Charles Schwab Corporation (The)

We are all set and ready to go. Please welcome Jeff Edwards.

Good morning, everyone, and welcome to the 2023 Schwab Winter Business Update. I'm Jeff Edwards, head of investor relations for our longtime listeners that were expecting to see Mr. Fowler. I can confidently say that I did reach him on his bat phone this morning, somewhere in his bunker in Northern California, and it is a top-down day now that we've finally gotten through that atmospheric river. We have a very exciting day for you today to talk about the Schwab story. We have, hopefully to many of you, a very familiar set of presenters that most have interacted with over time in person, but maybe over the last couple of years here when we've been apart, maybe you've only seen virtually. So we're looking forward to it. is very similar to years past. Walt will kick us off, as well, followed by Mr. Rick Worcester, our president. Joe Martinetto, a.k.a. Professor Martinetto, will follow and talk a little bit about the American trade conversion and some of the updates in technology. We'll then do a double-click into the business with Jonathan, Stacey, and Bernie. And then Nisha Hathi will join us to talk a little bit about wealth and advice. And then finally, Mr. Peter Crawford, CFO, will finish the day talking about some perspectives on 2023 and beyond. Now that we're back in person, it's important to kind of revisit our Q&A etiquette. We will still be taking questions over the web console for those of you that are joining us virtually today. For those here in the room, we will be doing our mic runners. Grace and Dylan, who you'll see coming down the aisle, so please raise your hand. We'd ask that you wait for them to bring you a mic before asking your question. Similar to the recent updates, we'll be doing the one question, no follow-up, However, we will be coming back around, so there will be ample opportunities for everybody to ask hopefully multiple questions and make sure you get all of those questions answered. For everybody virtually, please go through the web console. Ms. Lauren Gaspar will be helping me collect those, so let's be nice as we send those across. And if anything comes up, please don't hesitate to reach out to the IR team with any questions or concerns. Finally, everyone's favorite slide of the day, the wall of words. It simply reminds us that our disclosures can change and evolve over time, so please stay in touch. With that, I would like to transition to our co-chairman and CEO, Mr. Walt Bettinger.

Well, good morning, everyone. It's hard to believe that it's been three years since we were together in person. I think we squeezed this in right before the pandemic. I'm actually dealing today with a non-COVID cold. When I describe a cold course now, I have to make sure that it's non-COVID related. But my voice is a little bit off. If I start to lose my voice, I guess I'll have less to say. And maybe that will be a blessing for everyone, given my use of a lot of words. But it is wonderful to be with all of you today. And we're looking forward to an exciting day of interaction. So we often talk about our all-weather business model at Schwab and the ability for us to generate strong, powerful results throughout different timeframes. And I think if you look back at 21 and 22, you see that illustrated perfectly in the last two years. So in 2021, you had an extraordinary year for equity markets and we dealt with near record low interest rates and we delivered record financial results. When you flip over to 2022, you had a near record year in terms of equity market pain or difficulty. And then we had some of the rapidest increases in interest rates that we've experienced, and we delivered record financial results. And I hope that as I go through my time today, it helps paint that long-term picture, the way we manage the business, the way we think about the business, the way we execute on the business and our strategy, is to deliver those kind of results throughout all different environments, all different cycles, that you can count on a long-term perspective. We're going to touch on each of these topics in my section, both our ability to deliver growth consistently through all forms of economic environments as well as return capital during certain periods such as the one that we're in right now. I'll touch briefly on the Ameritrade conversion, although Joe Martinetto, of course, will go into that in much more detail. And then also I'll touch on how important it is that in our business we have aligned the areas of significant investment around places in the market where I think we all agree and research shows are the fastest growing. So I mentioned earlier about 2022. We all know it well. No need to necessarily go through the charts and the math, but we know it was a very, very difficult year for our clients, difficult year for investors. You had both, of course, equity markets and bond markets experiencing tough periods. And not surprising, when you get that type of environment, investors feel it. And so they operated in a bear environment from a mentality standpoint, a sentiment standpoint, throughout almost the entire year. And then, of course, as the year moved forward, we saw greater intensity in terms of yields and flipping with the long-term rates and short-term rates. So we inverted. Through the year, though, our clients remained very heavily engaged with us. So we delivered almost $430 billion in net new assets during the year. Interestingly, our clients remained buyers during the year. So despite their bare sentiment, there was optimism in terms of being net buyers. Processed about 6 million trades a year, and clients continued to enroll in our advisory offers during 2022. This is a really important slide as I talk about the long-term perspective of the company. We often describe that when you invest in Schwab, you invest in a growth story. And you invest in a growth story that thrives throughout every different type of economic environment. So this slide shares net new assets going back to 2011 and how we are consistently able to deliver within that 5% to 7% range no matter what's going on with the equity markets. Actually, 21, we were a bit over. If you look down at the footnotes, you'll notice that we're only including Ameritrade from, I believe, 2020 forward when we got the closing. So actually, if you were to layer Ameritrade on there pre-2020, you would see even stronger numbers in terms of net new assets. But what's important is the consistency, the consistency of our ability to deliver for our clients so that they then turn around and deliver for us in bringing assets into the firm. Now, why do they do that? Well, this slide, I think, helps paint some of the picture. So we refer to it as client promoter score. Of course, many people refer to it as net promoter score. And you can see results across our various parts of the firm. Investor services at 64. And, of course, these are world-class type NPS numbers for those of you who follow the NPS world. Managed investing dipped a bit in the fourth quarter, but as Nisha will share with you later, 22 of the past 24 quarters, clients who pay us for advice actually had higher net promoter or client promoter scores than our self-directed retail clients. So although it dipped a bit, not surprising with equity markets, they are very happy clients. Easy score of 92, and then 83% of our client interactions with one of our representatives resulted in the clients giving us a perfect score, the highest score they could possibly offer us. So underlying facts behind that very consistent ability to grow and deliver net new assets. Of course, we receive plenty of industry accolades. I won't spend much time on this. We'll hear some more about additional ones of these before long. But they provide some additional boost, I suppose, to consumer evaluation. And, of course, when you have that kind of consistent organic growth, consistent new asset flows, it puts you in a position to deliver consistent, strong financial results. And here you can just see revenue, net income, pre-tax profit margin, and diluted EPS again over the last handful of years. We've tried to go back. in this session today and cover a bit more historically because it has been the three years since we were together. So normally these would be things we might be sharing every year, only looking back a year or two, but I thought it was important this time to go a little further back and just reinforce the consistency of our performance. So we like to say at Schwab, it's all about the conversion, but it's also all about a whole series of other things. But we are about to begin the formal conversion here within a couple of weeks. We're very, very excited about that. I know many of the Ameritrade clients are also very excited. We're also really pleased at the response from the clients as we've reached out to them and begun our first transition group here over the next couple of weeks. And we know that this is a big complicated conversion. No one has ever converted a brokerage business anywhere near this size or scale in the history of our industry, but we feel very confident about where we are. Our test results of late have been delivering the 99.9% accuracy. We don't expect it to be perfect. I try to be very realistic about that, but we do remain quite confident that overall it will be a wonderful experience. And when it all is said and done, the clients at both the former Schwab as well as the former Ameritrade will have better experience, better tools, better capabilities than either one has had before. So I talked about our consistent ability to deliver results, but I want to just take a step back and again go through why we think that's possible. As you can see on the left side of the slide, we really believe at Schwab that we operate with some structural advantages within our industry. And we look to leverage those structural advantages to better serve clients and better reward our stockholders. Size and scale, relatively unparalleled, certainly within the public company environment. Operating efficiency, we are huge believers that the low-cost provider is the ultimate winner, particularly if being the low-cost provider doesn't involve trade-offs to be able to be in that position. Our service culture, again, I think goes without saying, but everyone is well aware of the quality of our service, our consistency. Look at 2022. For example, we averaged answering the phone last year in about 30 seconds on the Schwab blue side and about 11 seconds on the TD Ameritrade green side. Of course, those will come together as we do this conversion. But we answer the phone, we serve our clients, we're there for them. Our branches have been open for several years, and we're ready to serve our clients, and we know that they have a good experience when they interact with us. We have a very efficient operating structure. We don't have fiefdoms at Schwab. We have a one Schwab mentality in which everything is about the client. Everything revolves around the client. We work in partnership. We work closely together. We compensate all of our people based on doing the right thing. If you go into a branch and you speak with one of our reps, whether they're talking with the client about a Schwab solution around advisory or working with an RIA, we compensate them in a similar manner. They're talking about looking at investing in a fund, whether it's a fund run by Schwab or a fund run by a third party, maybe even a third party who provides us no shareholder servicing. We compensate our reps in the same way. We try to structure an operating model which is efficient both for stockholders but also serves our clients well and minimizes the potential for conflicts. Of course, our brand and our corporate reputation ties in with our willingness to disrupt. We have been a consistent disruptor on behalf of our clients, and you should expect that to continue in the future. Let me just go back for one second and touch on two other items here. I mentioned about the and, and it's so important, particularly in terms of being a low-cost provider. We look to not ask our clients to make trade-offs. There's no reason they can't have both great price and great service. Great people across the country, as well as world-class technology and digital experiences, and so on all the way down. And our virtuous cycle also continues at play. You could see it rolling all the way back to our decision to broadly eliminate commissions back in 2019 and how it's carried forward to today as we're able to reward our stockholders and also reward our clients. And, of course, you saw the latest example of that yesterday coming out of our board meeting where we substantially increased our dividend now up to $0.25 per quarter. As I come down to the end of my prepared comments, I just wanted to touch again on the way we think about strategy at Schwab. Everything sits with an overlaying what is going to be best for our clients. At the same time, we identify long-term industry trends. For those of you who have been with me for a long time as we've had these meetings, I would periodically provide to you a list of trends that we viewed were going to be critical in the coming years and how they would shape our strategy. And, of course, that continues today. You can see our view on broad trends, client views, and the competitive landscape. I just want to emphasize that the two fastest-growing areas in our industry are self-directed investing and the RAA world. And, of course, our positioning in both of those spaces we consider is absolutely optimal. So we have tremendous optimism about our future and our ability to continue to deliver the type of consistent organic growth that you've seen from us and that I shared in the prior charts. So let me just go ahead and wrap up here real quickly. Just again, emphasizing the consistency of our strategy through client size. 2022, another record year. We're very excited about 2023. We know it's going to be a transition year. We're going to be doing the largest conversion in the history of our industry. We know that we're dealing with still a somewhat challenging environment for our clients, so we know it's going to be a transition year, but we think it sets us up also very, very well for 2024 and 2025, consistent with the long-term perspective that we have at Schwab. So again, thank you for the opportunity to share with all of you. It is wonderful to be together after three years. And Rick Worcester, a great friend and our president, is going to come up and share some comments. And then I'll rejoin Rick for a Q&A with all of you after Rick has finished his slides. Thank you again. Look forward to our Q&A.

Hello, everyone. Welcome to Westlake. It's nice to see so many of you in person. One of the questions I'm often asked by analysts is, can we sustain the healthy levels of organic growth that we've delivered historically now that we're a much larger company? So I'm going to talk about that topic in two parts today. I'm going to talk about what we can rely upon from our virtuous cycle, which we think is the ability to continue that growth. And then secondly, I'm going to talk about our strategic focus areas and the role they can play in accelerating both our organic growth and our revenue. We're in a position of strength today. With over $7 trillion of client assets, we are the leading provider of investing and wealth management capabilities of any publicly traded firm in the United States. And as Walt just mentioned, our growth is supported by the fact that we're focused on the two fastest growing segments of our market. Underlying our growth is our combination of value, service, and choice. You see that in the retail channel, the ability to walk into our branch, to call our 24 by 7 line, or to deal with our outstanding digital experiences, all with products and services priced at great value. In the RIA space, we provide unmatched practice support. We provide unmatched custodial experiences in terms of our digital and technology capabilities that we provide to RIAs in custody with us. And all that comes with a commitment to no custody fees for RIAs of any size. And in workplace, it's about our solid platforms that are supported by our industry-leading service. You add that all up, and we have a healthy greater than 1.5 TOA ratio. Now, for those that have been covering the company for a while, you may recall us reporting numbers closer to two. And you can rest assured that our Schwab numbers remain at those levels. But I also want to anchor you to the new numbers that we'll report going forward, which are the integrated Ameritrade and Schwab numbers, still a healthy greater than 1.5. And I also want to provide some context for why Ameritrade has historically had lower TOA. What happens with Ameritrade is clients have been attracted to Ameritrade for their trading capabilities. They bring cash in ready to execute a trade. They grow their wealth over time with Ameritrade. And at some point, their needs change and they want more full service wealth management support. And so they take some portion of those assets or all of those assets and they TOA them out to a fuller service firm. And so the assets come in in cash and TOA out in securities, creating a lower TOA ratio. So that's why as we report our TOA ratio going forward, you should expect it to be closer to the 1.5 than the two that you've seen from Schwab historically. But therein lies an opportunity. Those clients that have come to Ameritrade to trade, that have built wealth there, we're going to expose them to our relationship model. We're going to make available our broader wealth support. And we're going to try to keep as many of those clients in the Schwab family as possible because we know when they're at Schwab, they don't have to make any tradeoffs. We have a strong market share today with 12% market share, but there's still lots of room for growth for many years to come. The virtuous cycle has been what has driven our growth over time. You know, Walt has said for many years, if we do right by clients, if we see through their eyes, clients will do more business with us. And this is proof that that approach has worked. When you look back over the long run, we have consistently delivered three to 5% of organic growth from our existing clients. That's our existing clients choosing to do more business with us because we've done right by them. Whether it's them investing their dividends and interests with us or bringing their hard-earned savings to invest for the future, we've reliably generated that three to 5% from existing clients. We've also been able to attract two to three percent of organic growth from clients new to the firm. You add that all up and it's the five to seven percent growth Walt shared earlier that we've consistently and reliably delivered. So now I want to take a moment and talk about why we're confident that we can continue to drive that growth from our virtuous cycle in the future. And it starts with existing clients. Our client base is young and getting younger. Our average client age is under 50, and 57% of our clients that came in new to Schwab last year were under 40 years old. That puts them squarely in the accumulation stage of their life, meaning they're going to need to contribute more assets to save for their future. The other element driving our future growth from existing clients is dedicated relationships. We know that when we have a dedicated relationship with a client, that client is a more engaged client, they have higher client promoter scores, greater satisfaction, and as a result, higher retention, and they bring us more net new assets. In fact, they bring us 2.5 times more net new assets than those that do not have a relationship. And we continue to invest in and expand the number of clients at Schwab that have that dedicated relationship, fueling our future growth. And then third, in our RIA business, as the RIAs who custody with us have success in growing their businesses, and as their existing clients bring them assets, that's fuel for our organic growth. So you can see from this that we feel like we're in a really good position, if we see through clients' eyes, to sustain our level of organic growth from existing clients. In terms of new clients, our recipe is what it's always been. It's about our brand, putting clients first. It's about being a trusted financial services provider, as we have been for the past 50 years. It's about our diversified acquisition model. It's about our sales teams, our marketing efforts, referrals, being able to walk into a branch. It all attracts clients to Schwab. It's our workplace pipeline, a business that's an increasingly strategic force and one that should bring new clients to Schwab. And then finally, it's our commitment to the RIA industry. As more advisors choose to go independent, as the leading provider of custodial services, that will fuel our growth. So we think, as we look forward, we're a much bigger company This to us is evidence that the virtuous cycle will continue to drive that 5% to 7% of organic growth that we've seen historically far into the future, even as a much larger company. I want to now pivot to talk about our strategic focus areas and the acceleration they can provide both to organic growth and to our revenue. We've talked a lot about the benefits of the Ameritrade acquisition. It's clear it's the expense synergies we've been clear about, the enhancements to our clients we've been clear about. Our clients are really going to benefit from bringing the best of Ameritrade and Schwab to them, both in the advisor channel and in our retail business. One of the things I'm particularly excited about is the runway of growth that Ameritrade will provide to us. At Schwab, we have a little more than a 50% share of our clients' assets here with us at Schwab. That's one and a half times the share of wallet at Ameritrade. Many of my Ameritrade colleagues will say to me, we're number one at being number two. And what Ameritrade meant by that was that their clients tended to have a primary financial relationship. And then they would have some of their trading assets with Ameritrade, but they always had that primary relationship. As we introduce clients to our relationship model, our broader set of capabilities, our advice, our financial planning, We believe we can move into that primary financial relationship position and grow our share of wallet with Ameritrade clients. And if we can do that, that's a more than a half a trillion dollars of net new asset opportunity for us. And importantly, it's clients that stay in the Schwab family and benefit from all that we have to offer. So it's a real win for clients and it's a win for us. I want to now talk about wealth. I like to say market for advice. And you can see that on the left hand side of this page. More investors are willing to pay for advice. We have a really strong wealth platform today. Nisha is going to describe it in a lot more detail later. She'll also describe the enhancements we're making to take what's a strong platform and make it even better for clients. We see room to grow here. 19% of retail assets at Schwab are in an advised solution. As Walt talked about earlier, those clients consistently have our highest client promoter scores and are among our most satisfied clients. They're also ones that we're helping along their financial journey and making a real difference in their financial life, fulfilling our mission as a company. You'll also notice on this page that only 7% of Ameritrade assets are an advised solution. We see opportunity to grow both of these numbers, and we also see an opportunity to close that gap between the 19% and the 7% as we introduce the breadth of advice capabilities that we have at Schwab to our Ameritrade clients. For each 1%, we can move the needle. First of all, it's more clients that we're helping and making a real difference in their financial life, most importantly. And in addition to that, it's $125 to $200 million of annual revenue. I want to now talk about direct indexing. Direct indexing is a capability that we think over time will take share from both mutual funds and ETFs. It's a capability that we think to be a market leader is gonna take three success criteria. We think it will take being a leading indexer. It will take strong digital capabilities because in order to personalize a portfolio, it's gonna have to be done in part digitally. And we think it's gonna take relationships. And we think it's gonna take relationships because many clients aren't aware of the benefits of personalized indexing today. So that one-to-one discussion about how it may benefit an individual client is going to be really important. As we think about those three characteristics, indexing capabilities, digital capabilities, and relationships, we believe there is no firm better positioned than Schwab to be a market leader. And as we're a market leader, there's a number of benefits that we'll accrue to our clients. Over the long run, they should be able to achieve better after-tax returns, and they should be able to personalize their portfolio in a way that meets their needs and allows them to commit to their portfolios for the long term, helping drive better financial outcomes. It's also a space where we can bring our no-trade-offs approach and our value orientation to clients in helping make a real difference in their lives. I wanna now talk about lending. Lending is an area we've been focused on doing more. And it started with our preferred rate program that we've introduced in the past few years. Something that's been very well received by clients as those clients that keep assets with us have been able to access industry leading interest rates. We've also invested in the past couple of years in making the experience of taking a loan or a PAL at Schwab easier to accomplish. This is an area where we think we have more room to grow. Clients come to us for the asset side of their balance sheet. But today, only 0.6% of client assets are in a lending solution. So far fewer are coming to us for the liability side of their balance sheet. And that presents us with an opportunity, an opportunity to do more for the client, to integrate their financial life, to give them a more holistic view of their financial life so that we can help them along the way to their financial dreams. And if we do that, if we can deliver in that way for clients, you'll see for us, we've had 0.6% of total assets in lending solutions. When we look at our peers, that number's about 3.5%. If we can close that gap and do more for clients, that's a one and a half to $2 billion of annualized incremental revenue that we could accrue at Schwab. But again, it's also, we think, happier clients because we know the clients that do have both a lending and investing relationship with us are happier clients, and also have higher retention, stay with us longer. I want to now talk about our third strategic focus area, client segmentation. And I want to focus on two segments in particular. First, I want to focus on traders. And you can see from the metrics on the page that the trading segment is a very valuable segment to us. which is why we continue to invest to make sure that the strength of our combined trading platform and the thinkorswim platform that we're bringing on from Ameritrade continue to shine. So we're investing in thinkorswim. We offer differentiated service for our trading clients. And we have an outstanding trading education group, which provides education to traders of all skill levels, helping them to be as successful as possible. On the right-hand side of the page, you'll see our efforts with higher net worth clients, an area where we are competitively strong, as you can see with our two times TOA ratio with wire houses, which is where we tend to compete for these clients. This is an area we've invested in over the past few years and will continue to invest. We've invested in differentiated service experiences, differentiated product to meet the unique needs of higher net worth clients, and differentiated wealth advice to help clients in that wealth bracket meet some of the challenges that they may face, all with the goal of making them better off in their financial life. So I want to wrap up with where I started. The question I'm most commonly asked by analysts is, can we sustain the level of organic growth that we've driven historically and that Walt shared with you earlier? And the answer from us is a resounding yes. Yes, we can. It starts with the virtuous cycle, driving 3% to 5% of new organic growth from our existing clients and 2% to 3% from new clients. And we can accelerate that via organic growth through the opportunity with Ameritrade that I described earlier and a $2 to $4 billion plus revenue opportunity through both wealth and lending. And it all starts with seeing through clients' eyes. When we see through clients' eyes and do right by them, that leads to enhanced growth and sustains what you've seen from us historically. And with that, Walt and I are looking forward to taking your questions.

