Charles Schwab Corporation (The)

And we are live. Good morning, everyone. Welcome to Schwab's Fall 2020 Business Update. This is Rich Fowler, Head of Investor Relations, coming to you from a still sparsely populated 211 Main Street in San Francisco. While I want to extend a particular welcome to those of you attending this session as new owners or followers of Schwab due to our recent acquisition of TD Ameritrade, we certainly hope everyone on the call and your families remain safe and well in this environment. and we thank you for spending time with us today. There's a full lineup of earnings reports for many of you to deal with, and we certainly have a full agenda here, so we're going to get things underway quickly. Joining me today, both virtually and literally, are Walt Bettinger, our President and CEO, Joe Martinetto, Senior EVP and COO, and Chief Financial Officer Peter Crawford. Now, those of you experienced with our interim updates will immediately recognize that Joe's participation signals that we're not following traditional practice today, and we are indeed planning to spend a longer than normal session, say around an hour and a quarter, with these three, bringing you up to date on life at Schwab right now, starting off with some prepared comments and following up with Q&A until it's time to wrap up. Our goal, as always, is to keep you current regarding management's thinking as efficiently as possible. We will follow tradition on questions, so we'll do so via the webcast console as well as the dial-in. And as always, to help us get to as many folks as possible, we very much appreciate your sticking to one plus follow-on in the approach to questions. Walt will start us off today to discuss our strategic picture, which includes both the continuing story of the company's performance during the pandemic and the implications of closing the Ameritrade acquisition. And then Joe is here to share an update on the integration process as we dig in on this front. Peter will review the recent financial performance of both firms on a standalone basis and then move to discussing the current outlook for the combined company before taking us into Q&A. Before that, let's spend a second on the wonderful wall of words, holding steady at a single riveting page, the main point of which is to remind everyone that outcomes can differ from expectations, so please keep an eye on our disclosures. Finally, the slides will be posted on the IR site during Peter's prepared remarks. I think that's it administratively. So, Walt, I think we're ready to get going. Over to you.

Thank you, Rich, and good morning, everyone. Thanks for joining us during certainly what continues to be extraordinary times. We all recognize that we're living in a unique and challenging time for everyone, and my best wishes for good health and safety go out to all of you who are joining us on the call. It's really times like these that a focused and consistent strategy means more than ever. The noise around us from a struggling economy, record low interest rates, a degree of political turmoil can shake those less committed to a sound long-term approach. At Schwab, we remain as committed as ever to our through client-sized strategy and our key strategic initiatives, scale, monetization, and segmentation. Our approach is winning in the market, and we believe that our combination with TD Ameritrade will deliver outstanding financial results along with furthering our competitive position in key client segments. As I've said before, we are on offense, and the response from our clients with record and near-record metrics supports the efforts that we're making to offer world-class value, service, advice, and transparency. Now, as of October 6th, we have successfully completed the four acquisitions that were announced in the past 15 months. Each of these transactions are strategically important for us, but of course in different ways, and each slots in perfectly with those key strategic initiatives I mentioned previously of scale, monetization, and segmentation. USAA adds to our scale of existing clients, And our exclusive wealth management referral arrangement that we have with USAA continues adding scale for us and should be effective for years to come. Motif delivers highly talented technologists along with a platform that is helping accelerate our efforts to deliver thematic investing as well as direct indexing to investors and advisors. And of course, that will in time contribute to our efforts around monetization that is good for clients. Wasmer Schroeder accomplishes a similar goal, monetization that's good for our clients, but with maybe a more traditional approach to investment solutions in the fixed income area. And of course, their expertise in tax smart fixed income investing is likely to prove especially valuable as tax rates potentially become an increasingly important consideration for investors after the election. Of course, the TD Ameritrade acquisition not only builds tremendous scale, but it also delivers outstanding capabilities that serve our segmentation objective. We know that they had a best-in-class platform for traders, several capabilities that are highly valued within the investment advisor community also. This slide graphically illustrates the scale impact of the TD Ameritrade acquisition Also, it shows the powerful combination of our firms with net new assets in excess of $75 billion and almost 1.5 million new brokerage accounts in the third quarter alone, keeping in mind that that third quarter included tax payments unlike in most years. Now, Peter is going to speak a little bit later regarding the near-term and longer-term financial benefits of our transaction, but for now, I will simply say that they are significant. Now, as strong as our asset gathering and overall financial performance has been, we see many untapped opportunities to drive significant asset and revenue growth by leveraging our scale, better monetizing assets in ways that are good for clients, and developing leading offers for key segments of our client base. M&A has played an important role in pursuing these initiatives, but M&A activity is only one way that will drive these efforts forward. with all three key initiatives contributing to our strong growth. Through the first three quarters of 2020, and of course this is looking exclusively at Schwab results, clients entrusted us with core net new assets in excess of $160 billion, a 5% organic growth rate, which is consistent with our long-term results. Included in there is an all-time monthly record for the month of September, with $20 billion in core net new assets. I remember when we reached $2 trillion in firm-wide assets, the number one question I received was always, could Schwab continue to capture an organic net new asset growth rate in that 5% to 7% range, even on such a large base? Of course, we were