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.