Give you a second there, Walt. Thanks.

Do a double take to get my water in case my voice goes out.

I hear you. Brendan Hawkin from UBS. Rick, I'd love to start where you just finished, actually. So you laid out several growth opportunities, and you quantified two of them. What sort of timeframe do you think you would expect for both the advice, you know, bridging the gap on the advice side, and on the lending opportunity, and then more broadly, where do you think is going to be the biggest impact to drive the growth in the next few years?

Well, I'd say first it's going to take time. This isn't going to happen overnight. We already have a very strong wealth business that is growing. You'll hear from Nisha later the investments that we're making for the long term. So we see it as long-term opportunity there. On the lending side, we've done a lot to enhance our capabilities in the past few years. As the lending, it's going to take those capabilities, which we think are ready for growth, but also probably a different lending environment. And when the confluence of those two things happen, I think you'll see an acceleration in our client lending activity.

Great. Mike Cypress, Morgan Stanley. Just a question on scale. You guys have mentioned in the past that scale is going to play a major role in determining the industry's winners. So I guess a two-part question here is do you feel you have sufficient scale at this point? And if you look across your businesses, where would you say you have sufficient scale versus where might you have more? work to do, and how do you ensure you continue to have sufficient scale in five years' time? And then the second part is, how do you think about the role of technology and software to potentially reduce or replicate the benefits of scale over time?

Yeah. So certainly I think in the retail side and the advisor side, we have a very, very powerful scale. We would probably be one or two on the retail side if you incorporate non-public companies. And, of course, one if you look at public. And from a purpose-built platform for RIA custodian, I think we would likely be considered a very strong number one. We have more opportunity in the workplace environment where we have a very strong approach in 401K with both a bundled and an unbundled approach. And then in the equity comp side, but there's probably more opportunity there to expand scale. Those are often more corporate or company-driven decisions as opposed to the investor side and the advisor side. I think technology is definitely going to play a role, but to me, if what you're really getting at, Michael, is the idea that someone could leverage technology to make a leap above others in scale, I don't envision that because we're all investing in technology to drive all of our costs down. So as we would evaluate our scale position, technology is going to help those who are less subscale to us, but it's also going to help us and is helping us. And so the relative efficiency of businesses is likely, I think, to continue to be there as we all make meaningful technology and digital investments. The other thing that I think is important in that is that our business model, although it has a significant part that relies on relationship, also has a very significant part that is less relationship-oriented. And so if we're competing against firms that have the majority of their revenue driven off interpersonal relationships, there's only so much scale that can be driven from that because of the compensation for those individuals. Good question. Good long-term perspective thinking. Thanks, Michael.

Rich Frappetto, Piper Sandler. First, congratulations, Walt, on the co-chairman since we last saw you. It's a great honor, and it's great to meet you and hear from you. Thank you, Rich. So I guess when we last got together, we didn't have zero commissions. We were just coming in. You know, we have Robinhood. Now we've got much higher interest rates. A lot of different moving pieces, you know, and you've got the Ameritrade integration coming up. So I guess my question is, is it just me, but it just seems like there's more – variables and factors, you know, whether we go into recession, but you've dealt with a market that has pulled back. Do we have more variables when we look at the retail investor over the next year to two years, especially when you're dealing with, you know, the biggest integration that the industry has gone through? And what are the guiding factors that, you know, sort of anky as you go through? And I suspect I know the answer a little bit to that. Yeah. Yeah.

I think in the short run, you have more variables because we've had such a tremendous swing in interest rates, right? From a ZERP world to the most rapid increases in rates that we've ever experienced. We went from an incredibly strong equity market in 2021 to a very difficult one in 2022. But that's all short-term. I think when we flip it around and look at the long-term perspective, I really don't think things have changed that much. Investors still need to plan for their future. They're still saving for retirement. They're still saving to put children through college, providing for other family members. All those factors remain the same. And I think what is important over the three years since we've been together in person is the strength of our franchise has only grown. as we've made investments, as we've leveraged our capabilities, as we are bringing together Schwab and Ameritrade, our offering to clients and prospective clients has never been stronger. So sure, short term, from a financial standpoint, there's more volatility. But from a long-term standpoint, clients are going to be turning to Schwab for their needs. I think we're better positioned than ever to deal with them. And I think even long-term financially, we're in a better position. Again, illustrated in 2021 and 2022. So 2021, the trading aspect of Ameritrade really helped lift our revenue and helped us in a ZERP world deliver record results. And then it turned in 2022, where trading was a bit softer than in 2021. But as rates started to move up, the Schwab part of the economic model really kicked in and helped us deliver record results. Again, I agree, Rich, short-term, we see volatility. Long-term, we really like our positioning, and we think the combined Schwab and Ameritrade also delivers a lot of benefits financially for our stockholders.

Hi, good morning, and thanks for hosting the event. Clearly, attractive TAMs, lots of growth runway. I think one of the questions that comes to mind is how you're going to tackle some of the hurdles if we think about direct indexing, for example, delivering those tax efficiencies at a lower asset threshold. Ameritrade clients more active on the trader side may not be as receptive to a wealth product. And lastly, as a Schwab client, you think of self-direct, RIA, maybe not as a lending platform. So I was hoping you could address some of the hurdles to delivering on some of those growth plans.

Sure. Do you mind just go through the three again? Because I want to make sure I hit all three.

Direct indexing, advice, lending.

Okay. So let me start with... Direct indexing. I think on direct indexing, the big opportunity in the near term is with higher-balance clients. And the reason that that's where the opportunity is is because the tax impact of direct indexing has the biggest impact on those clients. And so we came out at a $100,000 minimum, which the big direct indexers were at a $250,000 minimum. So we think that was a disruptive move and brings a lot more clients into the fold who can benefit from the tax benefits. I think that as we move forward... as this space evolves, I do think the minimums will come down. And I think the primary reason for that will be the desire for personalization. Because I think what you'll find is the lower balanced client, the idea that you want personalization will appeal to any wealth level. Now, there's some people at wealthier levels that may have concentrated positions, and you can do some really interesting things for wealthy clients in building a more personalized index portfolio, because if you have a lot of exposure to Schwab stock, you could build an index that not only takes out Schwab, but is built from a factor standpoint to be almost the opposite of Schwab so that you can, with your Schwab stock, get back to the index level performance and think about it holistically. So there's a lot you can do for wealthy clients, but also for less wealthy clients. So I do think the minimums will come down over time, and we've been building our capabilities to be able to do that in terms of our fractional share capabilities. There's more work to be done, but I think the industry will move in that direction over time. I just don't think it's important to do so today. We're at a phase where we're still educating that first wave of movers, and those are going to be our higher net worth clients, and that's where we want to keep our focus. On the advice side and the Ameritrade, I'd say a couple things. I mean, I think, and it goes back to what I mentioned earlier, that Ameritrade colleagues will tell me they were number one at being number two. So most of their clients that came to Ameritrade for trading actually had full-service wealth advice relationships. They just weren't with Ameritrade. So it's clear to us that there is interest among the client base. And I would just say 10 or 15 years ago, People used to say similar things about Schwab. You probably won't be able to grow advice. People come to you for transactional reasons. And, of course, it's grown markedly over the last 10 to 15 years. And I think our Ameritrade clients are in a similar position. So we are confident. And we've already seen... The benefits, I mean, I think 46% of our Ameritrade financial consultants have already opened an account in Schwab Wealth Advisory, which is a pretty remarkable number given they're not even fully Schwab, you know, embedded in Schwab yet. And they've had some higher hurdles to overcome to introduce that to their clients than a Schwab financial consultant would. So that's a pretty remarkable number. So we see a lot of promise there. And then on the lending side, I can't remember the challenge you mentioned, but do you mind reiterating the challenge you saw on the lending side?

I think it's more that Schwab clients don't necessarily view you guys as a lender in terms of, like, top of mind. What are the products that you offer? Certainly lending is not at least what first comes to mind.

Yeah. Well, that's the opportunity for us. And we've introduced the ability for our relationship people. So Schwab Wealth Advisory, for the first time, is now able to talk to clients about the lending side of their balance sheet. And it's a focus of the branch network, which Jonathan will talk about. So we have every reason to believe that we can engage more with clients on the lending side. It hasn't been an area of huge focus in the past for a whole lot of good reasons. But there is an opportunity there in the future. And the reaction to what we've done so far has been quite strong. And when you see the client engagement with our interest rate program, which has really lowered the cost of lending for our clients to keep balances with us, it's been a very positive thing with clients. And you see it in our client promoter scores that have both the asset and liability side with us. You see it in the retention numbers. It's stickier relationships.

One real quick thing on the lending side. I completely agree with what Rick said. I want to go back to being a low-cost provider. So in virtually every type of market environment, maybe other than one where you have ultra-high interest rates, our cost of deposits is less than almost everyone. And so you combine a most efficient operating model with the lowest cost of deposits, puts us in a position to be able to offer very disruptive lending rates to our clients in what is, for many ways, a commodity-oriented product, borrowing. And so we're in a position, I think, over time to be quite disruptive with the lending rates we can offer clients and yet still generate for us incremental revenue on a spread to securities basis. So we have a pricing opportunity there that I think you'll see us taking advantage of given our low cost of deposits and our low operating model.

Hi, thank you. Ben Budish from Barclays. I wanted to follow up on what you were sort of talking about with Ameritrade. And earlier in the presentation, you mentioned an opportunity to kind of gain wallet share. I was wondering if you could drill down in that a little bit more. You mentioned a lot of Ameritrade clients might use Ameritrade for trading but have a separate wealth management or advisory relationship. Is it simply a matter of sort of getting the advisory piece as well, or are there other types of assets that you could bring over, things like 401Ks or IRAs, just other kind of products that you could kind of point and click move over, and if you could just kind of drill down into that a little bit. No, go ahead, please.

Well, I would say, you know, our plan for doing that starts with building a relationship with them. And, you know, the work we've done with our financial consultants and what we've brought to our clients in terms of advice, I think is going to be the model for what we do with our Ameritrade clients. The Ameritrade relationship model has been a bit more service-oriented and a bit more trading-oriented because that's what clients came to Ameritrade for, and that's what made sense. And the journey we've been over the last 10 to 15 years, again, 15 years ago, there might have been some of that in the branches as well at Schwab, and we've turned the relationship much more into a wealth management relationship where we're helping the client with all aspects of their financial life. And so as we do that, and as we follow that playbook with our Ameritrade clients, we think we'll unearth all kinds of opportunities. There are full-service wealth business that may be elsewhere. There are 401K that may be elsewhere. But it starts from, to the client, how can we help you achieve your financial dreams? Let's look at your picture today. Let's look at where you need to get to. And let's talk about the breadth of capabilities that we now have collectively at Schwab and Ameritrade that can help you get there.

Thank you. Christian Bull, Autonomous. So just on the competitive landscape, your growth, organic growth of 5% to 7% over the last decade has definitely been impressive at your scale. But over that same period, a lot of competitors, wire houses, independent brokers have grown faster, actually doubled the organic growth. So just curious how you actually think about competitive landscape relative to peers. Is Schwab... losing market share on a relative basis, and some of your historic competitive advantages, are they beginning to diminish? I'm just curious to think about it relative to those peers that have grown much faster or have accelerated growth through the last decade.

So I would take exception to the concept that someone else is growing faster. Are you measuring percent or are you measuring real dollars? I don't look at anyone who's generating the type of growth that we're generating in real dollars in our industry. So I'm not quite sure I buy into that notion. I guess if somebody has a dollar and they add a dollar, it looks like 100% growth. If someone has $1,000 and they add $250, it's only 25%. But I'd sure rather be the second person. So I'm not sure I buy into that. And when I look at the TOA ratios, it just, again, the theory behind that doesn't hold any water because we know where we are on a TOA basis against all the firms that we compete with. And those numbers range from probably a worst-case scenario of around 1%, So it's just a swapping to best-case scenarios that can be measured into double digits. And some of the firms that talk about growth rates, particularly measured in percent, are some of the firms that we're taking assets at a double-digit-to-one type TOA ratio. So when it comes to competition, I just want to emphasize we respect everyone. We are paranoid, and we spend a lot of time studying competition and their moves and their opportunities and advantages they might have in their model relative to advantages we might have. But when it comes to organic growth, we don't think anyone within our two primary areas, retail investor and RIA, is growing at rates comparable to us. That's just our take on it, Christian.

Could you talk about the role of alternatives in clients' portfolios and what you guys are doing on that front?

Yeah, so alternatives is an area that – You know, we have capabilities in today, and clients are utilizing those capabilities, particularly on the advisor side. And Bernie can talk about that more later. On the retail side, it's an area where we are seeing increased interest. And it's an area where we're building out our capabilities, as we've talked about in the past. And that will take some time. And the reason it will take some time is... is that it's a legally complex area to be able to offer alternatives to the client in a way that's safe and sound for them and brings our fiduciary responsibility to bear on the client. So I would say we're in the middle of building out our alternatives capability, and in the next couple of years, retail clients can expect to have that capability. And I would put it as part of our strategy. what we're trying to deliver to ultra-high net worth clients, that we have been building out our product-specific capabilities for them. We've done it on the liquidity side. We've done it on the lending side. And we're going to do it on the alternative side. But it will take some time because it is a complex area. We want to make sure we do it right in a way that works for the clients.

This question here from the web. As you think about growth, how do things like additional inorganic or M&A and or international play into the future of the firm over time? And this is a question from Bill Katz at Credit Suisse.

Sure. Thanks, Bill, for asking the question out there in Cyberland. So we look at a lot of opportunities. As you can imagine, we receive a lot of inquiries with interest from firms that are looking to sell or divest parts of their business. We look at everything. We look at it all carefully and closely. Our view there hasn't changed from my response to that question in years past. It's got to make sense for clients. That's the first step, the first hurdle that it has to overcome. has to address. Is this going to put us in a better position to serve clients? If it does, then we'll go into the next steps and look at whether it makes economic sense for our stockholders, what the ROI is, what the risk is associated with doing that transaction. to our brand, but also risk to our ability to deliver the results. Because when we undertake an acquisition, we're very committed to recognizing that it is your money or your client's money that we're putting into that deal. So we just have a very thorough evaluation on any kind of acquisition. International is a meaningful opportunity for us. I think Jonathan will be in a good position to share some of our thoughts there. Our dollar-based international business is growing quite rapidly, and so there is some meaningful opportunity there. To date, we have not been aggressive around multi-currency, but the dollar-only part of that business has significant opportunity that Jonathan can share in his segment. I think we're at the end of our Q&A time. So, again, I just want to thank all of you for being here today in person. Thank all of you who are participating remotely. It is wonderful to be together. I can't wait to do it again. I'm very confident it won't be three years. And, Rick, thank you for giving me the chance to share the stage with Q&A. I'll step off, and I think you're going to introduce Joe.

Yes, Joe, welcome up. Joe's going to talk about the Ameritrade integration and scale. So it should be a good discussion and timely.

