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E*Trade, in Bid to Survive, Returns to Its Roots

Online brokerage pioneer targets active traders in ad campaign, sets ambitious growth goals in last-ditch turnaround effort

E*Trade Financial Corp.’s board has delivered an ultimatum to its new chief executive: Clearly define the company’s future by the end of next year or face a possible sale, executives at the discount brokerage say.

In delivering the mandate, the board is asking Karl Roessner, E*Trade’s chief since September, to reinvigorate the core brokerage business and achieve a revival that has largely eluded the six CEOs who preceded him after the company’s near implosion during the financial crisis.

“We have to get there...and make sure we can grow this [business] organically,” Mr. Roessner, who is 49, a former deal attorney and had been company’s general counsel since 2009, said in an interview. “We have to turn around that stagnation from the top of the house.”

Mr. Roessner’s plan is simple: return the company to its roots as an irreverent fintech firm. The 35-year-old brokerage is refreshing its trading technology, deepening its derivative-trading capabilities, and embarking on an advertising campaign to appeal to investors’ aspirational desires.

But E*Trade’s pursuit of traders and commissions is going against the tide in an investing landscape that has been upended since the company’s heyday in the 1990s and early 2000s. Its biggest rivals, including Charles Schwab Corp. and TD Ameritrade Inc., have moved away from relying on commissions, which are at record lows, and instead pursued fee-based accounts. Smaller competitors such as Scottrade Financial Services Inc. have decided they couldn’t go it alone and have sold themselves. And startups like Robinhood Corp. have captured younger investors with commission-free trading.

Besides that, E*Trade is trying to court investors at a time when many have taken to simply matching the market’s performance amid eight years of rising stock prices. Some $1.2 trillion has been withdrawn from actively managed U.S. stock funds since the start of 2007 through March, according to Morningstar Inc. Nearly the same amount, $1.1 trillion, has moved into passive U.S. stock funds that track broad indexes such as the S&P 500.

Shares of E*Trade have rallied nearly 9% so far this year to $37.68, keeping its gains close to rival Schwab, which is also up around 9% this year. TD Ameritrade, meanwhile, is down about 2%. E*Trade is still trading well below its $241 share price in mid-2007 and its peak of $577 in 1999.

“E*Trade is smaller than some of its larger competitors, so they’re going to have to keep looking for ways to be disruptive,” said Devin Ryan, a brokerage analyst with JMP Securities.

E*Trade is targeting investors who trade 30 times a month or more on their own and like derivative plays, such as options, believing that its rivals haven’t been catering to them much. Last year, it bought Aperture New Holdings Inc., the parent of online broker OptionsHouse LLC, for $725 million, to boost its derivative offerings and overhaul its trading platform.

Attracting those types of investors would bring Mr. Roessner closer to meeting the board’s growth expectations. By the end of next year, Mr. Roessner says he has to boost the firm’s net new brokerage asset and account growth rates by 2% to 3% each, while increasing the firm’s mix of derivatives trades and amount of managed products, which includes services offered through its automated robo adviser.

If E*Trade falls short of those goals, the board will then consider strategic alternatives, including a possible sale, Mr. Roessner said.

“Our decision to present specific growth goals, to be achieved within an aggressive timeline, was questioned by some,” said Rodger Lawson, executive chairman of E*Trade’s board. “But as a board we had great faith in the inherent but underused power of the E*Trade brand.”

E*Trade has already approached some of those benchmarks, pushing its net new brokerage asset growth rate to 6.1% in the first quarter of this year from 3.8% last year, while net new brokerage account growth has more than doubled to 6.7%.

Analysts say E*Trade is moving in the right direction, but the brokerage industry’s challenges can make further gains harder to obtain.

Mr. Roessner acknowledges as much. “These are early successes,” he said. “We have to show consistently that we can grow this.”

This turnaround effort begins the latest chapter for the brokerage pioneer that upended Wall Street’s traditional investing model with the first online trade in 1983. Along the way, the company came to be known as a poster child for a day-trading culture that was spawned by 1990s tech-stock boom as well as its high-profile Super Bowl ads featuring a dancing monkey and talking babies.

When the tech-stock bubble burst in 2000, brokerages, including E*Trade, suffered as burned investors looked for safety. E*Trade turned to banking to steady its revenue and amassed billions of dollars in toxic subprime mortgages on its balance sheet—a move that proved near fatal as the financial system started to blow up in 2007.

E*Trade suffered a $1.44 billion loss in 2007—its worst year in its history after reporting a $628.9 million profit in 2006.

In the years since, E*Trade attempted to stabilize itself, twice leaning on its largest investor at the time, hedge-fund giant Citadel LLC, for help.

Over that time, the company lost its competitive edge, analysts and executives at E*Trade say, as its technology grew stale and rivals, both new and old, kept a step ahead.

“They were really in a difficult spot,” JMP’s Mr. Ryan said. “That created a situation where the firm was inward focused so they could live to fight another day.”

If the turnaround falls short of the board’s expectations, analysts say, E*Trade’s prospects as an M&A target are promising, with more than $37 billion in deposits and $336 billion in assets spread across 3.5 million accounts. “It’s a firm that would be attractive for a lot of reasons,” Mr. Ryan said. “The most obvious attraction is adding scale.”