Charles Schwab Corporation (The)

to Schwab's 2022 Fall Business Update. This is Jeff Edwards, Managing Director of Investor Relations, and I'm joined today by our co-chairman and CEO, Walt Bettinger, President Rick Worcester, and CFO Peter Crawford. And finally, please don't forget about the enduring wall of words, which reminds us all that the future is uncertain, so please stay up to date with our disclosures.

With that, Walt, take it away. that began in 2020 and many others. In each of these time periods, there was a list of doubters. In fact, I recently went back and read some of the reports and articles that were written about Schwab during those periods. And although I generally respect those who doubted us, I have enormous confidence in our firm and in our people. I have enormous confidence in our ability to serve our 30 million plus clients. and enormous confidence in our ability to deliver for our long-term stockholders. As we all know, the third quarter was very difficult for investors. The Federal Reserve continued with an aggressive policy designed to battle deep-seated inflation. They did so with steep increases in rates, and at the same time, equity markets fell for the third consecutive quarter. The S&P 500 and NASDAQ now showing year-to-date losses between 25 and 32 percent. And yet, despite these challenging days for investing, our all-weather business model continued to prove successful. Whether we're looking at our strong organic asset growth rate of 7 percent, reflected in $115 billion of net new assets, or the fact that our retail net new assets in the third quarter were 20 percent higher than the same period last year, it's clear that our through-client size strategy is working and a major contributor to our organic growth. And just as our client strategy was successful, our commitment to encouraging a long-term approach to investing was also reflected in our clients' actions. Even with investing sentiment near record lows, our clients remained resilient with net equity buys exceeding net sales. and our clients remained trusting in our advisory services with flows into these solutions in excess of $8 billion during the quarter. Now, as expected in a difficult investing environment, cash is an important part of our clients' investing approach. Now, this is something that we've always known, always believed in, and as I often say, there's no investor who has ever lived through a bear market who then doubts that cash is a critical part of an asset allocation strategy. Recently, we know there's been a lot of commentary about so-called client cash sorting. And there's been a lot of commentary as if it's some kind of bad thing or something that we didn't expect, or frankly, didn't welcome. And to the contrary, we view it as both expected and as a positive. In fact, we put a lot of effort into helping our clients make the most of their cash. Our approach to assisting clients with their cash needs is robust, and it's very focused on their needs. For example, for transactional cash, we offer competitive yields and features relative to other transaction accounts, including taking steps like pioneering fee-free ATM withdrawals worldwide. And for investment cash, we offer money market funds with low fees, CDs from banks across the country, and a variety of quality fixed income investment options. Our clients' decisions with their cash are, of course, influenced by the interest rate environment. During a ZERP or zero interest rate environment, clients have little yield motivation to move money from a transactional category, like a bank sweep or checking, to an investment category like a purchase money fund or a fixed income offering. And then, of course, when rates rise, it's a prudent decision for clients to make that move with their investment cash. And we encourage that. We encourage those moves. We make outbound phone calls from our financial consultants and others. We do seminars. We offer marketing that encourages clients to position their investment cash into higher yielding alternatives. Now, some might question, well, Why would Schwab do that? We know that we take a revenue hit with every dollar that moves, for example, from a bank sweep to a money market fund. But to those individuals who question it, I would suggest that maybe they don't really understand what we mean when we say through clients' eyes, or they don't really understand our long-term horizon for growth. Because we proactively contact clients because it's the right thing to do. the right thing to move their investment cash into higher yielding options. And our clients, not surprisingly, respond very favorably to our proactive efforts to show them how to increase their yields on investment cash. I guess if I were to summarize this slide, I'd say that if you understand our firm, if you understand Schwab, you know we are doing exactly what you should expect us to do in the middle of a rapidly rising rate environment. And our clients are doing exactly what we expect that they would and, frankly, should do. And none of what is happening should interfere with our ability to grow our revenue and our net interest margin. And none of it should impact our ability to deliver earnings growth consistent with our financial formula over the coming quarters and years. Before I pass it over to Rick to cover some of our strategic efforts in more detail, I want to spend a couple of moments on the status of our Ameritrade integration and conversion. Because we're closing our second full year of preparing