So I was flipping through my emails this morning and I saw one with the intriguing title of hot topics in accounting this week. And I groaned inwardly and I pushed the delete button. And I've reflected for a minute that this presentation may sound a little bit like that email to many of you. Joe's going to go talk about technology infrastructure. So I really want to reframe it a little bit. My two objectives today, one is to maybe get you a little bit excited about the opportunities in front of us to continue to drive scale and efficiency into the business for the long run. while continuing to deliver great client experiences. So I think that's maybe a little bit more exciting. The second part is to give you an update on where we stand on the integration. And so if you still feel a need to groan, I'd ask please wait until after the prepared remarks, and then we'll take people's temperature then. So let's jump in on where we are on the integration. So we are into year three of work on integrating the firms at this point. And we've been doing a substantial body of work in the background to prepare for the client conversion, which is upcoming. We have done a tremendous amount of work scaling the infrastructure on the Schwab Blue platform to allow us to bring over all of the accounts and positions and clients onto that platform. We've also been doing a bunch of testing of all the work that we've done. Walt made reference to the quality of the outcome that we're starting to get out of the testing at this point. We've got very high success rates, which give us a lot of confidence that when we actually start to migrate the clients that we're going to be able to do this as effectively as possible. We have been doing work on the client side on a couple of different dimensions. So a piece of it is we've been bringing over different products and services onto the Schwab platform. So those of you that are Schwab clients may have noticed changes in the trading platform over the course of the last several months. As we've been bringing on some of the best of breed capabilities that were on that Ameritrade platform that weren't on the Schwab platform. So when we do bring the clients over, they're going to get an experience that's pretty similar to what they had prior to the conversion. We've also been doing work to ensure that when the clients come over that they have a great experience in the process of that transition, and we'll spend a little bit more time talking about what that's going to look like on subsequent slides. But the goal here is to try to... Make it as easy as possible for those clients to get themselves set up on the Schwab platform so that we can, to the extent possible, pull some of those questions forward before conversion and get them addressed before the clients come over so that when they actually are converted, that they don't then find themselves in sort of a cold experience, forced to call in and experience probably some challenging service experiences as we see a spike in activity on some of those most critical conversion dates. Rick made reference to the fact that we've been doing some work to start to make some of the products and services available to the client set. I think we're incredibly excited about the opportunity in front of us to continue to do more of that. Frankly, some of what we've done has been basically meeting demand, but we've done it in a way that probably is far more manual than what we're going to be able to deliver once we get the clients onto the Schwab Blue platform. And the last thing, Walt made reference to the fact that despite all of our best efforts, we know that there are going to be some glitches that are going to happen in the process of moving the clients over. So we've invested significantly in building out enhanced service experiences and training our people to be able to meet the needs of those clients as they do come over. And also bringing on some third-party services to help us make sure that we've got some ramped-up capabilities that we'll be able to meet some of the most basic client service requests and doing it in a way that's cost-efficient for the long run so that these are essentially kind of meeting spike needs in terms of call volumes but not embedding them into the long-term cost structure of the company. So we are on the verge of actually starting to move clients over. The first tranche is scheduled to come over on President's Day weekend in February, a couple of weeks from now. So what we have done here is broken the clients up into five different transition groups. So if I use a phrase like TG1, TG2, excuse me, it's just kind of embedded in the way I'm thinking about it at this point. We have in total somewhere between 18 and 20 million accounts that we're going to be moving over over the course of this entire integration. And the number moves around a little bit because clients are still opening new accounts. We're still doing work to clean up accounts on the platform. But still, between 18 and 20 million give you a sense of the scale of what we are achieving here. We have a relatively small group that we're moving in February. It's about a half a million accounts. It's intended to be more of a test group. So it's a relatively smaller group of people who are maybe not quite the most active users of the platforms, but it's an opportunity for us to move the assets, bring them onto the platform, test the service experience, make sure all the technology is working the way we expect before we engage in some of the larger transition groups later in the year We have a big group scheduled for the Memorial Day weekend, which is predominantly the non-advised retail client group. We've got another group scheduled for Labor Day, which is the advised client group plus the advisors. And then we have another launch scheduled for November, which is the bulk of the traders coming over the TOS users. We have one more group of traders, those most active people that use things like futures and Forex, that we have moved into a small tranche in the first half of 2024. And that will be the last group of clients that will move. I guess it's been a while since we actually spoke in person. The war in Ukraine impacted some of the resources that we're working on some of the conversions as a result of having brought some of that information. And with the TD Ameritrade acquisition, that group is no longer available to us. And as a result, we've had to do some quick shuffling to identify resources and replan some of the transition. But we're still on track to have the vast majority of clients moved over by the end of this year with a small group into next year. Because of the way we've scheduled it in that small group, we don't believe that it's going to have an impact on our ability to recognize synergies from a timing or total dollar perspective, and I'll summarize that here in the next page as well. But we do believe that we're ready. We have done everything necessary on the testing side to make sure that we are as prepared as possible. We have started client notifications and have now sent out over 10 million communications with a lot more to come this year. As people move into their time schedule, as we get closer to their transition group, they'll get a series of communications that will prepare them for what's coming and what it is we need them to do. We have built out capabilities like a welcome center to let people come in and get a sense of what's available on the Schwab platform. We've also built a client conversion hub. So the purpose of the client conversion hub is to get the clients to engage with Schwab and come in and set up their credentials in advance of that transition. So we get them to come in, establish their username and their passwords so that that's all set up before they actually get to the conversion window so that we don't have a bunch of people calling in on day one saying, how do I access my account? The upside for them for doing that is they will get what we call a future view. So they will get a chance to then look at the entirety of their household as we have mapped it inside of Schwab. The TD Ameritrade platform was a very account-based platform, so it was one login per account. At Schwab, we're more of a household base, so we will pull all of your accounts together into a household view. Once the client's established that credential, they'll get a chance to come in, see what that household view looks like, and to the extent that they have other accounts that they want to identify and get linked to their household, they'll have an opportunity to do that as well prior to conversion. So we've done a lot of good work to try to take as much friction out of the system as possible. to ease that transition process for the clients. On the dollar side, we're still on track to achieve the expense synergies that we have communicated, and we have gotten about two-thirds of those costs out of the system already. We have plans in place to be able to recognize the remainder of those by basically the end of 2024. The savings that we'll see this year will probably be relatively modest. There's a small amount, I guess, of full-year impact of some savings that we got last year. There's some smaller impacts as we bring the clients over onto the Schwab platforms. There's some places where we're more efficient on the operating side, so we'll start to see that as we migrate clients over over the course of this year. But the bulk of the remaining savings are really going to come from decommissioning the duplicated platforms, and that can't happen until we get all the clients over and there's a body of work to happen in 2024 to achieve that. But that's all programmed into our plans now for the remainder of this year and into next year. On the revenue side, we feel equally as good about the long-term projections. I'd say from a macro perspective, we have actually benefited from account acquisition and asset acquisition that's been better than anything that we had in the original business case for the transaction. Here in the near term, we may be feeling a little bit more pressure around interest rates and what it's doing to some of the balances. This is the biggest driver of the revenue synergies over the long run is tied to the BDA transition. But when we look at it over a long period of time, and we have a number of years to run still on that BDA, we still feel good about where we are in terms of being able to recognize the totality of the revenue synergies that we talked about. And I would highlight that while we have started to do some basic work around things like offering banking products and services, and we've done a few other things to make things like managed investing available, but it's still a pretty clunky process. Even with that clunky process, we've had really good feedback from the clients. I think Rick dimensionalized some of the opportunities that we think might be out there for us. Some of those numbers were not included in these revenue synergy numbers. So if anything, I would say that we probably have some upside out there related to some of those opportunities that we haven't put in to the synergies. Switching over to some of the rest of the technology stack, we haven't been sitting on our hands while we've been working on integration. We have been continuing to do a lot of work in the background on some of the things that we have talked about over a number of years. We have had to restructure some of this work as a result of doing the integration, and while You can see that there's really three or four things here that we've talked about historically as being sort of independent programs. This has almost become a singular body of work that was necessary to accomplish to be able to affect the transition of all the clients and to build the skill that was necessary to deliver that. you can see on application modernization which is really the move to pull a lot of the capabilities off of that old monolithic mainframe system and put it onto a distributed environment where we could scale it more efficiently we're about three quarters of the way through that body of work with the remainder of it expected to deliver over the course of the first half of this year so that program is wrapping up basically on time and pretty close to on on spend levels in terms of what we expected And we continue to see real benefits there in terms of some of the choices we've made. Really what we've done with the new environment that we've built is created a set of technology that's capable of being cloud-hosted, and we've, in essence, put it on a private cloud inside of our own data centers. I'd say we have been a little bit interrupted in terms of some of our thinking around cloud migration because of the integration. We've been more focused on making sure that the platform is scaled and ready to accept the additional volumes, but there's still an opportunity out there to continue to migrate additional capabilities to the cloud. even with that we've identified a number of workloads that we have already been in process of moving and i'd say they really fall into two main categories so one of them is things like um account login where you get big spikes in activity at points in time over the day where it's pretty inefficient for us to build enough technology to deal with that that volume that comes in over three minutes at market open and you got to carry that capacity for the remainder of the day Those kinds of workloads scale really efficiently in the cloud. And so we're prioritizing work like that as we think about some of our first moves to the cloud. I'd say the other part is things where capabilities are developing in the cloud that are becoming increasingly difficult to acquire and run on premise. A lot of the analytical tools and the data tools that are now available at a lot of the cloud providers are really just superior to what we're able to build and deliver in our own platform. So a lot of the work we've been doing is establishing our client information and other databases out on the cloud and data warehouses to allow us to take advantage of those kinds of analytical capabilities going forward. So work has continued to progress on the things that are maybe most important in terms of cloud impact, but there's a lot of work left that we're going to be able to continue to think about. Scale and resiliency. So that movement to a private cloud structure has allowed us to build out a much more – it looks a lot like the way modern cloud is hosted internally. So we've gone to a zone region approach. So we've got multiple regions where we're running multiple zones inside of each region. That has given us not only the capability to scale effectively, but it also has given us the capability to manage the way we adapt when we see system challenges. So one of the things that's mentioned up here is legacy retirement. One of the things that we have done for years when we had system problems, we used a code base called Host Fallback, which was a completely separate mainframe-based application which had a really limited set of capabilities on it. So when we had to go into Host Fallback, we were limiting what our clients could do. They could trade and see balances, but things like money movement and a lot of the more advanced asset management capabilities we've built over the years really weren't enabled in Host Fallback. And so today, with what we've built in terms of the way the infrastructure runs, we're going to fall over from a zone within a region and then across the regions a lot more elegantly than what we used to have to implement with host fallback. And as a result of that, the clients should notice a lot less when we have system problems and have basically access to all the capabilities when we're going through that transition process. So it allows us to retire that block of host fallback code as an example of some of the kinds of things that are happening in the background as we continue to make progress on modernizing some of the core infrastructure. So as we look forward, we are not done with some of the opportunities. You might be surprised to see that the number one opportunity we highlighted here is Ameritrade integration. But when you think about what we've done with integration so far, we really gave ourselves a set of constraints that were driven by how much we were going to spend to get the integration done, the time frame that we needed to execute that conversion in, and The, boy, I'm drawn to blank. The amount we were spending, the time frame we were willing to get it done in. And so, as a result, we had to opt in the amount of synergies we were looking to achieve. When you put all those things together, we made decisions that we thought were smart decisions as we were working our way through the integration approach. But that optimization frame meant that there was a series of things that we didn't tackle that give us future opportunities to continue to drive more efficiency as we look to some of the things that are still sitting out there. Public cloud migration, number two. There's still tremendous opportunity for us to look to move more workloads into the cloud. We're running a much larger and more complicated on-premise data center structure than we would like to run for the long run. the cloud really becomes the solution for how we get some of that workload off of the on-premise structures and lets us start to rationalize some of that over time. Efficiency and automation in the operations component. So some of that is very similar to the comments I made on Ameritrade integration. We made choices as we were thinking about how we were bringing these workloads together to try to make sure that we were going to achieve the synergy targets that we had committed to. But now with the volumes that we're at as we start to bring this work together, there's a lot of workloads that we can go through and continue to bring additional automation to. It's just a matter of now taking the resources that have been working on integration and starting to migrate them toward working on that further automation. And then finally, broker-dealer modernization. So those of you that have followed along for enough years might remember that broker-dealer modernization was actually a component originally of what we were trying to do with application modernization, and we pulled it out of that body of work as we migrated more towards some of the integration efforts. So the core here is to take that old core mainframe application books and records system of the broker-dealer and migrate it to a more modern platform solution, probably a SaaS-based solution as we look out into the marketplace and see what's available today. That not only drives additional expense benefits, but it also gives us an opportunity to take advantage of some capabilities that we don't have inside of the Schwab platform today. So things like multi-currency capabilities or multi-firm capabilities that we just don't have give us an opportunity to think about where we might go with products and services in a way that is not available to us on the platform that we have today. So it's a cost save, but it's also an opportunity for us to continue to build additional products and services to deliver to our clients. So there's a great body of work here that we're starting to try to figure out exactly how we're going to tackle it and sequence it. But we see a number of years of continued efficiency here that we're going to be able to deliver long beyond just the core integration work. So with that, I see hands coming up. We're opening the Q&A. Let's go ahead and get started.

Hi, Steve Chuback from Wolf Research. Great presentation, Joe. You noted that you've been very acquisitive. That certainly impacted the timing of the cloud migration. I know a few years ago you talked about, as you execute on that plan, modernizing technology, migrating fully to the public cloud, that you'd be able to bend the cost curve, maybe slow the rate of expense growth somewhere in the range of 2% to 4%. Is that still the long-term ambition as you execute on this plan? Yeah.

Sure. So I think we've got to be a little careful here. So cloud doesn't come for free. There's investment that has to be made to be able to do the migration to the cloud. And we are not talking about moving everything that we do in terms of technology workloads onto the cloud. So that is not the goal. We are looking to take the things that make the most sense to run on the cloud and move them there. But we expect that we're going to be running on-site data centers for the foreseeable future. There's certain amount of workload that's going to make sense for us to continue to manage on our own. So it's definitely an opportunity to use to continue to bend that cost curve. I think some of the bigger savings will actually come more on the physical side of data centers and data center infrastructure. because of what we've done with the integration. We're running quite a number of data centers now, including some are owned and some are leased, but we've had to take on additional space just to be able to house all the hardware, get enough power and enough cooling to run everything that we see coming at us post-integration. And so rationalizing some of that workload will allow us to rationalize some of that footprint and continue to bend that cost curve. What I think it's probably important to think about is, like I talked about some of the integration work as being a single body of work, I think some of this optimization work is also going to be taken in the same kind of frame. On any given system, it may feel like a step function change, but for a company as big as ours and given everything we spend in technology, it's probably not going to feel like a step function reduction. It's going to feel more like a portfolio of work that's going to allow us to continue to drive some incremental scale consistently over time. So I think bending the cost curve is probably the right way to think about it, that it'll allow us to slow that pace of growth as we absorb new volumes and continue to drive efficiency into the processing that we're doing. Peter's going to have more to say about what the long-term prospects are for expenses as we look out a number of years. And so I think it's all kind of baked into his numbers, and so I'll defer the more specific answer to his presentation, if that's okay. Okay.

Hey, Joe. You're sort of the special teams guy here now. But I guess the first question is on the attrition, or potential attrition. Maybe it's zero. But what do you feel like the scorecard here for the – integration, what do you feel is sort of the bar and how will it be measured? Like will we see the account numbers, will that be real time or monthly as well? So that's the first part of it. And then the second part, You know, in past integrations, it was just moving accounts to a platform. This is more sophisticated. And from what I understand, you're trying to do a lot more as you move the wealthier clients, like the documentation, the power of attorneys and so forth. So I guess the question is, you know, how do you accomplish that? You didn't really talk about that. Sure. How complicated is the migrations and when are those coming? Were you really going to do more than just moving, you know, DLJ direct onto a, you know, a council?

Yeah, so starting with attrition, the business case embedded a pretty modest 2% kind of number. So we are not expecting a material amount of attrition. We're going to measure it as best we can through the process. The risk probably comes at the time of conversion. As those clients get those notifications, that is probably the point where if we're going to see attrition, it's probably going to be as we're moving those specific books of business. We're doing everything possible to make sure that we're communicating with those clients, following up with those clients, giving them a great experience, trying to make it easy. Right now, I would say we are way ahead of the game in terms of client acquisition versus any attrition numbers that we embedded in the model. But we are probably going into the window where if we're going to see attrition, that's it. I say our business folks, maybe you want to ask them as they get up on stage to talk about what they're doing and how they're seeing it. But for right now, I think we're feeling pretty good about the attrition number based on the feedback we've been getting. From the process side, I'd say this is maybe a little bit different of an acquisition than something I'll draw a parallel more like the USAA, where that was we bought a book of business. It happened over a weekend. We couldn't do anything with those clients prior. We converted their accounts, their assets. We opened for business. We had them set up their credentials on day one. That was a rockier kind of experience because of the nature of that transaction and the limitations on our ability to work with those clients in advance. Here, we own both broker-dealers, so we can essentially subsume those accounts. We already have the client account agreements in place. We can transfer those across the organization without having to novate new paper. There are not going to be new account forms. There are not going to be new sign-ups. It's not paper-based. We essentially have taken care of all of that in the process of reviewing the account agreements already. We've been doing a number of things in the background to try to pull work forward to make this easier on us and easier on the clients. We have actually gone through a process now where we have created every TD Ameritrade account and formed all of the households. So we are now running all of that infrastructure on the Schwab blue platform. So all of that is set up and ready to go. The accounts are ready to receive the assets over the course of the transition weekend. And the clients, as I said earlier, are going to get that notification window and the opportunity to start to interact with that process much earlier. And we hope much more seamlessly, uh, We do know that there will be some clients that won't do that in advance and will therefore need to either go through that process after conversion or will call us and say, gee, I tried to log on and I can't get on. What do I have to do? And we'll have to help them get their credentials established. And we have, as we said, trained 11,000 Schwab employees. We have brought on a substantial block of third-party resources to help us deal with that. We have done... Everything that we can foresee. Again, I can't say it's going to be completely seamless, but it should be as well engineered as we can possibly make it. We have cleaned up over 3 million client records just trying to make sure that when people come across, their accounts won't be restricted because we'll have to put a know your client block on it because we don't have all the information. We've gone through, we've contacted the clients, we've got the information, we've cleaned that stuff up. We are down to... really small numbers measured in you know like thousands of accounts that we think right now we still might have some kind of lock on but when you think about 18 to 20 million accounts moving and maybe something less than 10 000 accounts where we're still working to to refine client data and we still have the majority of the year to work on some of that um you know like i said we we have done everything possible to try to make sure this goes as smoothly as it possibly can

Who's got the mic? Good to see you, Professor. Firstly, thank you for this presentation. None of your peers gives us any sort of insight into their infrastructure strategy, so this is very helpful. Thank you. On modernization, my question is around how you think about capitalizing on artificial intelligence. Given your tech stack is still a little bit on-prem, there's still some mainframe infrastructure, can you capitalize on AI? And to the extent you can, what areas, whether it's client-facing or back-end, can AI help?

Yeah, so, I mean, you saw one of the primary cloud initiatives was to move our databases over onto a cloud database. Some of that was to be able to take advantage of some of the advanced analytic capabilities that are available in those environments that are hard to stand up independently. So I think we've been doing the work to prepare ourselves to take advantage of those more advanced analytics. I'm a fan of AI, but I don't know that it's necessarily necessary. There's a lot of other advanced analytics that you can drive before you even get to AI that will let you be able to deliver superior client experiences. We've got some instances where we're already doing some of that work. capabilities that we've built over the years like Next Best Conversation. So our service professionals, based on the cues that they're seeing, get a series of prompts that are delivered to them to try to make sure that they're navigating through the right things that the clients might have an interest in. We have things like the Schwab Intelligent Assistant, so an online chatbot that's being driven by a lot of those same kind of capabilities. So we've been building up some of those core capabilities capabilities, I think we'll be able to accelerate into some of that where we see the opportunity. Some of it may be AI. Some of it may be more just kind of boring advanced analytics that we all kind of know how to deploy. But really the primary unlock here is to get that database established in the cloud where we can start to use some of those more advanced analytics. Oh, one more here.

Yeah. Hey, Joe. Quick one. As you're getting ready now to do this integration, have any potential disenergies emerged, whereas like maybe difference in margin rates or whatnot when you move that conversion over and how should we be thinking about that?

I'd say nothing beyond what we had already anticipated as part of the transaction. So we have been working to... So margin rates were different. We have been working to kind of normalize the margin rates as we've gone through this process of rate increases. So that gap has decreased somewhat, but there's still a little bit that's going to have to get recognized as the clients move over because the blue schedule is below the green schedule. Some of that's intentional so that when clients come over, they will see that they get a price improvement. So we've done some of this to be able to deliver and enhance the experience to the client at the time that they've moved. But we've, in some respects, tried to minimize the impact that's going to flow through financially, although some of that is still going to get recognized over the course of 2023 as we bring the clients in. It was anticipated, but this is the year it hits. So I think we're out of time here. It's my job to let you know that we're going on a break. We've got 15 minutes, so let's take the break and come on back for the rest of the day. Thank you all. Good to see everybody.

Let's pick up where we left off. Please welcome Jonathan Craig.