confident that we could back then, and we remain equally confident today. Now, to be sure, we talk about a range because as we all recognize that there will be some variability driven by market conditions as well as employment conditions, and those contribute to either accelerating or decelerating money in motion and therefore new assets in our category. I think what's clear, though, is what won't change is our ability to keep winning assets and continue gaining market share regardless of whatever the environment is around us. Our organic efforts around scale are also paying dividends in terms of operating efficiency. With almost two-thirds of our client households now digitally active, over half of the RIAs we serve are leveraging our digital service capabilities, and over three-fourths of our client base is now enrolled in paperless reporting. Here is an example of where the pandemic that we're dealing with has actually contributed to more rapid adoption of digital capabilities. And, of course, digital adoption and digital initiatives are what I like to refer to as triple wins. And by that, I mean that they result in a better experience for our clients through both faster processing as well as a richer overall experience. They contribute to lowering error rates and also lowering costs for Schwab. And, of course, that in turn benefits both our stockholders as well as our employees as our employees are able to engage in more value-added interactions with our clients. Let me emphasize, though, that adoption of digital does not mean that people, and specifically our branches and our service centers, don't matter. In fact, arguably they matter as much or more than ever. What digital adoption does mean is that employees can focus on relationships more than simply processing transactions. And, of course, that's exactly what we want, what our clients want, and what we mean when we talk about bringing together really the best of people and technology through our no trade-offs value proposition. We've demonstrated that when we offer clients, and this is both on the retail side and on the RIA side, when we offer them high-quality solutions at very competitive prices, they vote with their feet. Use of Schwab-managed ETFs is growing again. after a slowdown earlier in 2020 largely due to tax-loss harvesting. Clients continue to enroll in our retail advisory programs. We now have assets there exceeding $360 billion. And clients are increasingly turning to Schwab Bank for their lending needs, with loans up over 30% from one year ago. Our success with our asset management and lending products also fuels our confidence in continuing to extend our capabilities. And part of that is ensuring that third-party managers provide appropriate compensation for the many services that we provide them and the investors who invest in their products through our platform. These types of efforts will further diversify our model and decrease our reliance on spread-based revenue. Whether it's from ongoing negotiations with fund complexes that rely on Schwab to provide shareholder servicing without helping us cover those costs, to substantial opportunities in thematic investing and direct indexing, to the growth opportunity in the area of retail advisory services, And last but not least, the opportunity to deliver premier fixed income advisory to clients at a great value through in-house Wasmer Schroeder. At the same time, we're working hard to build and deliver increasingly segmented capabilities to delight clients of all sizes and types. Whether they are targeted at newer, younger investors, which certainly gets a lot of press today, new and creative ways to invest in a more customized or personalized manner through themes and direct indexing, better serving the fastest-growing segment of our retail business, which is high net worth and ultra-high net worth investors, creating new and more streamlined experiences for independent investment advisors that we serve, and, of course, we serve all size investment advisors, large, small, and in between. As I've said for a number of years, the future in our industry, in our view, belongs to the organizations that deliver a no trade-offs approach to investing. Great value, transparency and trust, omni-channel service, a single place to meet all of an investor's needs. All of this from a company that is both a challenger to the rest of the industry, as well as a beacon of confidence due to our size and scale. In our words, it's no trade-offs, no limits, and all done through client size. At Schwab, we call that modern wealth management, and we think that uniquely defines Schwab and is only achievable by a firm with our size, scale, and importantly, our focus. In our view, our capabilities are rather simple strategy Our enormous scale, our culture of service, and our commitment as a challenger company to continue disrupting to benefit investors and advisors is a combination that no one else in the market can match. And our transfer of account or asset figures tell the story better than I ever could, attracting $2 from core competitors for every dollar they take from us. Strong results. versus the global banks and wirehouses at 2.2 to 1, strong results versus the independent broker-dealers at 1.8 to 1, and exceptionally strong results versus the monoline fintech companies that were asked about so frequently at a ratio of over 200 to 1, all contributing to a firm-wide TOA ratio of 2 to 1. And as successful as Both TD Ameritrade and Schwab have been in taking share for the past four decades. The reality is we still collectively have a very small share of an enormous wealth management market in the U.S. So just in closing, we know that we're dealing with record low interest rates, and those create short-term headwinds. Eventually, we'll have relief from this pandemic. Eventually, the economy will get fully back on its feet. Eventually, our belief is that interest rates won't remain at all-time record lows. But in the meantime, we won't veer off course. We won't deviate from our through-client size strategy. We won't stop being on offense with our key strategic initiatives of scale monetization and segmentation. And we surely won't stop pursuing disruptive actions that benefit clients, the very soul of a challenger. For those of you who know Schwab well, you know that we don't measure our progress in quarters, and generally not even in years, but rather in decades. And I've never been more optimistic about what the future decades hold for Schwab. So I want to transition over to Joe Martinetto. I'm pleased that we're now in a position to begin the process that actually unleashes the potential from combining Schwab and TD Ameritrade. As all of you know, Joe is leading that effort, and I know he's looking forward to sharing an initial update on our integration efforts. So Joe, let me turn it over to you.