for conversion, and we feel very good about where we are. We have built tremendous scale and capacity, far greater than we anticipated when we announced this acquisition. We've committed to retaining our high-end clients with capabilities that take great features from both firms and For example, from Ameritrade, things like iReval or Thinkorswim and Thinkpipes. We've worked diligently to make the actual conversion process streamlined and simple for our combined clients, along with retaining key high-quality employees. And of course, we've done all this, as you know, in the middle of a global pandemic. When we complete this integration, we think we will be offering the industry's top overall investing experience. Of course, nothing as large and complex as this integration and conversion goes perfectly. In addition to the pandemic-related issues, which we're all familiar with, two additional issues are likely to push our total integration spend about 10% higher than we anticipated 18 months ago. The first one is probably obvious to everyone. It's inflation. Technology equipment, cloud contracts, market-driven staff compensation, all these cost more. Frankly, they cost a lot more than we anticipated back in 2019 and 2020. In addition, in light of the war in the Ukraine, we made a decision. We believe a correct decision. And this is actually creating the largest reason for these higher costs and also likely to push the last conversion of somewhere around 1% or 2% of our clients back into the first part of 2024. But I want to emphasize it will not impact the amount or timing of the expense synergies we've committed to, and here's why. The thinkorswim system at Ameritrade relied very heavily on software developers and engineers based in Russia. These individuals managed the majority of the TOS systems. from design to enhancement and even to ongoing daily maintenance. When the war in Ukraine began, we stopped using those Russian-based resources. This meant not only moving all of those efforts, but also training dozens and dozens of new engineers and developers on the TOS system. And this was very costly, but it was the right thing to do. And I know that anyone listening to this call would have made the exact same decision that we made. But just to sum all this up, despite the pandemic, despite record client engagement, despite the highest inflation in 40 years, despite geopolitical and market volatility, we remain on track to convert 98 to 99% of our clients in 2023, deliver on the expense synergies we committed to at the very outset, and do so with a total integration budget only modestly above our early 2021 estimates. So, Rick, let me go ahead and turn it over to you to talk in more detail about some of our strategic efforts.

Thank you, Walt. Walt shared the success we're having with clients, and it starts with seeing through clients' eyes and making a difference in clients' financial lives. We continue to be guided by our through clients' eyes approach and have additional opportunities to expand how we help clients. We're currently focused on three strategic focus areas, scale and efficiency, win-win monetization, and client segmentation. Within scale and efficiency, Walt just shared an update on our firm's number one priority, integration. As part of the integration, we've accelerated investments in technology and the client experience to make it even easier for clients to do business with us. Being through clients' eyes by making it easier to invest and build wealth has been a hallmark of both Schwab and Ameritrade. Our ongoing efforts to enhance experiences for our clients and our field will continue to be a key differentiator. I'll spend our time today going into more detail on three opportunities, wealth management, lending, and our RIA client segment. Said it before and it remains true today, we are bullish on advice. Although investor sentiment has fallen in this current market environment, our clients are still highly engaged in our wealth and advice solutions, and flows continue to be strong. I've spoken in prior quarters about how Schwab is uniquely positioned to deliver a continuum of wealth management experiences to meet a range of client needs. On one end of the continuum, we offer clients access to investment solutions they can use for part of their portfolios. The acquisitions Acquisition of the Wasmer Schroeder strategies is a clear example of a win-win opportunity for both clients and our firm. We brought down the cost of access to fixed income managed accounts on our platform, and flows have moved to Schwab. The strategies have attracted over $5 billion in net flows over the last two years. This includes a billion dollars in net flows in the third quarter alone, the highest quarterly net flows we've seen since launching these strategies on the retail platform in January of 2021. Another investment solution I'll highlight briefly is Schwab Personalized Indexing. We're still in the early days and our efforts are focused on educating clients in the field about the potential benefits direct indexing can provide. We expect it will grow more rapidly as clients continue to learn about it. Moving along the continuum, we're also meeting client needs with our two full-service wealth offerings, Schwab Wealth Advisory and Schwab Advisor Network, or SAN. Despite a challenging market environment, Clients are highly engaged. Both Schwab Wealth Advisory and SAN attracted strong quarterly net flows in the third quarter at $2.6 billion and $5.2 billion, respectively. This