All right. Welcome back, everyone. So what I'd like to do over the next 20 minutes is give a quick update on the retail business and, in particular, share some of the 2022 retail accomplishments and then spend the bulk of the time on priorities for 2023 in retail. It's fair to say when you think about priorities for retail in 2023 and beyond, the most significant of which, of course, is to complete the biggest integration in our history and industry history. But at the same time, I want to talk about some other priorities because it is those priorities and those investments that will set us up for the next decade of growth coming out of this integration. Let me just level set with some numbers. The retail business over the last several years through very strong organic growth, which we've talked about, and of course the acquisition of Ameritrade, has become a business of significant size and scale. We're sitting at 3.2 trillion in retail client assets, almost 25 million brokerage accounts, and this year 176 billion in net new assets. And despite all that growth, we've stuck to a very focused business model. Every single employee in retail, and really at Schwab, comes to work every day with one objective, which is to help individual investors and traders achieve great financial outcomes, either directly or through an intermediary. And we do that, of course, by bringing a broad set of capabilities to the table, from advice and trading to asset management, financial planning, banking, and more. And then we complement those broad capabilities with distinct sets of capabilities for the unique needs of key client segments. In this business in 2022, we delivered strong results. I mentioned 176 billion in net new assets, 1.2 million new retail households, 4.6 million daily average trades. And of course, those in-year results are strong, but I think what's more demonstrative of the resilience of the franchise is some of the multi-year trends. Walt shared some earlier, as did Rick, but just another example, our three-year compound annual growth rates are 28%, 7%, and 55%, respectively, for those core net new assets, new households, and daily average trades. Beyond the results, we continue to receive strong industry recognition from folks like Investors Business Daily, J.D. Power, Investopedia, and others. And as much as we covet that third-party recognition, what we most aspire to or for is recognition from clients because they experience Schwab every day and really pleased to see in retail a client promoter score of 65 in 2022. I think any of these results, these results in any market would be strong, but they were, I think, particularly strong in the environment in which they were delivered, an environment that you well know, but an environment where all asset classes, I think, other than cash and commodities were down, most in double digits, and an environment where investor sentiment hit decade lows. In that environment, it was more important than ever that we be there for our clients. These are critical times to really demonstrate your client centricity when the markets behave like they did in 2022. Being there for your clients means lots of different things, but among other things, it means maybe most importantly, picking up the phone when they call. Across the retail business, Schwab and Ameritrade, on average for all clients, this includes our core clients, we picked up the phone with an average of 24 seconds. I think that's an impressive number. I think industry-leading, and certainly if you've interacted with other firms outside the industry, too, I think you'd agree that that is demonstrative of being there for our clients in a difficult time. Being there for your clients also means having reliable web and app experiences, which we did throughout the year. It means delivering our clients trusted guidance rooted in financial planning. We did that through our thousands of financial consultants, through hundreds of thousands of financial plans that were delivered. And then finally, being there for our clients meant delivering insights, ideas, and perspectives, both in the moment as well as throughout the year. And we did that in multiple channels, via the web, via apps, newsletters, client email, of course, social media, podcasts, and even our live TD Ameritrade network. Now, it's one thing to produce content. What's more meaningful is whether clients engage with the content. And we had record engagement across the board. So really pleased to see how the team stepped up to really be there for our clients. And I think, again, that was probably one of the stronger indications of why our client service level or our client promoter scores were as high as they were. In addition to delivering strong results and being there, for our clients, we also made meaningful enhancements to our retail offer in 2022. We relaunched Schwab Wealth Advisory, which formerly was called Schwab Private Client. This is our marquee wealth management solution for retail clients. You're going to hear more about this from Nisha later. We continued our emphasis on personalized investing, I think Rick talked about, by launching things like Schwab Personalized Indexing, Schwab Thematic Stock List, and we'll continue to do more in both of those areas. Continue to invest in client service. We added 2,400 new service folks last year, as well as invested in the service ecosystem, not the least of which we moved all of our voice telephony platform to a more modern, nimble, cloud-based solution. To emphasize and invest in our digital experiences, including redesigning some of the most traffic parts of the web and the app, search, navigation, research. We also enhanced our trading capabilities, launching an all-in-one trade ticket, as well as making enhancements to think or swim trading. And then finally, we continued to invest in our relationship models, a critically important part of the Schwab retail value proposition. I'll talk more about this, but we assigned tens of thousands of more clients to a dedicated relationship, And we continue to integrate, modernize, and expand our physical branch network. Last thing I'll say about 22 is, as you can imagine, we spent a lot of time preparing for this big integration, this big event that's going to happen this year. I could point to a lot of things, but just a couple I'll highlight. Notably, we completed the dual registration of all of our green... So when I say green, I mean Ameritrade. Sorry, blue, Schwab, if you didn't catch that. We... We completed the dual registration of all of our Ameritrade financial consultants. And what that means is they're registered with the TDA broker dealer, but also with the Schwab broker dealer, but as well as with Schwab Bank. And what that means is that they can talk to their clients about Schwab solutions now. They can enroll those clients in those solutions if they make sense, and they can get paid on those solutions. You can see in the lower left, that's been already a significant unlock of value. And, of course, we're just at the beginning. Once they are fully immersed in the Schwab model, expect significant opportunity there. We also prepared our service teams and our clients for the conversion. On the service side, we fully harmonized our service teams. We've harmonized licensing, compensation, training, everything. So it is one service team across Ameritrade and Schwab. And then on the client side, we did everything to harmonize pricing, policies, experiences, so that when the Ameritrade client converts from green to blue, the change is minimized. And then finally, critically important, synergies. Obviously, a big part of the value creation in this deal is synergies, and we're on track to deliver our synergies, as Joe mentioned. And just one example, in my world, we've brought down our marketing spend well over $200 million already across both firms without losing any market momentum. So if that's 22, let me talk about 23. Our priorities in 23 are really twofold. Number one, and again, probably most critically, successfully execute the biggest integration in our history and in industry history. But it goes beyond that. We are also going to make other investments in our corporate priorities of segmentation, monetization, and scale. Starting with the integration, Joe mentioned some of this, but the retail part of the integration will happen over all five transition weekends, starting in a couple weeks in February, and then May, September, November, and then a very small transition group in early 2024. We are doing everything possible to create a seamless, positive client experience for these clients when they go through this significant change. Among other things, we've developed a robust set of client communications and digital experiences so that clients know exactly what to expect, what's coming, and what they have to do, which, by the way, is just set up new credentials. It really will be as simple as that. We're doing a lot to optimize the front line so that the front line is ready for the client calls that are going to come in. We've trained and developed a whole set of transition specialists. We've made significant enhancements to our service desktop, launched new service tools, extensive training that is going on and will continue to go on throughout the year. And then on the client side, we are doing everything we can to close any remaining gaps between what green clients might be able to do on green that they may not have been able to do on blue. Perfect example, on the blue side, on the Schwab side, we will be launching streaming quotes, streaming on both web and app. Currently that's only available on StreetSmart Edge. It was available on green on Ameritrade. We're going to bring it to Schwab before the conversion so that clients notice that. Another example is we're making final enhancements to money movement. So any money move capabilities that were available on Ameritrade will be similarly available on Schwab when the conversion happens. Lastly, I want to say about the conversion, and Joe mentioned this, but this is a novel conversion in that we're not just bringing over the client's accounts and assets. We are bringing over the entire client relationship. That's why it's taken a lot of time. We're bringing over their open orders, their move money instructions, their beneficiaries, their history, their cost basis. The entire relationship is coming over, and I think that's pretty novel to anything we've seen in the industry, and I think that's a big part of why we think it's going to be a seamless experience, other than the fact that they'll have a new website and a new app. No matter how well we do, we expect client calls. Without question, when you drive client change, you get client calls. And we are investing a lot to ensure we have the capacity for those calls, both the day after those conversion weekends and then for several weeks thereafter. We're pulling multiple levers. Number one, we are doing significant incremental hiring projects. That is one-time expense, one-time hiring, but it's bringing forward hiring so that we have those folks there to take calls. We're leveraging all management levers that we have, things like enhancing overtime, ensuring that we're not doing off-phone activities or training on those critical times, holiday blackouts, all the stuff you'd expect. We're leveraging technology even to a greater degree, so things like intelligent assistance, virtual callback, scheduled callback. Maybe critically important now, we're leveraging our partners across the firm, the most significant of which is we have thousands of branch personnel on the Schwab side who are licensed. Those Schwab branch personnel are going to be taking phone calls for us after those critical transition weekends. And then finally, we are leveraging some outsourced support from some third parties to help us with some of those low-risk, low-complexity calls we know we're going to get. So I know we are doing, I'm confident we're doing everything we can to make the experience seamless, to ensure we have the service capacity and to do this conversion in a way that is consistent with our through client size strategy. Beyond integration, the other priorities, scale and efficiency. Probably the number one way to drive scale and efficiency for Schwab from where I'm sitting is to continue to drive outsized organic growth. We are going to do that leveraging our diversified acquisition model that leverages data-driven marketing, a unique sales and relationship model, the importance of our workplace business, and critically important referral. Stacey's going to come up and talk more about each of those Scale efficiency, though, is also about being easier to do business with. For us, that's about continuing to invest in our multi-year priorities of digitizing more and more and really continuing to transform how we serve clients and how we do relationship management in a way that emphasizes ease. Critically important, when we talk about efficiency at Schwab, it's not about how do we reduce cost to get clients to self-serve. It's how do we deliver clients easier, better experiences. Now, when we do that, what often happens is the cost to serve actually goes down. So it is a win-win, but the motivation, the focus, it may seem like a nuance, but the focus is always about how do we make it easier for our clients to interact with us. Second priority is around what we call win-win or client-centric monetization. Really, this is all about taking the capital that we have with our clients and leveraging that to do more for them which all with the goal of helping them get better financial outcomes. And what that often leads to is wealth management or bank lending. On the wealth management side, you're going to hear a whole presentation from Nisha on the tremendous opportunity there. But suffice to say, we have a lot of growth opportunity there. On an asset basis, across both Schwab and Ameritrade, right, about 15% asset penetration. On a household basis, it's even less. And when we know, when we deliver wealth management to clients, the TOA ratios go up, the client promoter scores go up, attrition goes down, and ultimately our economics go up. So it really is the definition of a win-win. A lot of our focus there, again, will be on Schwab Wealth Advisory, as well as continued efforts in the direct indexing space and other personalized investing opportunities. Bank lending is also a significant opportunity. We've seen a lot of growth, but we have a lot of opportunity, as Rick shared. Much of the focus as it relates to retail there is to continue to enhance our bank lending capabilities, particularly for high net worth and ultra high net worth. We see more and more demand there, and I think we see more and more opportunity to deliver more specialized treatment for those clients. The second priority on bank is around pledged PALs, pledged asset lines, highly sought-after credit facility for our retail clients. We see great opportunity there to digitize more and more, to reduce cycle times, but also to extend relationship pricing to the PAL offer, which is a core part of how we want to go to market for our clients. Last priority is about segmentation. And segmentation starts with at Schwab delivering differentiated relationship models to our clients. We will continue to deliver those models very simply because they work. In fact, when you compare a client who has a relationship, a financial consultant, with a client who doesn't have a financial consultant, controlling for all other factors that we can control for, you see two... 2.5x greater NNA, 2.8x improvement in TOA, and a 2x improvement in attrition. So the numbers are there. The way we want to deliver relationship models, though, of course, is in a differentiated way that reflects the differing needs of our clients, but also the differing economics that they deliver to Schwab. We have four primary models to support that. The mass affluent model is a scaled model generally for the sub-1 million. We have the traditional FC, the local FC, the folks you see largely in branches, serve largely the million-plus client at Schwab. For the 10 million-plus, we've built an ultra-high net worth specialized model. This is a high-touch model built particularly for ultra-high net worth. And then we have specialized financial consultants for active traders, which have always been critically important, but even more important when you think about the integration of the Ameritrade client base. Segmentation, relationships are important, but segmentation goes beyond relationships, and we segment across all aspects of the business at Schwab. But historically, that segmentation has been largely behind the scenes by design, and it's been a little bit inconsistent in that we might segment one part of the business a little bit different than another. We might have different breakpoints. Going forward, we are going to change that. We are going to launch a million-plus and a 10 million-plus set of branded segments, branded client experiences. These clients already represent more than two-thirds of our client assets, and they also represent the areas where we have the greatest growth. want to deliver to ensure we're meeting their unique needs we want to deliver meaningful segmentation across relationship service operations product and price we will do that this year just for example with the 10 million plus the relationship model will be one of our top financial consultants or a wealth consultant that i referenced earlier the service model will be served by our most capable most tenured premier service teams On the operations side, we've built a bespoke operations model for ultra-high net worth. And then, of course, product access, pricing benefits, fee waivers, special client events. There'll be a host of other benefits for that client segment. And for the $1 million to $10 million, we will differentiate along those similar dimensions. The 1 to 10 will be called Schwab Private Client Services. The 10 million plus private wealth services will be rolling these branded segments out later this year in advance of the green clients who qualify for these segments converting the Ameritrade clients converting over to Schwab so that when the Ameritrade clients become Schwab clients, day one they will be in Schwab Private Client Services and or private wealth services depending on their assets. The last priority around segmentation, and it's certainly not least critically important, is the importance of the trader segment. The trader's always been important to Schwab, but it's gotten even more important with the integration of Ameritrade. Now, this year, representing over a quarter of our revenue. Last year, almost 40%, given the volatility. Our focus on Trader is really to solidify this position, continue to grow. We believe we're in a really strong position. Once we get Thinkorswim over to the Schwab platform, which will be middle of this year, we'll have the full trading ecosystem at Schwab. defined by powerful, downloadable web and app platforms, defined by industry-leading, specialized service teams, a comprehensive product suite, and engaging and thoughtful, I think, industry-leading education as well. I think that sum total, certainly from where I sit, it will be a best-in-class offer for traders. And because of that, we are planning to relaunch our trader offer later this year pretty publicly and loudly in the marketplace. So before I bring Stacey up, I hope you have a sense of the investments we're making to ensure that this integration goes seamlessly and well, and that will happen, and also the investments we're making to set us up for the next decade of growth around segmentation, monetization, and scale. I thought I'd just end by, you know, where do I think this will position us sort of this time next year? I think we will be and are a retail firm with an incredibly strong value proposition for self-directed investors, active traders, and those seeking advice, with premium offers for high net worth and ultra high net worth, all supported by a no trade-offs value proposition, including the industry-only satisfaction guarantee. So a very strong value proposition backed by a broader Schwab-wide winning approach. An approach that emphasizes client centricity. Everything we do is seen through clients' eyes. An approach that emphasizes a singularity of focus. Everybody coming to work with one objective, help individual investors achieve great outcomes. A long-term view, a willingness to take disruptive moves when it makes sense for the client. And finally, an expense discipline, a commitment to expense discipline, which allows us to continue to bring costs down for investors and feed that virtuous cycle. So strong value proposition backed by a winning approach. And last thing I'll say, still significant opportunity. We are operating the retail business in a business that's growing double digits with single digit 5% market share. So externally, tremendous opportunity to grow. Internally, maybe even more opportunity. When you look at our share of wallet, I think Rick shared these numbers as well, tremendous opportunity to grow share of wallet on the Schwab side, even more on the Ameritrade side. When you look at asset advice penetration, banking penetration, utilization of our advanced trading tools, in all those cases, we are in the single digits or low double digits. So a lot of opportunity internally as well. And finally, we have a diversified client and asset acquisition model to go after all that opportunity. So I'm going to bring up Stacey, but I hope you have a sense of sort of where my passion comes from, from where I'm sitting, the strength of where we are today, the strength of where we'll be a year from now, and the tremendous opportunity that sits in front of us over the next decade. So let me bring up Stacey to talk about how we're going to go after it all.

Thanks, Jonathan. As you've heard many times already today, the external environment has created some headwinds. And as expected, our new client outcomes have moderated as a result. And yet we continue to perform at pre-pandemic levels. So in 2022, we acquired 1.2 million new clients. Those are clients who entrusted us with their money to help them grow and manage their wealth. And it was the third highest year in terms of new clients that both Ameritrade and Schwab have ever seen. In addition to continuing to acquire a large number of new clients who entrust us with their money, the profile of the clients that we're attracting has been consistent and very attractive. So almost 60% of the new clients that we acquire are under the age of 40. And at the same time, maybe on the other side of the coin, we're seeing a significant increase in the number of new clients who are funding to affluent, defined here as 250K. So we saw a threefold increase in the number of clients who, upon becoming new clients, fund to affluent. There are a couple of data points that we look at to understand the profile of the new clients that we're attracting. I'll point out a couple of them here. The first, you've heard many people already today talk about TOA ratio. When we see more new clients funding with securities than cash, it's a signal to us that we are winning business from competitors because that is already invested money. When we're winning cash, it feels like we are winning new money to market. And we're starting to see an improvement. Of course, in 20 and 21, we saw a lot more cash. Now we're starting to see more funding via TOA. We're also seeing initial funding increase. And that's probably also a function of the fact that it's already invested assets. But we've seen more than 100% increase in initial funding rates. And finally, and this shouldn't surprise any of you, as I'm sure it's similar to your behavior as a consumer, we continue to see an increase in the number of new clients who are opening via mobile or web rather than physically in a branch in person. This success is driven, as you've heard a couple of times already today, by a diversified acquisition strategy that has remained consistent. Similar to an investor's diversified portfolio, each lever in our acquisition strategy serves a different purpose and balances one another. I'll share a little bit more about marketing in a minute here, but it's one of the most significant contributors to our new client outcomes, driving about 40% of our outcomes consistently over time. Whether it's a financial consultant inviting a prospect to a ballgame, or whether it's one of our phone teams picking up the phone and making a welcome call, we know that people are central to our value proposition. And in fact, earlier I referenced that we're seeing an increasing number of new clients opening accounts online, Well, if a new client opens an account in a branch, we see six times the average funding of an account that's opened online. That is, of course, both a function of the type of person who is attracted to walking into a branch, and it is also a function of the relationship and the conversation that the financial consultant can have with the new client. Our relationships with employers introduce Schwab to their participants, which in turn creates affinity so that when those participants have needs beyond their 401k or their stock plan, Schwab can be there to support their financial wellness. And as the workplace business grows, of course, the opportunity for retail grows. And finally, as Jonathan just referenced, core to what we do is delivering an exceptional client experience. And in turn, when we do that, our clients refer us. They talk to their friends about their experiences at Schwab. With the addition of Ameritrade's trading capabilities that you just heard a fair amount about, and also their incredibly robust educational content, each lever in the acquisition strategy becomes stronger. We have more things to talk about in marketing. Our people have more ways to help. We have more things to offer our participants in workplace. And finally, we have more reasons to love us so that they will refer us to their friends. I promised I'd talk a little bit more about marketing, which is a significant contributor to our new client growth. And our approach is central to our success. It starts with very clear design targets, which allows us to be focused not only in our messaging, but also in our media buys. And of course, with the addition of Ameritrade's trading capabilities, we see tremendous opportunity ahead to be a lot louder in terms of our trading capabilities targeting active traders. So just like each lever in our acquisition strategy serves a purpose, so do the channels through which we communicate with prospects and existing clients. And what I'd like to do is use a consumer trend that we're seeing to illustrate how those channels play together. So Jonathan referenced earlier that we're seeing increased engagement in our educational and market insight content. This isn't super surprising given what's been happening in the markets. But we've seen interest in content absolutely triple. So while we do use paid media to amplify our education and our experts' voice, we also focus very much on the experience that you get when you come to Schwab.com. So you come to consume the education, but then it's our responsibility to ensure that you stay engaged by serving up an experience that makes it obvious as to what your next steps should be. We also are expanding our owned channels. Many of you have probably increased your podcast consumption over the past several years, and we want to be where investors are. And so we now have a podcast. Jonathan referenced this earlier as well, where we've seen just incredible interest from prospects and from existing clients. And finally, of course, we use earned media or PR also to amplify our experts' voices. Perhaps more important than how we do what we do, that was what we do, sorry, the channels, is how we do it. And consistent with our challenger heritage, we're continuously disrupting ourselves to figure out how to market and how to market relative to our competitors. So I'd like to spend a minute talking a little bit about how we use measurement, creativity, and innovation to set ourselves apart from the category. So Jonathan referenced our marketing synergies earlier, and with media inflation, it's more critical than ever that every dollar that we spend is as efficient as it can be, and analytics is the way that we achieve that. I'll just touch on a couple of examples here of some of the analytics that we use. The first is relatively new, which is called a multi-touch attribution model. And that enables us to see how all channels, whether they are offline or online, work together to deliver outcomes. The reason why this is so important is that with cookie redaction, most advertisers lost their ability to see the prospect or client journey. And seeing that journey is how we deliver efficiency. So what we've done is created a solution where we have a privacy compliant first party tag. The reason why the cookies went away was a privacy issue. And we are building a model where we will be able to see how touch points from the branch network to Schwab.com to digital advertising work together and contribute to every new client and every dollar that new client brings to us. Our marketing mix optimization model is an econometric model that we use regularly to help us refine our media allocation across channels and also to help us anticipate outcomes. We're constantly improving the model. It has control variables like the number of branches that we have or what's happening in the external environment. And we add predictors of outcomes. For example, this year, we added personal savings rate, which probably is no surprise to you, tends to be a pretty good predictor of our outcomes. We also change our media buy based on what we see from the model. And I referenced earlier podcasts and education. Well, we have recently increased our media spend in audio. and in what we call native, which is where we distribute our education to where investors are seeking to consume education. And like many things at Schwab, our approach to marketing is a little different than the category. We do engage in all of the tried and true channels. They are workhorses for us, but we do it in a way that sets us apart from the competition. So taking advertising as an example, a lot of competitors in our category advertise the category. They advertise financial planning or the benefits of wealth management. We believe that we have to advertise in a way that is tangible and uniquely solves an unmet client need. So recently we launched a campaign called Humans. I referenced earlier that our people are central to everything we do at Schwab. And each video in the Humans campaign demonstrates our shared commitment to serving clients and brings to life a tangible point of differentiation, many of which Jonathan referenced in his presentation earlier. Whether it's our service or our satisfaction guarantee or in the case of Jim Titus, one of our financial consultants, who tells the story about his father's business and how important it was to him to be clear and transparent with his clients about how much they were paying. He talks about why price transparency is important to Schwab and how that informs his approach to his practice. I'm also sure many of you recognize our friend Carl. Carl is our antihero. He is the broker that represents what our competitors cannot do so that we can crisply articulate what we can do. And both humans and Carl consistently test in the top five in the industry in terms of TV advertising. Getting a little jumpy there, sorry. Finally, lots of people have probably been to a golf tournament with a financial services firm. I'm sure you've stood there and watched on the fairway. This is another place where we continually innovate. Let's start with the fact that we named the tournament that we sponsor the Charles Schwab Challenge consistent with our heritage. We wanted to telegraph what it is that we stand for through the tournament. We also imbued the tournament with all kinds of innovations that were driven by both the players' experience and the guests' of the financial consultants' experience, whether it was a moment of silence because the tournament takes place over Memorial Day or the car that everybody loves to talk about. Traditionally, you get a tartan jacket and a trophy when you win a golf tournament. We kitted out a car that stands for something unique at Schwab. that the winner of the tournament receives and drives away with, which has been just tremendous from a media buzz perspective. And finally, our competitors tend to host large events. They tend to focus it on the category. They want to talk about what they do. We do that too, but the way in which we do it more creatively is we tap into clients' passions. So an example of this is that for Schwab investing themes, we are tapping into people's passion for beer, which seems like a rather obvious one, but we have different types of beer that tie to the different themes that enables us to then have a conversation about why you might be interested in renewable energy. This, of course, is just one example, but one that shows tremendous engagement because we're listening to the client. I mentioned earlier some of the innovations that we've done when we see consumer behavior changing or when we see the media landscape changing. I'll start with, we do use traditional channels, but we're also looking for ways to engage with prospects in high engagement categories. You may be surprised to learn that 65%, two-thirds of adults, use some gaming platform. And Jeff Kleintop, our chief global investment strategist, is one of that 65%. So he recently held a session on Twitch with a gamer, the purpose of which was not to equate investing in gaming. The purpose of which was to go to a place where investors are highly engaged and educate them about portfolio diversification, asset allocation, and risk tolerance in a place where their eyes were glued to the screen. It's a great example of how we go to where consumers are. We all run advertising in traditional media. You see it when you open the Wall Street Journal or when you turn on CNBC. But again, we're looking for environments where we know that eyeballs are watching with their full attention. And a really great example of this is holiday movies. So we actually inserted our brand digitally into three holiday movies recently on Hallmark and interestingly found that brand recall was higher from those holiday movies than some traditional advertising. Again, it's our insight that that is a place where people are giving their undivided attention. And finally, last example here, you've all been to a restaurant with a financial services firm. Well, we upped our game, and we wanted to bring to life what is special about our financial consultants. So we hosted a barbecue cook-off in Atlanta and Denver, and each financial consultant had their own special sauce that brought to life what is different about them. And what the financial consultants love about this is it enables them to connect in a very human way by something that marketing can deliver. so what do I want you guys to take away before we get Jonathan back up here for questions what I hope you take away is that even in this difficult external environment we continue to deliver consistent growth and it's because of our consistent acquisition strategy that is diversified so that in any environment each one of the levers works uniquely and finally with the acquisition of Ameritrade our value proposition only gets better and we will of course continue to get better at what we do So, Jonathan, you want to come on up, and we'll take some questions.