Great, thanks, Walt, and good morning, everybody. So today I would characterize my presentation as more of a cameo than a full update. I'd remind everybody that we just closed the transaction a couple of weeks ago, and we were able to do a fair amount of integration planning prior to close, but there are a lot of details that we've just recently been able to share. While we feel very good about the work we've done and what we're seeing, we're gonna need a little time to firm up the executional plans and financial implications before we can provide you with that fuller update. That said, we've already made a number of decisions about platforms and client experience that we'll share today, and we've also moved quickly to recognize some of the closer-in synergies. I'll update you on those activities as well. So let's start with the expense synergies first. Just a reminder, our targets at the time of announcement called for us to realize between $1.8 and $2 billion in expense reduction synergies. We've spent the last 10 plus months developing plans to achieve this level of savings. And by close, we had high level plans at the business unit level to achieve it. We still believe it will take 18 to 36 months to get through broker-dealer consolidation, account conversion, and the shutdown of all the redundant systems and functions that are necessary to achieve this level of savings. I'll have more to say about the timeline in a couple of slides. I'm also focused today on expense synergies, as those are likely to occur in a more material way more quickly than revenue synergies. As we've discussed before, the bigger revenue synergies come from the repatriation of the BDA balances, but we do expect that there will also be revenue synergies that are tied to the account conversion when we'll be able to offer the best of both companies' products and services to the combined client base. Those outcomes will be a little longer coming as we're still operating as two separate broker-dealers today. With respect to the expense actions, we've already taken steps to achieve between $250 and $300 million in expense reductions. We've aligned the management structure, and across management and the branch network, eliminated over or about 1,000 roles. We've moved aggressively to rationalize the branch network. There was a significant amount of overlap across our footprints, which we're eliminating. Of their roughly 260 branches, we're retaining about 55. The majority of the rest will co-locate into nearby Schwab branches, where we'll have both Schwab and TD Ameritrade employees. Our combined branch footprint after the consolidation will be larger with over 400 branches, 140 of which will be shared through conversion, And 90% of our clients will have a branch within 25 miles, up from 80% before the transaction. We've also closed a number of previously open management positions, as well as reduced our anticipated marketing spend. So while it'll take some time to recognize the full level of synergies, we expect to see additional reductions over the course of the next 36 months. And with the meaningful reductions that I just noted, along with other actions that we plan to take, We're thinking we'll exit the first year after the transaction with between one-quarter and one-third of the expense synergy total in the run rate. Moving on to some of the platform decisions, as we've said all along, we expect to realize the best of both when it comes to customer-facing platforms. Both companies have well-regarded and recognized platforms with very complementary strengths. We expect to leverage the existing Schwab websites and mobile applications for investors, independent advisors, and automated investing solutions. We'll be adding the thinkorswim web and mobile experiences for traders and supplementing the advisor experience with the trading and rebalancing capabilities from TD Ameritrade's advisor platform. That said, we expect that there will be changes to all of these platforms that we'll need to make for a seamless experience for our combined clients. For example, the trading experience on Schwab.com will evolve a bit to serve the more active traders from TD Ameritrade who prefer to use the web. And Schwab Advisor Center will incorporate more integrations with third-party platforms to accommodate the advisors who use services where we don't currently have an easy-to-use integration. I promised I'd have more to say about the timeline for integration earlier, and I'd like to remind folks that this is an extraordinarily complex integration. Both firms are large in their own rights, and when you combine them and look to add the headroom that's necessary to handle potential spikes in activity, there's a geometric effect on the capacity necessary to run the firm safely. While we're availing ourselves of our own recent experience with integration, as well as the expertise available to us as part of the team that's joining from TD Ameritrade, and we're eager to get to full synergy recognition, but we, of course, have to balance that with the client experience considerations. We want this to be an incredibly smooth experience for all of our clients, both retail investors and advisors, and we expect to continue to serve the vast majority of them long past integration. At this point, I'll turn the mic over to Peter, and he'll give you the details on how all of this works into the financial picture.