is an opportunity for win-win monetization, as it is an area where we are investing in the client experience and have several levers to improve our economics. First, we believe there's an opportunity to attract more clients to the programs. particularly at Ameritrade, where less than 7% of assets are engaged in advice, and we have already seen 40% of Ameritrade FCs enroll a client in Schwab Wealth Advisory, and over 80% of Ameritrade FCs have enrolled a client in some form of Schwab advice. Second, we believe we can increase flows into Schwab Wealth Advisory through continuing to enhance the program for clients and making it easier for our field to use. Third, We are reviewing our SAND program economics to make sure we are capturing our fair share given the value Schwab brings to the program including our track record of successful new client acquisition, our sustained marketing investment, our brand, and the important role our field plays in the process and with clients. Schwab Wealth Advisory consistently has the highest client promoter scores at the firm and we're investing in the program to make sure it remains that way and increases its growth. As I've shared previously, we are adding to our capacity to sustain growth, training advisors in new ways to add to the wealth expertise we're bringing to clients, and making investments in the sales team that supports this offer. We're enhancing the client experience, including making it easier to access our supporting expert teams and beginning to add to our digital experiences. And we are expanding our capabilities, and over time, plan to provide a discretionary wealth management experience. We believe that demand for advice will continue to increase, and we expect to see growth in both Schwab Wealth Advisory and SAN. With Through Client's Eyes as our North Star, we want to make sure that no matter what type of advice an investor needs, that we can connect them with the right model. When we think about long-term growth, we believe lending is a win-win opportunity as well. We know that retail clients want to consolidate as much of their financial lives as possible in one place. We know that RIAs want to reduce the number of relationships their clients need to have with financial institutions. Clients who do their borrowing at Schwab today are delighted by our competitive rates, and our client promoter scores exemplify that. And with a large balance sheet, this is a productive use of capital for us. With our lending offer, we are making investments today so we can be the preferred lending provider for clients on our platform. We introduced a preferred rate program and we are enhancing the digital experience. We are building out our service teams to provide more tailored service akin to what you might see at the largest banks or wealth firms. In the third quarter, we expanded the rollout of the ultra high net worth senior lending team model to six more retail regions in preparation for full retail rollout by the end of the year. In the last quarter, we started to train and license more than 600 Ameritrade FCs so they can offer PAL and mortgage loans to their clients. We've also seen increased retail FC adoption of lending despite rising rates. And we've partnered with advisor services to help onboard some significant new RIAs with billions in assets through our lending capabilities. These efforts have been met with very positive feedback. Even in a difficult lending environment, we are seeing growth. PAL demand continues to grow. It is up 31% compared to last year because demand is driven by factors outside of the rate cycle. As we continue to build out the offer for the future, we will take the no trade-offs approach to lending that clients expect from Schwab. Attractive rates, enhanced digital experiences, and a tailored service model. As we've shared previously, About 2% of retail clients turn to Schwab for their borrowing needs. We see about the same level of utilization among RIA clients as well. We believe there is an attractive amount of potential upside here. Now let's turn to client segmentation. We are continuing to enhance and expand the services and solutions that we offer to our RIA client segment. Expanding our institutional no transaction fee, or INTF, mutual fund offering for RIAs who custody at Schwab and Ameritrade makes us even more attractive. Earlier this month, we added more than 800 institutional funds without a transaction fee from 15 leading third-party asset managers. This is in addition to over 130 funds already available through our strategic relationship with T. Rowe Price. We're thrilled to offer this expanded lineup to advisors with more choices for low-cost share classes without a transaction fee RIAs can personalize their clients' investment portfolios and put more of their clients' initial investments to work. It is a win for RIAs and their clients, and it is a win for us at Schwab. As I look at opportunities on the horizon, our through-client-size approach continues to be both our north star and our winning strategy. Clients are continuing to turn to Schwab, and they remain engaged despite economic uncertainties. This challenging environment reinforces the importance of our strategy and delivering on our strategic priorities. I'm energized by the momentum we've built. By continuing to keep clients at the forefront of everything we do, I'm confident that Schwab remains well-positioned to capitalize on the key opportunities ahead of us. And with that, I'll turn it over to Peter.