So I think we're in the – we've got one already.

We like to stand, so the chairs were removed. Great. Thank you. Mike Cypress from Morgan Stanley. Just a question on the client experience. Where would you say Schwab and the industry is today in terms of the client experience compared to, say – leading industries on that front. And as client expectations are in part being formed from outside of financial services, how might Schwab and the industry close the gap there? And what actions might we see from Schwab over the next year or two on that front?

That's a great question. I think you framed it well. I do think our clients, any one of us as a consumer, our experiences, our expectations are often set by our best experience. Our last great experience that we had often frames our expectation for every future experience. And I think we in the financial services industry take that to heart. Certainly we at Schwab recognize that there's opportunity to continue to get easier to do business with, which is why I focused on it so much. I think what's unique about the financial services space is the depth and breadth of what we offer, the seriousness of what we offer, the regulatory environment around it. So, you know, sometimes some of our best thinkers will come and say, you know, why can't we be like company XYZ? And, you know, often that company might just, you know, a ride share company, they might just do one thing, the same thing for all folks. in a different regulatory world so you know my response to that is we need to be as close to that seamless easy experience as possible but we also need to recognize that we're doing something very different in a much broader way in a much more regulated way so i would say it's a very high priority for us it's a high priority for for rick i know the entire retail leadership team i think we feel like with our singular focus the strength of our people and technology the investments we're making in digital that we deliver and will deliver a great experience, but it's an endless opportunity to do more, for sure.

Hi, I got a question on the marketing because a message has been you know, very clear, and you've had good results. But the $100 million that was cut, and I was just looking at the advertising expense, and you can see it down. So where did that – where was that cut? And I think I have an idea, but just where was it cut, and what do you see? Were there any impacts? And just to follow up, Jonathan, on the bank lending, because Walt did mention that you had an advantage with low-cost deposits and being disruptive. Where are we? Are we fully, you know, are we at eight out of the ten in being aggressive there? Are we still near the three or four, and that's still to come?

We'll go quick. You go quick.

Yeah, I was going to say. So you did hear from Jonathan that the marketing synergy was incredibly significant. However, I believe that it's the power of the combined value propositions that will make every dollar we spend more effective in that we will now be able to speak to both affluent clients who are seeking a wealth manager and to traders or somebody who's simply looking for a place to place a trade. We're also delivering significant efficiency out of every dollar that we spend. So despite the reduction, we continue to see a decreasing CP cost per account, which gives me confidence that we're buying in the appropriate places in the appropriate way and sharing the appropriate messages.

On bank lending, I'd say, so lending is a significant opportunity, significant priority. Growth has been good in both. Historically, mortgage has been a little bit bigger than PAL, obviously in a different market. I think we see a lot of opportunity in PAL over the next couple of years and mortgage as well. But again, that depends a bit on the interest rate environment. Our financial consultants are fully licensed, compensated to talk about lending. Our clients are open to it without question. We market our lending capabilities. It's But the financial consultant is a big part of the channel. So I would say we're all in as it relates to helping our investing clients with the liability side of their balance sheet as much as we can.

Cowboy, KBW. You spoke about the dual registration of the Ameritrade reps, and they're already offering Schwab lending products, for example. Just wondering, as the conversion happens this year, what additional opportunities does that unlock in terms of additional solutions that those reps can sell or clients can get access to that will continue to drive that increase in cross-selling?

Okay, so the ability to offer lending is very new. The brokerage part, the wealth management part has been throughout, well, six months now at least. So both are very new. They do have access to the full suite of capabilities at Schwab. So the short answer is they have access to the full suite now. Having said that, it takes a while to understand the breadth of what we offer on the wealth management side. It takes a while to understand the banking. As Rick mentioned, some of the processes right now, since they're still green financial consultants, they're still supporting the TDA client in a TDA environment. It's not quite as seamless as when they get over to Schwab. So the short answer is they have full access to everything now to talk to their clients about. but I see a lot more leverage over time as they get more familiar with the products, the clients get more familiar, and eventually when they're in a Schwab branch, they're a Schwab employee, their clients are Schwab clients, it's going to be even easier.

Web console. There we go. Number one is we've, over a couple different sections, we've gotten a few questions just about maybe initial reactions from yourself or the broader leadership team around market structure proposals. So maybe if you had any quick commentary on that.

Yeah, let me share a couple of thoughts from where I sit. I'm not the expert, but I think I probably represent the broader view generally. I think, first and foremost, at Schwab, our focus is and has always been about the individual investor and what's best for the individual investor. And as we look at these market structure proposals, we are looking at them, of course, through that lens. It's early. We have provided some commentary and published a white paper earlier. We have more to digest and we'll share more as the process unfolds. But I think the key thing for us is any change that happens, especially significant change in market structure, has to benefit, or at least in our mind, should benefit unambiguously the individual investor. If it does, it would make a lot of sense. We would support it. If it doesn't, obviously we'd have a different opinion. From what we've seen so far, I think we have some questions as to whether it really would benefit the individual investor, especially relative to how we wrote orders today, which we have a lot of pride in around best execution. So I guess we'll have more to say as this unfolds. But, you know, for us, the lens is what's great for the individual investor and also critically important under any scenario that we've seen. I think the Schwab all-weather franchise will thrive. You know, our revenue tied to all these proposals is a very small fraction.

Great. Thank you, Jonathan. One more from Devin Ryan at J&P Securities, and this could be for you or Stacey. Embedded finance is becoming a bigger theme across financial services and meeting clients where they are, as Stacey spoke to. How is Schwab positioned for this and maybe a little more insight into some of the opportunities you see on this front ahead?

Do you want me to start? Sure. Great. I mean, I think central to marketing is being where clients are. I can't expect them to come to us. And I think core to innovation is figuring out where clients are and how we can meet them efficiently. I think a really good example of that is the work that we do with education. So we want to show up where people are curious about investing, whether that is with paid media or with earned media. Of Of course, once they get to Schwab.com, the experience is even more robust, but I can't expect them to start there. So a lot of what we do is think about where are investors, how can we be useful to them in the place that they are, and then how can we be there when they need us. I think the second part of that would be about new channels. I mean, I think about the number of ways in which we have to communicate with investors today, and it's much more expansive than it was even five years ago using, for example, the podcasts, using our digital magazine. There are all kinds of examples of making sure that we're creating content in a way that reaches people where they are as opposed to expecting them to come to us. We're trying to make it simple, as Jonathan referenced.

Yeah, I think I would agree. We will go to where the clients are, and at the same time, often investing involves a multifaceted conversation, tools, relationships, and a lot of cases that eventually leads to coming in a branch or a full Schwab.com experience. But we'll go out to them where they are, and that's all tied to ease. So I think we're at time. I think I'm bringing up our friend and colleague, Bernie.

our bias towards action when we all stand up about 15 minutes before we're supposed to be up here and lean against the wall and do circles and we just like to be on the move and it's a little hard standing still anymore but great to be here I think Rich said it well in one of the breaks you know this is often about what's up here but it's more about what's down there when we're having conversations. And I hope to be able to turn this conversation around some of our performance in advisor services and with independent advisors into a conversation. So get your questions ready. There's a lot going on. And certainly the one thing that's very, very consistent in this space is the success of it. Everything else seems to be changing. Very much an evolving landscape. But, and it didn't occur to me when I first asked for this, everybody likes to talk about what we are and who we are and print articles and talk about that we're not there for something or we are there for something else. And so we thought it was really, really important as we were about to welcome in all of these new TD advisors that we told them who we are. And so I said to Tracy, who helped me with this presentation, I said, let's start with the pledge that we put out there. What didn't occur to me at that point in time, and I was so happy we started with the pledge, was the fact that when I launched the pledge, it was with all of you in February of 2020. And that just, when I was sitting there thinking to myself, I said, that must have been when we first put the pledge out. So it was apropos, and the three years that were mentioned since we've been together living in this place, the little box that we look at on our screen. But I want to remind everybody, we have a pledge out to advisors, and it's so critically important because these are businesses. These are people who entrust their franchise to us as the custodian, and they don't know us, some 7,000 or 8,000 of them that are coming over. And maybe they've read some of the articles or been told some of the stories about who we are, and that was the whole purpose of the pledge. What are we going to do now that we've taken this pledge? large share of the marketplace, and how are we going to help them continue to grow their franchises? So most importantly, we are there for every advisor that's serious about being in business. We're not there for clubs and people who are just sort of kicking the tires or maybe have some powers of attorney on accounts. But if you're serious, we want to be in business with you. My job has never been to tell you when you're successful or what size you're at when you're successful. So we have a lot of small firms. In fact, 80% of our firms are under $200 million. And we have far more small firms at Schwab before we even engaged ourselves with TD Ameritrade. That's important to remember. So there's no asset under under management minimum. We have there's no custodial fees and we don't plan on putting custodial fees in starting to hear through the industry about custodial fees as the economics get more challenged. And for some of those who don't have the opportunities that we have that don't have a bank, don't have the breadth of services and don't have the scale to They're starting to talk more about having asset management fees or custody fees. We have and will not have those. And we have no intention to introduce a minimum. I want to say this very clearly. Nor do we have any intention of putting in a custody fee for advisors. Best-in-class technologies. Christian asked me the question when we started, so he said, did you just embrace all of the TD technology? I think there was a belief out there that TD had a superior technology to what Schwab had, and I think in some cases it was true and in some cases it wasn't. So you'll hear me talk more about this, but we took a look at both platforms. independently and honestly, and tried to make sure we kept the best of both of what we were seeing. And we kicked the tires on all the APIs, and we'll talk more about that, in making sure we could bring the services to advisors that they really needed. The best and brightest service professionals, I'm going to lay claim, because I've been in this business for a long time now at Schwab. We have the best people. We have always known that this is a relationship business. That never eluded us for a moment. And making sure that we hired the best, retained the best, and kept them in seat as long as we could before we had to promote them into even more broader roles to pursue their careers. We've been good at doing that. And technology is an augmenter, really, of those people and the deep relationship. After all, advisors are in the relationship business, and they expect us to be in the relationship business with them. Practice management. We started this a decade ago, critically important, making sure that we're helping clients to grow their businesses. That's how we grow. Most of our growth is organic, as you can see from the numbers. And so making sure that we're out there helping them to think about their futures, thinking about their successors, thinking about how they create firms that are multigenerational has long been part of what we're doing. And I'm pleased to say that many of our TD colleagues now, as they've joined us, or recognizing, hey, that platform, we thought we had that as well. Yours is a little better. You've got a little more than we had. And so it's all become additive. And then we talked about an account opening process that would be digital. The good news about this line item is it's not what I really am going to talk about further into this conversation. This was about making sure people understood we're not going to make you get wet signatures when we do this transition. This was about the ease of coming over that you've heard Joe talk a lot about. You've heard Jonathan talk about. which is a process that is well underway with advisors. That's what we meant by saying a digital process. I'm going to talk to you about a digital process we've now created for all the business that clients are winning and how successful it's going to be in the industry and it's going to revolutionize how you bring a new client to the firm and how easy we can make that for you to do it. I do want to stress that point, though, about as you talk about the transition, I'm not going to spend a long time on the integration. It is important to recognize that because these are businesses, our integration with advisors started two years ago when we first announced this. Advisors, we shut down the idea of having new advisors join the Ameritrade platform. They could put new accounts on the Ameritrade platform, but every new advisor at that point in time joined the Schwab platform. And so we're well underway in the process of transitioning those over. So let's talk about the change in the industry. It's getting dramatic. And you can see the success we've had. As I said, that's the one thing that's been there consistently. A 13 CAGR. I think I used to talk to you three years ago and through our virtual updates, we used to talk a lot more about a 10 CAGR. Certainly, this has been a successful industry. It's drawing assets away. Jonathan mentioned some statistics about the retail markets. We at Schwab all feel the same way. The assets, our growth is out there. It's not even necessarily with competitors. We have a small fraction of what is a very, very successful marketplace, and we are going to continue to exploit that in every way that we can. And as I think about what's going on in the marketplace and the growth that we've seen and the CAGR that we're enjoying, I think about everything that's happening from within that marketplace. M&A. You could argue, and I do often with our industry colleagues, there's a lot of M&A. where there's not really very much M&A at all. The truth is we did about 300 deals last year, up about 5% from the year before, which is dramatically up from the year before that. But deals are happening constantly. Firms are coming together, and they're coming together to grow. I think that's the important aspect of it. The M&A is being done because firms are seeing opportunities to merge together, to create more centralized services, to build scale, which is also important to advisors. Certainly, fees are not going up for anybody, including advisors. And hence, we have to make sure that we can cover more assets with similar cost structures. And they're starting to get that idea as well. And as we continue to move forward in creating those opportunities for advisors, they will continue to bring more assets in. And the M&A that's happening within advisory firms is going to create more success within those firms. The concept, you'll hear us talk about this a lot going forward. The concept as rep, as portfolio manager, is starting to change. Centralized services used to be done around operational functions. It's going to be a lot more, I think, about sort of the strategic and the more important relationship functions that are within a firm. as we go forward. So we'll keep an eye on that and we'll keep updating you on where we think that's going and the opportunities that we have. There's also a lot of capital coming into the space. It's been recognized as a successful place. Why wouldn't capital want to be here? You're seeing some of the likes of CI Financial coming in and acquiring firms en masse and with an intent to build those centralized services and scale. They've taken a lot of like firms and trying to create a capability there and doing it with advisors at the helm You know, sometimes this is a retirement strategy. Quite often what it is is trying to create that multigenerational firm I talked about before. So you have two types of M&A there. You have money coming in, third parties acquiring in a successful way, I may say, and then you have advisors acquiring advisors. The thing that still eludes me, I've said this to you before, is I thought the M&A would focus itself more at the lower end of the market because of the complexities of regulation, the cost of operations, the ability to scale or the inability to scale of smaller firms, and it hasn't. M&A has really resided in the billion-dollar space mostly, large successful firms coming together with other large successful firms. So we have to keep an eye on that and continue to monitor how that's going to change the landscape of what's going on. The target always being taking more assets away from the traditional models. That's the most important thing that can happen here. So as we continue to talk about the change that's happening, no one in this industry is staying in their lane. Everybody's looking to get involved in some other aspect of the business. Much of that, I think, has to do with chasing different revenue streams and opportunities. Some of it has to do with reaction to legislation and regulation or proposed legislation and regulation and trying to grab a spot there. We're seeing a lot of consolidation of providers. It's never been easier to go independent, and much of that is because FinTech arrived on the scene in a big, big way. Providers arrived on the scene in a product-type way. And the open architecture nature of the independent space is really what's been driving its success. I may add that we are part of that open architecture in every particular case. Our capabilities sit right on the shelf along with others, but the independence is what is so critically important to advisors, and we have to make sure that we're maintaining that. I think about what's going on with some of the providers like InvestNet announcing they're going to be in the custody business. I found that quite interesting. It's really hard to be in the custody business. I can attest to that. I remember when a competitor many years ago announced in November they were going to be in the custody business with advisors by February. I didn't laugh because we are paranoid and we take everything quite seriously, but I knew that was impossible to build a platform of that magnitude. And I think to myself, why would an investment think they want to be in the custody business? And then I start to think, well, proposed regulation and legislation around outsourcing and what that could potentially mean. Interesting possibility. Goldman talked about wanting to be in the custody business. I'm not so sure they're there any longer. This is a business you need to love in order to stay with it. I say that to Walt all the time. Can we love a business that's a 9-bit business, you know, 9-bit net? And we are, and we do, but it is a hard business, and it's a business that's taken us two decades to build in making sure that we could get all the capabilities that advisors want. I wouldn't quite say it's bespoke. But our job is making sure when an advisor has a need, that we can fulfill on that need. You've probably seen us go out, make a couple of passive investments. One passive, one actually more of an ownership investment, or investment in Dynasty. I think some of you may be curious about that. Dynasty is one of those solutions that exist in the marketplace that help to bring assets away from the more traditional models. Not to demonize those models, but that's our job. trying to get more people interested in the independent space. And Dynasty has done a fantastic job in doing that. They have 25 of their firms on our platform as custodian, and we've created a fabulous partnership along with them. And there's others in the industry. But they asked us, would we like to be part of it? Absolutely we wanted to be part of it. And so we made a... nominal capital commitment to them in a passive kind of way because they're helping the industry grow. And who knows? Will we do more of those? Perhaps. But it will have to be under that same kind of criteria as we think about it. Another deal we did recently was Family Wealth Alliance. In fact, just a couple of weeks ago, some of you asked me about that. We've become much, much bigger in the family office space. We now have 80 family offices that we covered through our model, 60 people dedicated to that. It's a really important space. Clients have more than doubled their size of accounts, affluency, certainly driving up the change. And it's our job to make sure that we're creating capabilities that make sense for our family offices. many of which are multifamily offices, which were our clients already. And we had capabilities, but branding it has made a real difference. And getting something like a family wealth advisor that's been around since 2003 – with credibility, covering 25,000 families, $450 billion in assets, not all on our platform either, which is kind of neat. And a guy like Tom Livergood, who created it that long ago and we've been working with for the last decade as well, I think is going to be very, very positive for us in continuing to penetrate that market from multifamily and into the single-family offices, getting exposure to those people. I opened by talking about the community and how important the community of people can be. Well, when you deal with family offices, and many of you I know know this, The value of them is coming together more than anything. Often their needs are economic, financial, but often not. Security, travel, capabilities, services around the world. That's what they want to talk to other family offices about. And we then have the ability to bring them to bear in those conversations. And that's certainly going to make a big difference for us in penetrating those markets. So we're quite excited about being able to do more of that together. And we'll look for those opportunities. These are not big M&A deals. They're additive to what we're doing. And if you look at FWA, Family Wealth Alliance, they look an awful lot like our consulting offer. So why not go out and get something that's in place and running and get into this place right away and sit it aside, the consultative services that we've built over the past decade for premium firms and other firms throughout our network to make sure we continue to help them grow. So lots going on in that space. As we talk about the growth of the industry, one thing I would highlight to you, 15 straight quarters of 2 to 1 TOA ratios of assets coming away from others. That's a critically important dynamic that we have to continue to watch. Bringing assets in. bringing in share of market, winning against our competitors. I would say our number one advantage right now in the marketplace is capability. But most importantly, it's focus and consistency. We're in this business. Lots of other people say they want to be in the business. Lots of other people were in the business. Some other people are saying they're still in the business. I don't see the evidence of all of it. I see us with the assets that you can see on the right-hand side, half the firm's assets in this business, a third of the revenue. This is really important business to Charles Schwab, and we're never going to forget that. I see lots of people smartly saying, 13 Kager, very successful place, lots of P&E and capital coming into it. I want to be in that business. But can they get there? Do they really want to be there? Can they stay there, get there, stay there, and be there through a lot of different economic climates? We can't. We've got that scale, that earlier question from Christian. We clearly have that scale in this space. In fact, you can believe these numbers or not believe these numbers. They're all kind of bantered about. But Cerulli talks about there being like 16,000 or 18,000 advisors. Conservatively... I will tell you that we are doing business with 85% of those advisors. Not always as the primary, but we have some form of business with 85% of advisors in the industry. And that's significant. And our aspiration is always to be the primary in every one of those relationships. So we'll keep stressing forward on all of those. Deal size. I often talk about the deal size coming to us. It's growing exponentially. Firms are larger when they come into independence, but they're smaller as well. It's easier to be in independence, so we often see them come. Another sort of fun fact aside that that we're seeing is there are twice as many transactions happening today than happened two years ago of $10 million or more. generational wealth transfer is moving forward, and it's moving forward at a very rapid pace. So if you think about our advisors being the same age as our clients, our clients are starting to pass their wealth on to that next generation, which is further stressing, I think, the industry to update itself and to make sure they're current for those next generation of assets. Sometimes they're going to a single individual. Often they're being fragmented. Advisors are going to have to evolve. And because of that, We're also seeing the emergence of strategic firms in the industry, firms that come together. I can mention a few, but you can think about Hightower and Focus Financial, firms that are very aggressive at trying to make sure their capabilities are staying current with the markets so they can continue to grow. And when I say their capabilities, usually it's an agglomeration of advisors and their capabilities. Let's be honest. As the market moves quickly and evolves quickly, It's not serving anybody well to be standing alone and not taking advantage of a great custodian and the evolution of the business, or perhaps taking advantage of an enterprise firm that's in the consolidation business, a mariner. The list is long as you go through. In fact, when we talk about deal flow, there's often 10 or 12 things. Firms bidding for businesses in the marketplace. There's no shortage of demand and capability. And then you think about the other side of the marketplace, the independents or the IBDs. They're here to stay. They've had some success. LPL talks about taking yet another run at this space. I think they've had great success in building models that help to retain the assets they've had. But can they attract assets? I think that's probably a question that remains. The regionals, Raymond James, they're out there. We still don't see a lot of success against the independent model. But they're trying. And so add them to the list of others who say they want to be in this space. They want to be in the independent space. And remember, you can always move to fee. That's probably the step one of moving into independence as a custodian. Gets really, really hard when you start talking about open architecture product. And you start giving up that revenue flow that comes with your captive product, your IPOs, and your capital markets. And so I think you're going to see this only go so far that competition can come. We did $30 billion in net new assets in our new-to-industry assets. $18 billion of those came from wirehouses. So we're still continuing to see the success that comes along with that. And wirehouses are, again, waffling just a tiny bit on competition. Am I going to buy revenue flow? Am I going to rent revenue flow? Shouldn't I? Am I going to trade teams with other teams? And while they're doing that, good firms, large firms, in some cases firms with tens of billions of dollars, are just coming out into independence saying, I'm not playing that game anymore. I'm going to go out and I'm going to create a legacy here. I'm going to create a firm where I have terminal value in it that I can trade. I'm going to build a firm that can work for the people and the clients that I have. So we'll continue to see some of that growth. But with that, there's another challenge. When I talk to advisors, they always talk to me about technology and talent being their two number one concerns, and they should. So we're heavily, heavily invested. I think we've put $18 million since 2007 into university CFP programs and university grants. Not grants that necessarily get our name on the door anywhere, but programs that are starting to bring help and capability into the marketplace. Programs that are designed to make sure that their diversity of talent is getting better, whether it's ethnicity, gender, sex, it is so important that we continue to move this industry to a place that represents the clients. And we've kind of been stuck, again, in most of the industry being post-55, a lot of white male, not necessarily the demographic of the client base any longer. And so we're working hard at making sure that we're driving success into the universities at an early age and trying to create more opportunities in the Historically black universities, certainly other opportunities. The goal, if you look at this right now, the goal here, as I said to the team, is to try and get every state to have a blue that we can bring in. I remember when it was odd for us many years ago. to have students at our impact events. Some of you noticed them there. There would be 10 or so wandering around. They'd be wearing school shirts. We now have 100 every year who come. And not only that, more importantly, everybody else at their conference started bringing students as well. Do you know, if the industry continues on this trajectory, We're going to need to hire 70,000 more people in the next five years. 70,000. Where are they going to come from? How are we possibly going to do that unless we promote this at a very, very early part of people's career development? We're building a firm of the future while delivering on promises to clients. Enhancing our controls, critically important. This conversation we had a little bit earlier, Michael and I were having this. At the end of the day, when you think about it, We're a $3.4, $3.5 trillion franchise for advisors. We can't take risks with that. Not because we can't, as the firm Charles Schwab, which, of course, we want to be very careful with. But our clients tell us, don't be a page one headline. We can't afford to take that. We tell our clients their assets are safe with you. And so we have to have the right controls in place. We have to have the best of both as we bring these two teams together. And I will tell you, we did it with the people. We had lots of replacements, lots of people where we took our TD partners and replaced some of our. Schwab partners, and then we have to do it on technologies as well. APIs are something that frequently comes to mind. We have 190 now. They're not all what were the TD APIs. They're not all what were the Schwab APIs. They're a combination of what we deem to be the absolute best APIs. And we have a sandbox for those who want to come along and maybe try some stuff out with us. But we're not going to put that sandbox into production and jeopardize our clients. I promise you that. New launches, T. Rowe Price, Institutional Transaction Fund, very important. That's been waiting for some time. DocuSign 2.0. Something that TD had that was really, really good, and the clients like it. We had to meet them with that one. We think we have a better solution coming through e-signature, but at the same time, we had to meet them now to make sure that they could continue to do their business. And, of course, digital onboarding, as I keep talking about that, so, so important. As we complete really the whole process, Integration sits top of mind for all of our strategies going forward. Digital adoption, our culture, our people, efficiency, wealth management solutions, and lending capabilities. Two things I'll highlight there. The digital adoption, we've created something called Start. It is a digital onboarding process for advisors. As I said to you at the beginning, it's going to revolutionize, and I think it's going to bring a lot more business directly to Schwab because it's going to be ease of doing business. It's going to make such a big difference in transitioning assets at such a very critical time. And lending. I know Rick, Jonathan, everybody covered this. Pledged asset lending, so important to advisors right now. We're starting to get our legs under us there. We'll continue down that path. I think originations are going to be right there. And then business lending has to be on the horizon, right? A premier bank that can really serve these institutional firms. And as always, you know, I will highlight to you, and this is just a fun story. I show this slide all the time. We do this all through our clients' eyes. We do this all with our clients. These are all clients in our advertising. You should see the glee on TD Ameritrade advisors when they pop up in a commercial. It's like seven years ago when we first started doing it with the Schwab advisors. They love seeing their face up there on banners in commercials, and they've been coveting this opportunity for quite some time. So quite proud to see the firm coming together. As always, I've got too much to say and too little time. Let's go to some questions.

