There’s a saying in show business: Never follow an animal act. Yet that was the tough task facing Mitchell Caplan, CEO of E*Trade Financial Corp., when he took the floor to deliver a speech at Wharton — with the audience still laughing over the clip from a notorious E*Trade ad that aired during the 2000 Super Bowl.

After a chimpanzee in an E*Trade T-shirt danced to “La Cucaracha,” the 2000 ad’s message was “Well, we just wasted $2 million. What are you doing with your money?” The great irony is that in real life, E*Trade’s free-wheeling, free-spending ways at the height of the dot-com bubble nearly ruined the company.

“I’m amazed in many respects that E*Trade, or E*Trade Financial, or whatever you want to call it, even exists today,” said Caplan, 49, whose soft, understated delivery was in contrast to the dramatic change in corporate culture that has taken place at E*Trade Financial since he assumed the helm in January 2003. Caplan’s presentation was part of the Wharton Leadership Lecture Series.

In just four years, Caplan — who joined E*Trade as chief banking officerafter a 2000 merger — has overseen the complete turnaround of a company that appeared doomed once the mania over online stock trading subsided and Wall Street began to demand actual profits, not just revenue growth.

E*Trade’s stock price had cratered from more than $60 a share around the time of that Super Bowl ad to less than $3 in 2002, after the company posted losses totaling $428 million in the two disastrous years leading up to Caplan’s appointment as CEO. Not only did Caplan slash the company’s once-huge advertising budget by more than two-thirds, but he also eliminated a lot of high-profile ventures such as ATM machines and even a retail store hawking E*Trade merchandise in midtown Manhattan. The new management instead emphasized value-oriented banking services, using its edge in Internet services, software and technology to offer higher returns on deposits and competitive rates on loans.

In 2007, the now-profitable E*Trade is forecasting earnings growth in a range of 14% to 24% and revenue gains in the area of 15% to 26%, with annual revenue expected totop $3 billion for the first time. Its share price has surged back over $25, more-than an eight-fold increase from its low point. Relocated under Caplan from California’s Silicon Valley to New York, E*Trade employs more than 4,000 people.

The “Mass Affluent”

Strategically, the key to the turnaround, according to Caplan, has been a laser-like focus on exactly who the potential customers of E*Trade Financial are and what financial services they are likely to need, as well as which products are not necessary at all. Rather than compete for the small pool of very high-wealth customers, he said, E*Trade seeks a group that Caplan calls the “mass affluent” — investors with between $50,000 and $500,000 in liquid assets eager to build wealth.

The company’s broad goal is to entice these “mass affluent” customers, both here in the United States and increasingly around the globe, to shun the long-established brand names with bricks-and-mortar offices for financial services that are based largely on value. While E*Trade currently serves some four million customers, company executives believe there are as many as 80 million households worldwide in this “mass-affluent” category, and their combined wealth is approaching $12 trillion — meaning the potential for future growth is enormous.

E*Trade Financial is offering those customers “some combination of price and then functionality by using technology that makes it easier and more integrated and then giving appropriate levels of service,” Caplan said. Experts note that a key reason for E*Trade’s recent success has been its edge in Internet software and platforms that make it easy for online users to determine how best to weigh their assets between stocks and interest-bearing banking accounts, and then provide the ability to transfer their money in a matter of seconds.

This newer model means that a much smaller share of E*Trade Financial’s revenue comes from rapid, low-commission day trading of stocks; equity trading accounted for 60% to 65% of the firm’s revenue at the start of the decade, but just 16% to 17% today, according to Caplan. Now, more than half of the company’s income is the result of net-interest income, which derives from traditional banking.

It is not surprising, perhaps, that Caplan drove the company in that direction. From 1989 though 2000, the Brandeis University graduate, with a law degree and an MBA from Atlanta’s Emory University, founded and guided TeleBank, which pioneered the art of offering customers better rates by doing business without the high cost of bricks-and-mortar. Since the Internet was not in wide use in the early 1990s, customers handled transactions over the phone or made deposits through the mail.

