comparison, Charles Schwab had 8.8 million accounts with growth of 3%, and TD Ameritrade had 5.6 million, and growth of 3%.
That's over 500,000 new brokerage accounts just between the three companies! So E*Trade -- or all three for that matter -- is growing, but while some is nice, more is better.
Investors would want to see E*Trade accelerate that growth, and one way to do that is by becoming more visible, which means advertising. As I discussed in my last article, E*Trade's less-than-perfect financial position may mean it has to be more careful about its advertising spending versus TD or Schwab, but the company can still get creative.
Recently, E*Trade cut ties with Grey Group, the ad agency responsible for developing E*Trade's famous talking baby commercials. This is a bold move -- that baby was darn popular, after all -- but it's a "shake things up" kind of move that could pay off if the execution is right. Moving forward, investors would be savvy to pay attention to how E*Trade is revamping its marketing efforts.
Hi, how may I help you?
Generating new customers is good, creating life-long customers is better. That should be what companies are shooting for: developing a user-friendly and supportive customer experience.
Kiplinger did a review of the "Best Online Broker for 2012," in which they tested, among other things, the helpfulness of each company's customer service. According to Kiplinger, E*Trade is the best of the best, absolutely blowing the competition away -- it was the only company to receive a five-star customer-support rating.
"With its speedy responses to emails and its (mostly) correct answers. The firm says it has been focusing on improving customer service, and it showed."
In comparison, TD Ameritrade received three-and-a-half stars, and Charles Schwab received an underwhelming two stars for not offering a chat feature and failing to respond to an email.
Better days ahead
Ultimately, E*Trade seems to have a good formula going; it has begun to really crack down on reducing risk -- decreasing the likelihood of repeating serious financial troubles -- while generating new customers and developing a customer-friendly interface.
As long as E*Trade continues to stick to the formula, I see no reason the company can't continue to come back from its dark days and nibble away at TD Ameritrade and Charles Schwab's market share.