Hi, thanks. Ben Budish from Barclays. You talked a little bit about generational wealth transfer. I was wondering if you could talk about maybe like attrition and also win rates when those sort of transfers are happening. I think it's kind of understood that that's sort of an opportune time for maybe the next generation to make a change. To what extent are you guys winning there versus seeing people potentially leave?

What we see, and obviously we win and we lose through our advisors, advisors are adept at getting involved with families way downstream. And so they're keeping the assets, but what they need to do is they need to be building models within their offices that serve those assets in a slightly different way than they might have served the parents' assets, right? I think virtual, I think this is one of those silver linings of COVID. I think we've learned a lot through all of that. I think they have an opportunity to create different portfolios for this group, you know, Asset accumulation versus deaccumulation, if you will, is something that they're all starting to focus an awful lot more on. And I think M&A is going to play a little bit of a role in here, too, in creating some more of those centralized services. Some firms are using junior partners and assigning them to the books of these smaller clients as well.

Hey, Verity. On the institutional space, you are an institution as well. I've been around for a while. But I guess one thing is on this no load, I think... We don't need to know the economics. Probably Peter will cover that. But in this last earn, we see a jump up. It looked like the no-load funds weighed down on the mutual fund one source fee. So could you just give us the strategic sort of the color behind that, and I'm sure we can ask Peter more of the financial, hardcore financial.

Well, advisors are continuing to rotate in their performance portfolios and thinking about the markets differently. One of the things behind the no-load and something we should be talking about is their movement into alternatives, which has been quite prolific recently, using things like iCapital, so important, case management, just two examples of third-party platforms we have in that open architecture environment I mentioned. Clients don't want to pay transactions, and yet there's pressure on economics across the board. And so I think no loads are coming into it. The SEC has entered into it. Best-in-class share is something that they're looking deeply into. And so I think you're seeing advisors now really revisit that, along with the fact that they're coming to realize that the idea is rep as the portfolio manager is something they need to move away from. That's going to be gradual, and it's going to take some time. But I think we're going to see more of that migration. And I think there's space there for us and other third parties in overlay-type management. You know, I didn't mention iRebalance ThinkPipes when I was going through some of those best of both worlds, but I think our model marketplace is going to play a very big role in the future as well, our combined TD and Schwab. I keep pointing, but it matters who they give it to.

Brian, it'll get there eventually, I promise. Just a two-parter, Bernie, on the competitive landscape. Are you seeing any evidence that the RIA consolidators are becoming less aggressive given higher rates and a growing interest burden? And you didn't really touch on what you're seeing from your larger RIA peers. Pershing is announcing this big launch with PershingX. I was hoping you can give some perspective since it does appear that they're making some pretty meaningful investments to help accelerate growth within the RIA channel. That's

Rich has highlighted I've been around a while, so I can only do two-part questions. There could be no three-part questions. But, yeah, no, I'm shocked by the interest that continues at very, very high multiples. I'm not sure that advisors, they're a bit of an altruistic bunch. I'm not sure the multiples are what are moving them. but they are high, and there are multiple bidders. So that continues. And I do think that firms are going to have to, in some way, change to that or find opportunity. And we're helping some of those consolidators to find opportunities and how they can build those businesses after to create some better economic, if that's what they're after. But I do think the centralization of capabilities is what's going to be important in the future. But I don't see the flow going away.

And bridging? Bridging, yeah.

You know, I almost hate answering that question because it always sounds like I'm a homer. But at the end of the day, you know, Pershing X, it feels to me, so I'll give you Bernie's opinions, right? It feels to me, which is dangerous, and I'm about to get run off the stage. But at the end of the day, Pershing feels like they're trying to move towards a fintech. And Fidelity feels like they're trying to go back to their DNA of being a fund company. Everything is distribution. So that's how I look at our two competitors. Still fierce, still with great capability. I could probably tell you more about Pershing than I can about Fidelity because they hide behind that cloak of secrecy of not being public. But I will tell you that when it comes down to capability, We will not be outdone when it comes down to longevity in the marketplace. We will not be outdone. And I think we may find ourselves doing business with Pershing X, and that's just fine. As long as we're the primary custodian and we're in the driver's seat, we can do that until we have a capability that's superior.

All right, here we go, Bernie. So in the industry slide, you talked about being roughly, or the numbers suggest roughly 45% of the industry, the RIA industry. So that's an awesome achievement. I'm curious, the footnote looks like it suggested and included hybrid RIAs. So is that just their fee-based portion, or is there a portion of that market that you wouldn't have access to? And as you become larger and a bigger portion, How do you continue to keep the growth going and not become kind of a victim of your own success, if you will?

Well, the growth is still coming from outside of the space. So it's not an internal competitive space, right? We have about a third of our clients that we call hybrids. I think the hybrid assets are excluded from that number, but it's reasonably de minimis. When someone comes to us, typically what they're trying to do is grow themselves out of that revenue stream, and they're quite successful at doing it. I just sat with a very large consolidator. I had this conversation the other day. from the Midwest, and they're looking at the opportunities of how fast they can remove themselves, because they can't be truly a fiduciary as long as they're hanging on to that commission space, right? And they have to keep the licensing, and there's all sorts of stuff that comes along with that. So I think that's a de minimis amount. I think the amount of assets that make the most sense are probably the $8 trillion to $10 trillion that sits in the wires. And we see a lot of advisors who are in the independent broker-dealer space who are finding themselves to what looks more like an 80-20. Indirectly, I would tell you some of these models that they're trying to hold assets onto in the IBDs are actually helping us because they're forcing advisors to the fee space, and then it's just a small across the street to us or independents in general. I shouldn't say us, but to independents in general once they get the fee. And if they have a little residual commission business, it can always be handled through a – there's a preponderance of independent broker-dealers that can do that. I think I'm out of time. No questions? Awesome. So now I get the pleasure of introducing my friend and colleague who I said before, too, if I forget to introduce you, please just come up. Nisha Hathi. Nisha Hathi, many of you remember, had a cup of coffee with Advisor Services for a decade. So she's been a key part of ours. She runs Wealth and Advice Solutions now, and she looks after everything in the firm having to do with that and certainly is going to be a big aid to advisors as well on a going forward basis.

Awesome. Thank you, Bernie. Thank you, Bernie. And it's great to be here with all of you today. I know I'm the last thing between you and lunch, so I will keep it moving as I as I go forward. I think the last time I had the opportunity to spend time with you, I was in a different seat. I was our chief digital officer. And so you might see a little bit of my digital roots, not to mention my advisor services roots come through. But I want to share today what I'm really excited about, which is actually leading our newest enterprise at Schwab, which is called Wealth and Advice Solutions. And what I'm going to do is try to accomplish three things. First, I want to give you a little bit of a lay of the land. So what are all the capabilities that we have in this area around wealth and advice solutions? And you've heard a lot about this opportunity around wealth management today. So I want to bring some of that to life. Secondly, I want to talk about the actual opportunity. And when you look at that opportunity through our eyes, given the growth of these businesses that you've been hearing about all day, we really think that opportunity is tremendous. So a really great opportunity that we believe we're very well positioned to pursue. And then finally, I'm going to talk a little bit about what are those priorities. So how are we actually going to go and pursue this opportunity and accelerate our growth in this area? So let's dive in. So as I promised, I wanted to start with the lay of the land. And the first thing I would start with is that in that one Schwab spirit that Walt talked about this morning is that our goal here is really to serve all of the clients at Schwab when we think about the wealth and advice solutions that we bring to market. So that includes our retail investors, of course, as well as our registered independent advisors. And to a lesser extent, at least for now, our employers and the employees or the participants that work with those employers as well. There are three kind of major components to what we offer in this space. So, of course, the investment solutions. So think about this as the building blocks of the portfolio, right? ETFs, mutual funds, separately managed accounts, alternatives. And, of course, we have lots of third-party asset managers that we work with there, as well as, of course, the proprietary offers that we have and many that we've acquired over the last few years as well. Then in the middle of the page, you see manage investing portfolio solutions. So these are not the building blocks, but these are the more holistic portfolio solutions that we offer. Here you have our flagship offer, our Schwab Wealth Advisory that you heard a little bit about earlier today, but also the great program that we have with our RIA clients, our Schwab Advisor Network, where we work with over 130 RIAs. across the country and work with them to refer clients who are a better fit for a high-touch, customized offer like what's offered through those RIAs. And then, of course, offers like Schwab Intelligent Portfolios, our robo-advice software, or Schwab Intelligent Portfolios Premium, where we offer human access to a certified CFP, a certified financial planner, as well as digital advice. So really a robust set of solutions that we have when it comes to managed solutions, so those portfolio solutions. And then when you get to the right side of the page, what you see are our experts, our specialty teams. So along with, of course, the building blocks and those portfolio solutions, we have a lot of experts in the house. And these are certified financial planners, folks that specialize in tax, trust, and estates, equity awards, all the various components that you would imagine. I think of these as the wealth management services that wrap around the portfolio. But a key part of the value proposition when you think about a client is who's looking for help, guidance, and advice as to how to get to better outcomes. And when you bring all this together, it's a significant driver of our revenue. Over $4 billion of our revenue come from the offers and solutions that you see on this page. So the really wonderful thing is that as you can see this big, broad, robust set of capabilities that we already have in the house, our goal is to deliver those capabilities to our clients. And what we know is that when a client engages with us, when they take advice from us, when they engage with us on a financial plan, we have happier clients. And the reason we have happier clients is because they have the confidence, they get the support, they get the guidance that they need to get to their financial outcomes. And the left side of this slide kind of illuminates some of that. So if we think about financial planning, and you heard Jonathan talk a little bit about the financial plans that we deliver. Financial planning is a key component, we think one of the first steps for a lot of investors. When an investor engages with a financial plan and does a financial plan with us, not only are they more confident, but we see 12 times the NNA of a typical retail client. If you think about our offers, Walt talked about this this morning a little bit, managed investing. When a client actually is paying us a fee for advice, they are more likely to have a higher CPS score. Actually, on average, an offer like Schwab Wealth Advisory has a CPS score about 10 points higher than the average retail client. Average retail client, by the way, has an incredible CPS score if you think about the industry out there. But our managed clients are even more excited about being at Schwab, more likely to refer, and more loyal. And loyalty is actually what the third point talks about, which is in that Schwab Wealth Advisory offer, when a client actually enrolls in that offer, they're much more likely to be retained at Schwab and actually stay in that offer. So they're having a great experience and bringing more of their assets to the offer and referring that offer to their friends and family. And then finally, at the bottom of that column, you see even when it comes to digital advice. And you think of digital advice, especially over the last few years, as perhaps a more transactional client, perhaps a client that's really still kind of tiptoeing into advice. When we ask our clients how they feel about Schwab Intelligent Portfolios, we again see a very high satisfaction rate. We know that clients, again, sometimes what they need is actually digital advice. Sometimes what they need is a consultation with a certified financial planner. And I think one of the real assets that we have is we have all these capabilities in the house, and we're free to deliver the advice and the guidance that they need in lots of different forms, not necessarily the traditional, you have to have it all this way. At Schwab, you can have it the way that the client really needs, and it really does vary depending on the asset size, their personal needs, where they are in their life trajectory. So when clients engage with us when it comes to advice and guidance, we have happier clients. When we have happier clients, the great thing is we actually drive revenue for Schwab. And what you can see if you look at the charts on the right side is that the advice solutions, the dark blue part of that bar chart, you can see is growing at a faster rate. Those are those solutions in the middle of the slide that I showed you previously. Those managed solutions, when a client is paying us a fee, is actually the higher rate. growth area of our AMAF revenue. And also, as you can see by that, revenue on client assets, an attractive economic. So better, happier clients means stronger growth for Schwab as well. So as you can see, it's already a robust business. But what I really get excited about is talking about the opportunity because this is a growing opportunity and probably not surprising. As the information out there, as investors are hearing all this information about how they should live their financial lives, what good advice looks like, what they should be doing with their portfolio, more and more investors are looking for help and guidance. And actually, I think Rick talks about it as a bull market for advice. What you can see on the left side of this chart, and by the way, this is Cerulli data, is that more and more investors, no matter what their segment is, so whether they're self-directed or more advice-seeking, you can see that that's up and to the right. They're more and more often looking for advice. And at this point, across the industry, 61% of investors are saying that they're willing to pay for advice, not just looking for it. They're willing to pay for advice. So what we look at is we say, well, that's a great opportunity across the industry, but what about our clients? How do our clients feel? Well, when you look at the right side of the slide, we see a really great opportunity. So when we ask our own clients, our Schwab clients, and say, would you be willing to pay for advice? We actually do this in an investor profile survey that we do regularly. Are you willing to pay for advice? 37% of our own Schwab clients are willing to pay us for advice. And by the way, the dark blue bar chart shows you that only 11% of those households actually do pay us for advice. So we have a real opportunity here where we have clients who are saying that they want advice and only 11% that are actually paying us for advice. And actually, we talked a little bit earlier, there was a great question in the audience here around Ameritrade clients and are they more trading oriented and would they be willing to pay for advice or how are all these wealth management solutions going to resonate with them? When you ask that same question, would you be willing to pay for advice, you actually get a number not much lower than what we see from the Schwab blue side. 31% of Ameritrade clients are willing to pay for advice, and only 2% are currently paying for advice. Now, not really that surprising if you think about Ameritrade's focus was not necessarily in wealth management, some of the capabilities that they had, but when you think about the opportunity as you bring them into the Schwab universe, it's really tremendous. The other thing I would point out is that we know that likely those 31%, they're actually getting that advice somewhere else. We talked earlier about the share of wallet opportunity. So not only is this an opportunity to engage them in advice, provide them that great experience, but also consolidate those assets that are probably being served somewhere else. So that's a little bit about the retail opportunity. But we also see opportunity on the advisor side as well as with employers. And let me start with the advisor space. Bernie alluded to this a little bit. And, you know, if you think about the RIAs out there, many of them for many years have been looking to outsource more of their back office. So there's been a trend over time outsourcing the technology, maybe portfolio management, performance reporting, some of those things that they saw as administrative opportunities. But for many years, they were somewhat reluctant to think about outsourcing what they would call maybe their secret sauce, investment selection, portfolio construction. That was something that they wanted to keep closer to home. But what's happened over the last years is actually a change in that dynamic, as advisors are realizing that their core value proposition is not necessarily investment. in that part of the value proposition. It actually is more about the relationship and all of those wealth services that they can provide outside the portfolio management. There's an increasing trend for advisors to outsource investment management and investment selection portfolio construction. And what that means for a provider like Schwab is there's an opportunity for us to leverage all the great platform that we have, as well as this great capability around asset management wealth solutions to actually bring those things together so we can actually help serve more of those advisor needs as they continue to move forward on this trend towards outsourcing. On the right side of the page, what you see is the opportunity in the workplace environment. As we talked about a little bit earlier, workplace is an opportunity where we have more and more employers out there who are looking to serve their employees in a broader way. So think about what the pandemic did You think about a lot of employers wanting to help their employees not only with their physical health, but also with their financial health. And so when you talk to sponsors, employers today, one of their number one areas of focus is financial wellness. This is quite different than it was many years ago. But what that results in is employers are more and more looking for providers to provide more help and guidance to their employees. That could look like a financial plan. That could look like a portfolio. But it is a higher level of service than just managing the portfolio. And this demand is actually not only coming from the employers, but actually the employees themselves. So if you look at the top of this right side, you see that there's demand growing because it is their primary relationship, right? For many people, their 401k is their primary service provider. Their primary relationship in financial services is with that 401k provider. And so they're looking for more help and guidance, and often they're looking for more personalization, too. So as you can see, we look at this wealth and advice opportunity very broadly. There's a great opportunity with retail clients. We have a great opportunity with RIAs, as well as with employers and the participants. And what I think is really exciting is that we are really well positioned for this. If you think about what a person looks for in a financial services institution and what Schwab stands for, what we're good at, where our competitive advantages lie, there's a really good match. First of all, trust. Schwab has been recognized as one of the most trusted brands in the industry. And when you think about advice, yes, you want to have a trusted relationship with your financial services provider. But if you're going to take advice from them, that's an elevated level of trust that you're going to need to have. And so our position here as a trusted provider is really important. secondly this combination of digital and human and i think this is a really interesting area of focus because more and more investors sometimes driven by the pandemic but it was a trend that was happening already are seeing the value of both the power of both and i think we've talked about this quite a bit but when it comes to areas of wealth management i think we're really just scratching the surface when you integrate the expertise of humans and bring technology to the back end of that and digital experiences to the front end of that, I think we can do some really powerful things. And no firm is better positioned to do that given our strengths than Schwab. The third, I would say, is value. And I think this is something we all know that Schwab stands for value. This is one of our core competencies, and this is something that we really believe is a principle when it comes to what we deliver to investors and advisors. But if you talk to investors about why don't they get professional advice. So for the investors that are not getting professional advice, the number one reason is I feel confident in my decisions. Well, great. If they feel confident in their decisions, great. Schwab's a great place for them. But the number two reason is fees and costs. And so we know that there's a population of investors that are out there that want advice, that see the need for it, but are maybe turned off by the fact that they're not sure if the fees are going to justify the value that they get. And that is something that we have an incredible strength in doing. And then finally, the one-stop shop. And I kind of look at this in two ways. One is that we know that there's a growing population of investors that are looking for their, you know, their investing, their wealth, their banking all to be in one place. And by the way, this is not only younger investors. We see that same trend in higher net worth individuals. But I think the other part of this is something that Stacey was talking about earlier when we talk about newer investors. Because what Schwab can do is actually be with an investor throughout their life journey. A lot of firms are going to want to come in and talk to an investor once they're a high net worth investor. And what we have the opportunity to do is actually work with an investor throughout that life journey. When they're a self-directed trader, maybe they don't have a lot of assets, but then they're thinking about stepping into advice, thinking about maybe a non-discretionary solution. We can be with them across that journey. And I think that's a real powerful differentiator and helps us stand apart. So what are we gonna do? So how are we gonna go after this opportunity? So let me talk about three areas that we're focused on. So first of all, introducing more clients to wealth and advice solutions. And this is, you know, we talked about this quite a bit already today, but when we think about those, you know, millions of TD Ameritrade investors that are out there that we are going to be bringing on to the Schwab Blue platforms. We have a real opportunity to introduce them to this broad suite of solutions that I shared with you. And we'll be doing that in lots of different ways. Of course, there's digital capabilities that we have. They have welcome experiences, and we talked a little bit about that earlier, but lots of different ways that we can introduce them to these solutions, not to mention all of those green Ameritrade financial consultants. You know, as we talked about earlier, a lot of those consultants have now been, they're now duly registered. They're able to talk about these wealth management solutions. But the process is still pretty clunky. They have to actually help their client navigate to the blue platform, the Schwab platform, to actually open that managed investing account. Once we bring them over onto the Schwab Blue platform, all that friction goes away. And the early indications as we work with those financial consultants is really, really exciting. You know, those are financial consultants who have recognized for years that Ameritrade was a great place for trading, but maybe they weren't quite able to follow through on the rest of the needs that that client had. And when they look at that Schwab Blue, that Schwab solution set of wealth and advice solutions, they get very excited about that opportunity. to serve their clients in a more holistic way. And the middle column is really around enhancing our offerings. And we have a lot of work to do. We have a great offering, but we have a lot of opportunity to do more. And this is, again, where traditionally in this industry, when you think about managed accounts, managed investing, tends to be a more paper-centric type of experience, tends to be all about the human expertise. And we believe a lot in the human expertise, for sure. That is the center. But we also know that we can do a lot around that human expertise to create a better experience. And this really is an area that's very win-win. We know that clients want digital and human experiences, so it's a better client experience. We know that our field, so whether it's a financial consultant, a wealth advisor, a tax and estates attorney, we know that they all are dealing with the same problems. friction in the process, whether it's paper, it's process, it's manual work. And we have the opportunity to really bring a lot of automation to that. And then, of course, it's a win for Schwab, because as we scale these processes, we really have an opportunity to bring a lot of efficiency to these different types of offers that we have. As we brought this organization together, one of the obvious opportunities is you have Schwab Wealth Advisory, you have Schwab Intelligent Portfolios, you have Schwab Advisor Network, you have all of these various offers out there. And we have a lot of opportunity to bring those things together in a much more holistic way for investors. It's really, we believe, is going to resonate. I'll also touch on the bottom of that middle column around Schwab Wealth Advisory. So Schwab Wealth Advisory is one of our longstanding, we used to call it Schwab Private Client, but rebranded it just about a year ago. Schwab Wealth Advisory is one of our flagship offers. It's a non-discretionary offer. And if you think about, again, our heritage client, a self-directed client, or even an Ameritrade client, a self-directed client, A non-discretionary offer is a great way for a client to step into advice. They may start as a self-directed client and then say, I could really use a sounding board, someone to talk to, someone to give me some advice, but I'm not quite ready to hand over the keys. And non-discretionary solutions are a great solution for that. And so Schwab Wealth Advisory has grown as a non-discretionary solution. But what happens often is after a client works with Schwab Wealth Advisory for some period of time, one of the most common requests, actually the most common request is, well, can't you just now do this for me? Can't you just now manage the portfolio? It was great. I got your advice. I trust you. This is working for me. Now, can you take this on? And we've never had a discretionary option within Schwab Wealth Advisory. So we are in the process of building that offer. And that will help us be able to serve those clients as they move into that phase of wanting more discretionary management. So again, back to that life journey, you can imagine a client starts out as a self-directed client. They decide to step into advice through maybe a non-discretionary experience. And then as they become more comfortable, a discretionary experience is available for them. So really a great opportunity for us to continue to broaden the way that we serve investors in this space. And then finally, the right side of the slide here talks about expanding our capabilities. And I won't spend much time here so we can get to questions, but Schwab personalized indexing, we've talked quite a bit about. We'll be introducing new digital capabilities for both retail and RIAs to expand the capabilities there. more personalization capabilities. And I'll touch on Model Market Center. Actually, Bernie just talked about it for a second. But Model Market Center is another great example of a capability that was on the Ameritrade side that we are bringing on to the Schwab Blue platform. And if you think about Model Market Center, it sits on iRebel. But again, back to that outsourcing trend that I showed you for RIAs. It allows us to actually present to advisors third-party models as well as, by the way, CSIM models, so Charles Schwab Investment Management models, to advisors so they can actually get more scale in that investment management process. And we're going to continue to invest and improve those capabilities over time. So I hope you walk away from this taking away a few things. One, we have a robust business in wealth and advice, and it's growing quickly. Secondly, we have an even bigger opportunity. If you think about the retail opportunity, the RIA opportunity, and again, we didn't spend too much time on it, but the opportunity we have in the workplace as well. We have these great assets around wealth and advice solutions that we can deliver to clients no matter what channel that they're in. And then finally, that we have a lot underway to improve our performance, which has already been quite strong, but improve our position in the future. We really believe that this is an area that we can excel and we can leverage all of the core competencies of Schwab to do so. So with that, I'm going to pause and see if we have any questions.