Caplan noted that in the late 1980s, he had been told he was on a partnership track after five years in a somewhat staid New York-based law firm. “I walked out and said, ‘This is terrific. I’m on a partnership track and I don’t give a damn.'” Instead, he and his college roommate, who then worked for Goldman Sachs, decided to launch their idea for a telephone-based bank. “For some reason, we had this belief that we knew how to manage a balance sheet, so we were entitled to buy a bank,” Caplan said, recalling the seemingly endless round of meetings with banking regulators in Georgia — where they bought a small, existing brick-and-mortar bank — and in Washington, as well as their initial struggles to raise $10 million in start-up capital.

It was not an easy task. According to Caplan, it would prove much easier for TeleBank to raise a whopping half-billion dollars in the late 1990s. As for that first $10 million, the partners borrowed some of the money from friends and family. “Thanksgiving that year really sucked,” said Caplan.

Still, he looks back on the early days of TeleBank with obvious nostalgia, including the night he spent covered in ink from frantically trying to fix his copy machine before the first board meeting. The idea of a telephone — and later an Internet — bank proved so successful that Caplan said he sometimes lost sleep in the late 1990s thinking that a large established bank would copy the model and force TeleBank out of business. None did.

Caplan also benefited from good timing, and so did E*Trade. In the early summer of 2000, he was in Silicon Valley with his management team and met Christos M. Cotsakos, who was E*Trade’s charismatic and outspoken CEO at the time, for sushi at a small restaurant. Seemingly out of the blue, Cotsakos announced that it made sense for the two firms to merge. “I was literally dead silent for about 20 seconds, Caplan recalled, “and then I looked at him and said, ‘Okay.'” E*Trade’s due-diligence staff flew back with him to New York the next morning, although the deal took months to gain final regulatory approval.

For the first time in more than a decade, Caplan accepted a subordinate role, as E*Trade’s chief banking officer and then as president and chief operating officer. By then, the Internet stock frenzy was over, and Cotsakos’ over-the-top style — punctuated by strange office props like beanie propellers — and his large compensation package had fallen from favor as well. It would be Caplan instead who provided the focus to finish the three-year-old dream of seamlessly integrating online financial services.

Navigating on Their Own

What E*Trade learned, he said, was that it needed to position itself as offering more to investors than just a web site and a call center, and more value than an old-line brokerage house or bank. The company developed a model in which the Internet and customer service reps could handle most transactions — maybe 70% — but that an advisor network would be available for more active clients, when needed.

The analogy that Caplan developed was driving a car: Online investors want to be behind the wheel while investment-house clients want to be chauffeured. E*Trade would provide something in between. “Our customers still wanted to drive the car, but they needed a GPS,” he explained. “We built that GPS system.”

Now, with that model and the technology in place, E*Trade is eagerly eyeing the corner of the world with the most potential new “drivers” — the emerging markets of India and China, where economic growth and the popularity of the Internet have created demand for financial services.

But Caplan noted that the two booming nations have little in common, except their large size. In India, E*Trade last October became the largest investor in brokerage giant IL&FS Investmart. (E*Trade is now seeking a controlling interest in the company.) Caplan describes India as a country whose culture celebrates and values entrepreneurship.”At the same time that Indians are creating markets, they are creating a middle class, and the opportunities are powerful.”

That is a far cry from China, where the economy is strictly regulated by the government and E*Trade has so far taken only limited steps, such as seeking permission for an information-only office in Shanghai. In fact, when Caplan told a financial reporter in Hong Kong about E*Trade’s eventual desire to conduct business in China, his contacts told him that he was risking arrest and that he had to “figure out how to smooth things over before you open your mouth again, so you can come back here.”

That problem has been solved, and now E*Trade has seen 1.3 million Chinese people register for an information-only web site, while the company has also enlisted Kissinger & Associates, a consulting firm headed by former Secretary of State Henry Kissinger, in an effort to open doors. The process may take some time, but then patience is clearly one of the virtues of a man who essentially became a dot-com entrepreneur years before anyone actually used the Internet.

During the dot-com frenzy of the 1990s, some investors saw the Internet as having the potential to work miracles, like “cure the common cold,” Caplan joked. He said his philosophy about doing business on the web is a lot more grounded. “We found that, in fact, you could — if you were disciplined in your operation and executed well — build something of value. The companies that have succeeded today are the ones that have done exactly that.”