Great. Thank you. Mike Cypress from Morgan Stanley. I was hoping you could elaborate a bit on the new discretionary management product that you're going to be rolling out for retail customers this year that you alluded to. Just maybe you could expand upon that. What are the economics for Schwab? Can you talk about the value proposition and how that's differentiated from other offerings in the marketplace?

Sure. Yeah. As I mentioned, we have a very large offering with Schwab Wealth Advisory, and it is a non-discretionary offering. And the opportunity that we see is actually to introduce discretion to those clients who are asking us for discretion in that offer. And so it is a discretionary offer that will be part of Schwab Wealth Advisory. It's not a new offer. It's not going to have a new brand. But it will be a very robust digital experience, robust capabilities underneath, and it's something that we're going to be building out over the next couple of years. But it is, I think, a real important element of making sure that we have advice solutions across the spectrum of our clients' needs.

You talked about the gap between those who pay for advice and those who are willing to pay for advice. Can you elaborate more on why that gap exists and what is it specifically that you'll do and kind of the timeframe you expect to kind of close that gap over time?

Yeah, of course. Yeah, it's a great point. And I think when we look at that data, we all get very excited and say, well, why aren't these clients coming to us and knocking on the door? I think there's a few reasons for that. One is really awareness. And part of that is we have, of course, all the Ameritrade clients who haven't had access to these. So they're these products and solutions. So they're just becoming aware. I think the second is that we have, you know, we've grown pretty tremendously organically as well. So we have lots of Schwab clients who, you know, maybe came in as a self-directed client and didn't even know that, oh, Schwab has capabilities around this. So there really is a significant opportunity around just awareness. You know, our heritage as serving clients directly and being a place for self-directed investors is is certainly something that's a strength, but in this area also gives us opportunity because we have the opportunity to tell them about these other things that we do. I think the other thing is we have an opportunity to enhance our offers. And as I mentioned, making some of those offers more digitally capable, adding some more capabilities that will resonate with clients is something that we're focused on doing, and you're going to see a lot more about that over the coming years. And then finally, I think that there's, when you ask someone are you willing to pay for advice, What they might be thinking about advice might be different than what our industry thinks about it as advice. And I think one of the reasons why I think that we are so well positioned at Schwab is that we have lots of different tools in the toolkit and a really great scalable model to be able to deliver that advice in the way that makes sense for the client. So I'll give you an example of this. You know, traditionally in our industry, wealth management solutions are delivered with asset-based pricing. One of the things that we did with Schwab Intelligent Portfolio's premium is to create a subscription model. And that allows a client perhaps who wasn't comfortable or didn't like that idea of asset-based pricing to engage with us in a different model. You could also imagine that there might be clients who say, I'm willing to pay for advice, but I don't want to enroll in something forever. I want advice kind of moment in time. We call it moment in time advice. And so we have all of these experts, all of these capabilities, and our opportunity is to look at that population that is saying they're willing to pay for advice. and figure out how is it that we deliver that advice to them in a way that resonates with them. But the wonderful thing is we don't have to go out and prospect a single additional client in order to do that. Of course, we're going to keep growing the engine at Schwab and continue to bring new clients in, but all of that opportunity already exists right within the Schwab house.

Yeah, Steve. Oh. I'll do it without a mic if you guys can hear me okay. Yeah, we don't have time.

So I'm going to introduce, I didn't see you up there. I'm going to bring back Jeff, so thank you.

Thank you all. Thank you so much. And sorry, Stephen. So we do have a short kind of working lunch break. The food will be right out the door that you guys came in this morning. You can grab your lunch, stretch your legs. If anybody wants to stick around for Peter, he will be here presenting some materials and trying to take a few questions. But no pressure. So, yeah, just follow this way. Pick up your name should be on the lunches, but feel free to reach out if there's any questions. And we'll see you guys back in about 10, 15 minutes.

We're in the homestretch. Please welcome Peter Crawford.

Right. Excellent. Well, thank you very much. The homestretch indeed. And thank you. It looks like most of you came back to hear my session. I feel honored and delighted, and hopefully I won't disappoint. Great to see so many familiar faces here and see the familiar backs of the laptops here in the room and here in Dallas. And I also want to thank all of you up there out in the web for joining us for this multi-hour webcast. I know we're all at this point tired of doing long webcasts, but hopefully we made it worth your while and gave you a lot of good information about the company. So by now you've had a chance to hear from my colleagues about the strong momentum we have in the market despite investor sentiment that has been decidedly negative. About the progress we're making on the Ameritrade integration and our excitement about the considerable opportunities that the combination enables. About our ambitious but achievable agenda to create and to continue building the premier wealth management platform for retail clients and for RIAs. And finally, about our confidence in sustaining this enviable level of organic growth we've been able to deliver. So in my time today, I'll recap yet another year of record financial performance in the face of a mixed environment that featured both headwinds and tailwinds. I'll also provide some more empirical data and some more information analysis around our clients' behavior regarding their cash and explain why we're confident that this behavior will abate during 2023 and we'll see at some point this year a resumption of deposit growth. And finally, I'll talk about our outlook for 2023, a year that Walt described in his comments as a transitional year. A transition for our economy as the Fed seems poised to pause this tightening cycle. A transition for the Ameritrade clients who are going to be coming over to the Schwab platform. And for our organization as we shift our focus beyond the integration to the considerable opportunities that this union creates. And a transition for us as well from our financial performance. as we're poised to produce revenue growth that may be a little bit lower than what we've seen the last couple of years, but that sets the stage for much stronger growth in the years ahead, even, and this is really important, even if rates fall in the outer years, as many expect. So let's talk about some of the factors that contributed to that record financial performance in 2022. So it was a year ago at this meeting, it was virtual, but we laid out our scenario for the year. And the scenario assumed a number of pretty conventional assumptions, and the most important of which was the expectation at the time by the market that we'd see 75 basis points of Fed increases over the course of 2022. Now, of course, the year unfolded very, very differently than we or pretty much anyone else expected, with the Fed actually hiking rate 75 basis points almost every meeting, but every other key measure falling over the course of the year. Now, our financial performance reflected the resilience of our business model amidst these combination of headwinds and tailwinds. Revenue increased by 12% year over year, a function of our expanding net interest margin, which more than offset the decline in client cash balances and margin balances and trading, and, of course, the impact of the declining equity markets. We contained our expense growth despite that revenue outperformance and continued high inflation and increases in some third-party pass-through fees. We contained our expense growth within the range that we communicated. And that combination produced a 50% adjusted pre-tax margin, our highest, best year ever, and 20% growth in adjusted earnings per share to $3.90. Turning our attention to the balance sheet, our balance sheet reflected the reaction by our clients to the dramatic increase in rates as they move some of their uninvested cash off our balance sheet into higher-yielding alternatives, oftentimes with our active help and encouragement. Total balance sheet assets declined 17% for the year, driven by declines in both bank deposits as well as payables to brokerage clients. While we finished the year with roughly $17 billion of FHLB advances and other short-term borrowings. Now within interest earning assets, we saw a 28% reduction in margin balances, a function of the lower equity markets, more negative investor sentiment, as well as higher rates. But we did see a 17% increase in bank loans, going to a lot of what my colleagues talked about. Despite the higher rates, we continue to have a remarkably strong pipeline of loans, certainly relative to those pre-pandemic levels. Now, our stockholders' equity declined by $20 billion for the year. That was mostly a function of declines in our available-for-sale, mark-to-market, unrealized declines in our available-for-sale portfolio. Of course, those don't impact our regulatory capital. So with that, despite that, our consolidated Tier 1 leverage ratio climbed 100 basis points to finish well above our operating objective of 650 to 675%. Now, we've talked for years about Schwab's ability to do two things, to deliver strong financial performance, top line growth, organic growth, and at the same time, deliver significant capital, return significant capital to our stockholders. And I think 2022 demonstrated our ability to do all that. Because even as we were producing that record financial performance, we increased our dividend, bought back 47 million shares of stock, and we redeemed a billion dollars of our outstanding preferred. That is growth plus, we talk about growth plus capital return. 2022 was a great example of growth plus capital return. Now, it's been just over a year since we closed the acquisition of Ameritrade. And my colleagues have talked about the strategic benefits of that acquisition and also about the considerable revenue and expense synergy that it unlocks. And those are certainly the most important aspects of the deal. But the union of these two companies also creates a company with a more all-weather, diversified business model. And I think it's helpful to see that, to compare our performance in the fourth quarter of this year to the first quarter we were a combined company, the fourth quarter of 2020. Now, remember, that was a period of time when we had been enjoying an unprecedented level of trading activity, a function of the COVID and the introduction of a lot of newer investors into the category. So our financial performance in that fourth quarter was the best financial performance in our company's history. And since then, equity markets have fallen. We've seen trading activity has softened. And yet, despite that, we've had over a 30% increase in revenue growth. over 45% increase in adjusted earnings per share. We've increased our pre-tax margin by roughly 600 basis points in just those last two years. So I mentioned in the CFO commentary last week that we've entered what we believe is the later innings of the client cash sorting cycle. I said this is not the Mariano Rivera inning, this is not necessarily the last inning, but the later innings of this cycle. And so we wanted to build off the commentary provided at the fall business update to explain this and explain why we're confident this is the case and why, again, we'll see a resumption of the deposit growth over the course of 2023. So our clients, recall that our clients tend to keep a certain level of transactional cash in their accounts for liquidity purposes. And as their cash levels approach that sort of minimum floor of transactional cash, as more accounts approach that level, the cash that we receive from new accounts offsets any lingering sorting activity that we see in the existing accounts. And this is a graph that explains how that looks. Now this is a particular wealth tier, a particular tier of clients who have, for example, between a million, let's say a million and two and a half million dollars of total assets in their account. We've done this analysis across 30 different wealth tiers, across five different client segments, and the pattern is exactly the same. And what you see and what these lines represent is different cohorts of clients within that wealth tier based off of how much cash they had at the beginning of the rising rate cycle. And so the upper one, of course, has more cash and the lower one has less cash. And again, we've done this for multiple, we've shown two here, but we've done this for multiple cohorts of clients based off of their cash levels. And what you see, of course, is that as interest rates increase, those cash balances for that entire cohort start declining. But they don't decline to zero. They decline, they sort of converge around this, what we call here an equilibrium line, or what we called previously that floor. And really importantly, the pace of that decline, the pace of that sorting, roughly corresponds to the distance they are from, their cash levels are from that equilibrium level. Now that may not be totally surprising, but what may be more surprising is what happens with clients whose cash balance are below that level at the outset of the rising rate cycle. And what we see there is their cash balances actually increase. And this is why we say it's better to think of this more as an equilibrium versus a floor. point is, even clients who start off with low cash, even as rates are increasing, even if rates have increased by 400 plus basis points in the last year, they're actually increasing the level of transactional cash, the level of cash on our balance sheet during that period of time. Again, it supports this idea that there is this equilibrium level of transactional cash that clients want to maintain. Now, we saw this pattern in the last rising rate cycle, and we've seen it in this rising rate cycle as well. The same pattern is holding true here. Here's another example of another demonstration of the existence of that equilibrium level. And each of these lines represent a group of clients who placed their first purchase money fund trade during that month. And what you see is they start using purchase money funds, and they basically reduce their cash level to a certain equilibrium level. And then they're content with that. It doesn't go to zero. They stay at that level. And regardless of when they start that process, they all end up basically in the same place. So again, we're very confident there is this level of transactional cash within the different accounts. Now of course it varies based off how much assets they have in their account, but each of those have a pretty consistent level of equilibrium transaction cash they want to have in their account. So what we've seen is that the sorting activity that we have seen thus far follows almost identically to the analytical models that we developed based off of the last rising rate cycle. It's following the same behavior, following the same behavior that we saw from the 2015 through 2019 cycle. And we continue to believe that the magnitude of this sorting activity for existing clients will be not that much different from what we saw in the previous cycle. And therefore, at some point during 2023, that sorting activity will continue to slow and it will be offset by organic cash that comes in via new accounts and we'll see a return of deposit growth. So our success in 2022 puts us in a great position as we head into 2023. But even so, there are, as always, a number of uncertainties over which we have various degrees of control. So now for the long-awaited, much-anticipated scenario. There's clearly a debate in the market, a lot of conversation in the market about what's going to happen with Fed policy, and frankly, even a debate between what the market expects and what the Fed expects. And so rather than try to take a stand on that debate, we put together two different scenarios. The first one roughly follows the forward curve, market expectations for two rate increases at the beginning of the year and then a rate cut at the end of the year. And the second roughly assumes the dot plots. So three Fed hikes over the course of the beginning of the year held constant throughout the year. And then those different scenarios share a handful of common assumptions. One is the deposit betas that continue to be low. Second is end of period, or December average interest earning assets, down between eight and 12% from the end of 2022, with a portion of that decline being our expected reduction in some of those temporary funding sources that we had at the end of December. A third is what we call BDA breakage fees. This is a breakage fee that we incur. It's counted as a contra revenue from removing the third party fixed rate balances from the BDA. Now, we pay a breakage fee as we do that. These are fixed rate balances, but we have the opportunity to reinvest those funds at now prevailing higher yields or use that to offset higher cost funding. and then a capital payout ratio of well in excess of 100% for the year. And you can see, for those two scenarios, in the lower scenario, we'd expect to produce revenue growth in the 5% to 7% range. On the upper scenario, 7% to 9%. Both scenarios, we'd anticipate adjusted expense growth in the 7% to 8% range, which I'll talk about more in a moment, with an adjusted pre-tax margin of 48%, 49%, or potentially a little bit better than that. So let me talk about the different components that go into these two scenarios. And we'll start on the revenue side with our net interest margin. Assuming that rates follow the forward curve, and actually we potentially see a rate decline in the outer years, we would see our net interest margin climbing into the low two sixes, by the fourth quarter of 2023 on a path to exceed three percent by the end of 2025. now why is that with if interest rates are falling how could that be and the reason for that is because our fixed investment portfolio our fixed investment securities portfolio much of that was purchased during the period in 2020 2021 when interest rates were at historically low levels And you can see on the right here the average yield on those securities. And so as those securities pay down, mature, et cetera, we have the opportunity to reinvest those proceeds at much higher yields in the market. So rates could follow. These yields are more than 300 basis points lower than they are today if we were to replace those securities. So rates could still fall and we'd still have a nice opportunity to pick up yield as that fixed investment portfolio turns over in the outer years. Now, that 7% to 8% adjusted expense growth is certainly a little bit higher than our long-term average that we've allowed over our history, but it puts us in a really good position to limit expense growth in 24 and 25 to no more than 5% per year as we harness the remaining expense synergies from the Ameritrade integration strategy. Schwab has, having disciplined expense management is part of Schwab's DNA. It's one of the hallmarks of what you can count on for Schwab for much of our history. We are on a multi-decade journey to drive our expense on client assets ever lower. We see it as a really important competitive advantage, one we certainly don't want to take it for granted. The number one way you can drive EOKA, Expense On Client Assets, lower is to grow. And the way to grow is to do right by clients. And so there's always a balance between managing expenses in the near term while making appropriate investments in our clients and our business to support long-term growth. I think our track record speaks to our ability to find that balance, our ability to grow, to drive down EOCA over time, and to deliver operating leverage through the cycle. So without this context, let me share our thinking and the components of our adjusted expense growth. So we start with our gap spending of last year of $11.4 billion, and we deduct about $1 billion of integration expense and amortization of acquired intangibles, and that gets us to our adjusted expense number. And then we layer on top of that what we call fundamental operating expense. This is our sort of normal routine expenses to support our growing client base, to handle moderating but still elevated levels of inflation, and to advance the strategic agenda that my colleagues talked about. Now this year we have on top of that, we have a two basis point increase. I know a number of other institutions have talked about a two basis point increase in the FDIC premium. We expect that to add about a half a point to one percentage point to our growth rate. And then this next item is one I talked about last year, and I don't expect I'll be talking about it next year, but these are basically integration-related spending that's still included within our adjusted expenses. There's really three components to that. One is software that we're developing for the integration. Joe talked about that, all the work, for example, we're doing to bring Thinkorswim over to sit on top of the Schwa platform. other software we're doing to ensure a smooth client experience. Second component is hardware, most of which we added last year to support the combined client base at conversion and support growth in the years ahead. We're admittedly a bit conservative in terms of the capacity we added, but this will allow us to decommission a lot of the legacy Ameritrade hardware. And then the third is something that Jonathan talked about, which is temporary, emphasis temporary surge staffing to handle what we expect will be a high volume of calls around the conversion events. And so you put all those together and that adds about two to two and a half percentage points of growth. And then we have the benefit of the synergies. Most of these are synergies that we, or actions we took in 2022, and we got the full year benefit of them in 2023. And that's how you get to the 7% to 8% adjusted expense number, or expectation for the year. So before I close, we're certainly, I would say, gratified by the financial performance of the company over the last couple of years. But I think those of you who have followed this company for a long period of time, and I think that includes pretty much everyone in this room, know that we don't manage the company quarter to quarter. We have a long-term orientation, which is born of our confidence that our Through Clients' Eyes strategy has delivered and should continue to deliver for clients and stockholders over a long period of time. And so before we close, I wanted to zoom up from the conversation around 2022 and 2023 and look at how that financial formula we've talked about in the past has performed over the last two decades. And it starts, of course, with our through client size strategy, our competitive positioning, generating strong, consistent organic growth. which when you combine that with average market appreciation, leads to high single digits to low double digits asset growth. Through our business model that combines banking, brokerage, and asset management, we're able to offset pricing pressures in some parts of our business with win-win monetization opportunities elsewhere, converting that level of asset growth into an equivalent level of revenue growth. By managing our expenses to grow at a pace slower than the growth in revenue, we're able to expand margins and generate even faster growth in earnings. And then by being thoughtful around how we manage our capital, being very efficient in how we manage our capital, we're able to generate even stronger growth in our earnings per share. How is that done over the last 20 years? certainly quite well. So that financial formula has absolutely delivered for clients and, of course, delivered for stockholders for the last 20 years. It starts, of course, with our ability to grow assets. Both Walt and Rick talked about the strong organic growth and how we've been able to sustain that organic growth even as we become a bigger firm. That is the key ingredient here. It's that through client-side strategy, disrupting the industry on behalf of our clients, always being focused on our clients. When we do that, we focus on our clients, they reward us with more of their business, and they also refer their friends to us. Over time, we've converted that asset growth to revenue growth, overcoming the decline of equity, the long march of equity commissions to zero and the shift from a lot of client assets from mutual funds into ETFs with a business model that gets revenue, big contributions of revenue from net interest revenue, trading, and asset management fees, all without taking any material credit risk. Now, net interest revenue is, of course, the product of net interest margin and interest-earning assets. And as we've seen in the last nine months, those can sometimes move in different ways. They can be cyclical, but cyclical in opposite directions. But the point is, because of that, we're able to grow net interest revenue one way or the other. By thoughtfully managing our expenses, we've been able to increase our margins over time. And by being equally thoughtful in terms of how we manage our capital and being very efficient in how we manage our capital, we've been able to reward our stockholders by increasing our dividend and by opportunistically buying back our stock with a payout ratio over the last five years of roughly 60%. Let me just close with a couple of thoughts. Almost $430 billion in net new assets, 12% increase in revenue, 20% increase in adjusted earnings per share, a 50% adjusted pre-tax margin. We're certainly proud of the financial performance of the company, especially in light of what has been a challenging environment for many companies and many investors. But I'd say we're even more proud about how we've been there for our clients during this tough period of time. Somebody asked me the other day recently, what's the investment thesis for Schwab today? And I said the investment thesis for Schwab today is the same as it's been for much of our history. It's not just a bet on higher interest rates or a snapback in the equity markets. Well, certainly both of those would be beneficial to our business. Rather, it's the confidence in a company whose strategy and whose operating and financial performance has stood the test of time. The premier asset gatherer in our industry, a function of our strategy, of our no-trade-offs positioning, of the millions, now tens of millions, of client promoters we have among our client base, and of our leading position in the two fastest growing segments of wealth management, the RIA channel and the retail brokerage channel. It's a company that has been consistently able to turn that asset growth into revenue growth via a diversified, all-weather, resilient business model. A company that doesn't take credit risk. A company that is thoughtful about how it manages expenses. That doesn't always mean growing expenses at the lowest rate in the industry, necessarily. It means striking that careful balance between delivering in the near term and making appropriate investments that will drive long-term growth, long-term success for our clients and for our business. And a company that recognizes that it's not our capital, it's our stockholders' capital, and always being very, very mindful of being very, very efficient. That's been the investment thesis for much of our history, and I'm very confident that'll be the investment thesis for us for the next 20 years. So with that, I am happy to take some questions. And we already have our first hand up.

So, Peter, it looks like the market was probably expecting a little bit less on the expense side. And when you look at expenses, you know, you sort of point to what a run rate farther out the 4% to 5%. And I guess what gives us the confidence, if you look back now, we've been at 7%, I believe, the last couple years. Is that right? So could you go over what keeps it at 7% this year? And how do we get the confidence that you can get to the 4% to 5% that you're looking at in the outer years?

Sure. So I tried to lay out some of the drivers of that expense increase from 22 to 23. I mean, the biggest single one was the integration-related spending. Now, that's not a – just to be clear, the surge staffing to handle those call volumes, a large portion of that will reverse and will go down in 2020. in 2024. So that'll be a helpful offset to our other expense growth. And then the software and hardware depreciation and amortization, a lot of that's on hardware that we put into place in 22. And so we're already having the full year impact of that. So I wouldn't expect another step up in that expense as we go into 2024. 2024-25 are also the years where we harness the expense synergies, and so that's going to be very, very helpful. Remember, we said that the vast majority of the remaining expense synergies would not necessarily be harnessed until we get through the client conversions. With that last client conversion in 2024, that's the year where we really unlock that remaining roughly one-third of the expense synergies, so that's also a driver of that. 4% to 5% expense growth. Rich, we're always a balance when we think about our expenses. We want to drive down that IOKA, but the most important thing is to make sure we're there for our clients. We will always make that trade-off to make sure we're there for our clients because we know as important as it is to manage expenses, you know, staying true to our clients, doing right by our clients, that is even more important. And so, you know, we want to be thoughtful around how we manage expenses, drive that expense on client assets down over time. And we think, you know, this is a plan to get to continue to do that.

I almost feel like I should have let Brennan go first after the last time. So I wanted to talk about the slide, Peter, showing the trajectory to that 3% NIM. It's consistent with what you outlined at the last business update. At the same time, we have seen long-end rates come in a fair amount and was hoping you could speak to what enables you to hold the line at that 3% given some of the pressures that we've seen at the long end.

Well, it's really a function of, as I mentioned, I mean, there's not any unusual assumptions in there around sort of outsized margin balance growth. It assumes continued growth and margin balances can, you know, consist with the growth in the market and continued growth in our lending solutions that we talked about. But it really is the more significant driver of that is the repricing, resetting the yields on the fixed investment portfolio at those prevailing higher prices. And whether the market is at 375 or 4%, that pickup is still very significant as we continue to reinvest those maturing proceeds. That's the real advantage that we have of having that sort of unlocked earnings power stored up that we'll be able to unleash as we reinvest that fixed investment portfolio.

Hey, Peter. So I actually have a longer-term strategic question, but a couple just tactical questions, just because you dropped a lot on us. The interest-earning outlook, the interest-earning asset outlook, does that contemplate the FHLB borrowing, and does it include it? And are you still thinking that the mid-single-digit as a percentage of interest-earning assets is an upward bound for some of those alternative funding?

So the interest-earning asset assumption of a down 8% to 12% over the course of the year assumes that we've reduced those interest-earning assets significantly by the end of 2023. In terms of your second question around the mid-single digits, I guess it depends on how you define mid-single-digit. It might be mid, might be upper-mid, somewhere in that range. But the most important point is it's a temporary funding source that we expect will be paid off as we see a resumption in core deposit growth.

Okay. And then on the strategic side, sort of taking a step back, about a dozen years ago, you transitioned to the bank as sort of one of the main pistons in the earnings engine for Schwab. And you've been through a couple cycles. We now have what's called cash sorting. It's become like an industry term. When you look back and you think about that transition, number one, do you still feel good about it as far as the right decision to make for shareholders and for the company? And then when you think about lessons learned and how you might manage future cycles, how are you thinking about making some adjustments from here?

Great question. I'm very grateful that we launched the bank when we did. The bank is what has enabled us to continue to grow revenue as we've grown assets, to continue to be successful as we've grown assets. It's a more efficient way to monetize our clients' uninvested cash balances. And that's what's allowed us to be able to thrive amidst an environment where equity commissions were going to zero, where we saw a movement of client assets out of mutual fund one source into ETFs and index funds. And I think that's clearly been very, very successful. I think what's interesting about the bank, though, is while it started out a little bit more as a way to monetize our clients' uninvested cash, its role has evolved. it's now a really important strategic capability for us. Because as Jonathan and Bernie and Anisha, Rick, Walt all talked about, we are competing against big banks and warehouses. And this lending, our ability to offer lending solutions, very compelling lending solutions at a very low cost, is really, really important both defensively and offensively for us. So it absolutely allows us to compete against those firms, to compete for clients, to retain the clients that we have. Very, very important capability for us, without a doubt. Thank you.

Yeah.

Great. Thanks, Mike Cypress from Morgan Sealy. Just wanted to follow up on your point around sorting will be likely in 23. I guess if we look at the labor market remains very tight. Some questions out there that the Fed may have to hike even more than what anyone expects today. So if that plays out, if that other scenario plays out, and we're sitting here a year from now and rates are meaningfully higher at the front end, how would that impact your view on sorting and baiting in 23 and impact that down 8 to 12 on IEAs?

So we think that we're at a rate now of the Fed funds rate, short-term rates, where incremental rate moves, increases, don't have a material impact in terms of level of sorting. In other words, if a client's going to move into a purchase money fund when purchase money funds are yielding 5.25%, they're probably going to move when purchase money funds are yielding 4.75%. We're at a point now where, again, that determination, that decision is not a huge factor. So I wouldn't expect that to be a big impact. While at the same time, of course, higher rates will be good for us in terms of the floating rate assets that we have, margin loans, the segregated cash portfolio, the cash that we have on hand, and so forth. Should we take one just maybe from the web before we, maybe from the web or no? We're okay?

Sure, yeah, we can take one. Staying kind of on the sorting cycle, this would be – we've got a few questions, but the most recent one on this topic would be from Craig Siegenthaler, Bank of America. Talk a little bit about how investor utilization of cash evolves through different market cycles. So, for example, in bull markets, they tend to rotate out of cash and become net buyers of equities. Could that create some kind of synthetic cycle? additional leg of sorting, or how have we seen those trends evolve over time?

Yeah, I would say a couple things. Our client behavior regarding their cash is much more determined by, in terms of the cash per account, is much more influenced by a level of interest rates than it is by what's happening with the equity markets. When clients, what we tend to see, the impact from the equity markets is typically equity markets, if the equity markets drop dramatically, Cash comes onto the balance sheet, but then it comes off the balance sheet much more slowly, and there's definitely a big lag. And of course, an environment where I think you're getting at is, you know, equity markets, we suddenly see a big rally in the equity markets. That clearly is a net positive for Schwab. If we see a dramatic rise in equity markets, all the asset-based fees, those go up. The measures of client engagement tend to follow, so we tend to see more margin utilization, more trading, more securities lending revenue, all of those. That is absolutely a net positive for Schwab on that. Any impact on client cash allocations tends to be very delayed and much more muted relative to the impact of interest rates.

Kyle Boyd, KBW. Just given that you're above your target on tier one leverage coming into 2023 and considering the additional expected decline in the balance sheet in 2023, I would expect the payout ratio could be meaningfully above the kind of 125% level that you laid out in the slide. Just wondering how we should think about the tier one leverage ratio as we progress through this year, given that your deposits have been volatile over the past couple of years with the growth and then the decline. Is there an additional buffer above that 6.5 to 6.75 range that we should be thinking about you wanting to keep throughout this year? Or should we think the tier one leverage could actually move closer to the 6.75 as we progress? Thanks.

Yeah, so we've said our buybacks tend to be opportunistic, not programmatic. But I would say, and I think you're absolutely right, the payout ratio could be significantly above that 125% level. We wanted to make sure we gave ourselves a lot of leeway there. I'd expect that... We will continue to buy back our stock, again, opportunistically, and bring that leverage ratio down over the course of the year. In terms of maintaining, I don't see the need to necessarily maintain some buffer. That 650 to 675 already has a buffer on top of a buffer. Now, if we saw a dramatic change in the market that we anticipated a dramatic increase in client cash coming onto the balance sheet, that might be a situation where we say, okay, let's slow this down. But if we're in a situation that we're in right now, I think we'd be bringing that tier one leverage ratio down from where it is today over time.

Peter, maybe one more on the scenario. Just directionally, this would be from Dan Fannin at Jefferies. Could you elaborate a little bit more on some of the other, we'll say, client-driven metrics that might be baked into the scenarios that you shared? So in terms of how should folks think about trading levels relative to recent periods, margin utilization, et cetera?

Yeah, so you can see all the, I should have mentioned this, you can see all those assumptions in the appendix, and certainly you're welcome to follow up with the IR team in terms of the specifics. Given the interest of time, I won't go through all those different assumptions, but they're a set of relatively conventional assumptions, not dissimilar from what we assume every year when we provide our scenarios.

So, Peter, I believe last quarter, at least versus our estimates, the BDA, there appeared to be some sorting going on with BDA, and you commented about the unique arrangement with TD Bank. So I guess the question is, We didn't expect the BDA to, at least from what I remember in talking to Ameritrade people, it didn't really soar last cycle. So are you making the same assumptions on the BDA that you approach this equilibrium? What do you incorporate? It's 6% of revenue, but is it meaningful enough to have an impact, I guess?

Yeah, so what we see when we look at differences between green and blue clients, to use the same terminology that Jonathan referenced there, is the green clients, as we would expect, the green clients do tend to sort less than the blue clients. And that's smaller accounts, more trading-oriented accounts. What's also different, though, is the green clients tend to be a little bit more responsive to the market. And so what we've actually been seeing is as the market's been declining, a lot of Ameritrade clients are looking at it as an opportunity to buy into the market. And so we've actually seen net equity inflows, probably an opposite to the question that was asked earlier, net equity inflows even as the market's been declining. And that's been one of the drivers, the big drivers of the decline in those BDA balances.

So, following up on that, I think in your slide, there was the $100 million BDA breakage. Can you discuss some of the mechanics of that? So, what does that do? Is that what you pay to basically break the ladder, and then what sort of percentage of that BDA would move into float? And why? What are the underlying assumptions around the continued maybe – are you assuming the balances keep declining kind of to the extent that Rachel is asking?

Yeah, so the way to think about that breakage fee is essentially it's like the marked – those are what we're essentially breaking as our fixed-rate investments, for lack of a better term. And so that breakage fee is roughly equivalent to the mark-to-market on those fixed-rate investments. So from an NPV standpoint, it's neutral to positive for us from a net present value standpoint because we can take those proceeds and reinvest at higher yields. In terms of the BDA assumptions going forward – I think it's fair to assume that the BDA balance is declined by roughly $10 billion a year until we get to the $50 billion floor. So we're six or seven years away from that. There's a lot of sort of moving pieces within it and a lot of acronyms we can throw at you. But I think if you're trying to model the business over the next five, six, seven years, ten years, I would assume that the BDA balance is declined by roughly $10 billion a year until we hit that $50 billion floor. I think we have time maybe for one more question. Yeah. Yeah.

So Brian actually asked the question. Seems like that was due, or at least some certainly deserve. But does the IEA guidance assume any incremental BDA sweeps as well, Peter, as we think about the 8% to 12% decline that's being contemplated?

So the 8% to 12% decline assumes all the actions that we're planning on taking in 2023. Yeah. That's sort of everything. There's nothing we're holding out sort of separately from that. But again, I want to emphasize that assumes a reduction in some of those temporary funding sources, the CDs, FHLB, et cetera, that we had at the end of 2022. Our expectation is majority of that is gone by the end of 2023. So I think we're just about out of time. I'm sure there's no shortage of questions. Certainly the IR team is always available to answer any follow-up questions. I want to close this by thanking all of you for hanging in there. We really appreciate you taking the time to certainly understand this company. Hopefully what came through as my colleagues and I spoke is a combination of excitement and confidence. in the excitement about the momentum that we have, about our engagement with clients, about the opportunities we have to continue driving strong organic growth, continue unlocking revenue opportunities, continue doing better for our clients, and continue driving greater efficiency. And then the confidence, trusting that our strategy has worked through good times and bad times. Our track record speaks for itself. That's certainly what makes us all feel very excited. We'll look forward to engaging with you again at our April business update. Thank you again for those of you who traveled here to Westlake. Thank you for those of you on the web for joining us for the last four-plus hours. And we'll look forward to talking to you soon. Cheers.