Charles Schwab Corporation (The)

And here we go. Good morning, everyone, and thank you for joining us for the Schwab 2023 Summer Business Update. We certainly weren't going to let a little searing Texas heat wave get in the way of providing you with a strategic update on our business. This is Jeff Edwards, head of investor relations, and I'll be followed very shortly by our esteemed presenters, co-chairman and CEO Walt Bettinger, President Rick Worcester, and CFO Peter Cropper. Before we kick off, let's briefly hit on a few housekeeping items. Number of past events, I'll be helping facilitate Q&A, and we are still abiding by the one question, no follow-up format. We also ask that you save any clarifying or reconciling questions regarding this morning's reported quarter for the IR team. Today's slides will be posted to the IR website at the beginning of Peter's remarks. Okay, before we get on to mention stuff, let's stop by everyone's favorite slide, our forward-looking statements page. which reminds us all that the future is inherently uncertain. So please stay up to date with our disclosures. And with that, Walt, please take it away.

Thank you, Jeff. And good morning, everyone. I'm looking forward to another triple-digit day here in Texas. It's a beautiful day, but it definitely will be a scorcher. A number of years ago, I used an illustration that seems timely to resurrect. When my office used to be in downtown San Francisco, I would often look out toward Treasure Island early in the morning, only to see dense fog. And the fog would not only mask the beauty of Treasure Island, it would often be so dense that you couldn't even see the island out in the bay. In fact, if you didn't know it was there, you might not even realize Treasure Island even existed. In some ways, it seems to me that the fog has settled in again, just as it did a few years ago. And that fog is clouding how some see Charles Schwab today. Years ago, the fog represented the extended period of ZERP, or zero interest rates. Today, the fog represents the short-term challenges brought on by the near record pace of interest rate increases by the Federal Reserve. But as we all know, the fog clouding Treasure Island ultimately lifts, and the beauty of Treasure Island becomes clear. And of course, Treasure Island represents Charles Schwab. Some look at the fog and only see fog. Some look at the fog and know what is temporarily hidden by it and recognize how that fog is currently masking the extraordinary progress we are making as a firm. Those who know what is hidden by the fog recognize our ongoing organic growth and market share gains, successful execution and integration of the largest brokerage combination in history. Ideal positioning with leadership positions in the two fastest-growing areas of investment services. That's serving registered investment advisors and serving independent-minded individuals. The low-cost provider today and poised to widen this advantage over the next 18 to 24 months. An exceptional profitability, even in the most challenging of times. Today's presentations and discussions are intended to help more people understand the fog, as well as what is hidden by the fog. So thanks a lot for following along. Although still somewhat uneven, the second quarter began to show some signs of an improving economic and investing environment. Inflation began to moderate, and while the Fed paused its record pace of interest rates, at least interest rate increases at least for the month of June. As equity market volatility fell, overall equity markets performed reasonably well. But it was an exceptionally narrow market with just a handful or two of large cap growth companies accounting for a significant percentage of the solid performance. Investors took note. And as you can see, investor sentiment turned positive by the end of the quarter. Our investor clients remained relatively active in the markets, making over 5 million trades per day, and with purchases exceeding sales by about 20 percent. Year to date, our clients have entrusted us with over $180 billion in net new assets, a strong number given the tax month of April falls in the first half of the year. and a level of net new assets consistent with our long-term historical trend of net new assets between 5 and 7 percent of our total asset base. In addition, clients have opened approximately 2 million new accounts year-to-date. E-client metrics continue to be solid. In retail, our speed to answer phone calls averaged under 20 seconds, and this is a particularly important metric as we transitioned millions of former Ameritrade clients over to Schwab during the first half of the year. Advisory flows in retail were also solid at over $13 billion. In advisor services, we continued to be the destination of choice for breakaway brokers and broker teams of all sizes. Year to date, we've assisted almost 160 teams moving over to independence with Schwab as their primary custodian. and the average advisor manages about $90 million who converted to independence. Of course, these near-term metrics are important, but the long-term success of Schwab is even more important and revealing. We have a distinctive set of competitive advantages built over multiple decades that enable us to serve clients in a better way while at the same time rewarding our stockholders. Our advantages revolve around our size and scale, our operating efficiency, service culture, operating structure, reputation, and willingness to be disruptive. These six advantages help us to execute on our through client size strategy, which has resulted in a dramatic increase in market share over the past decade, as we've meaningfully grown our market share of client assets by multiples of our key competitors at independent broker-dealers as well as wirehouses. And this change in market share is more than simply numbers on a page. It represents millions of clients and hundreds of billions of dollars of client assets proactively choosing Schwab, and in doing so, getting a better deal than what they traditionally experienced. And while our scale and efficiency has positioned us as the low-cost provider for many years, we are ready to widen that gap meaningfully in the next 18 months as we reap the efficiency and automation benefits of the Ameritrade integration. We anticipate the realization of expense savings to be substantial. In addition to the remaining $500 million of synergy savings that we originally committed to as part of the Ameritrade acquisition, we now anticipate achieving at least an additional $500 million in future expense savings. These savings will come from a variety of areas, real estate savings, lower headcount from efficiencies gained via automation built and implemented as part of the integration work, streamlining our organization to ensure we are set up to operate most efficiently post-integration, and the removal of temporary expenses that were associated with the integration that we added to ensure a smooth and thoughtful process for our clients. Rick, before I turn it over to you to discuss in more depth where we stand with our integration process and the ongoing success we're seeing with existing clients and new prospects, I wanted to simply reinforce the strength of our firm. The successful track record we have built up over decades continues. The competitive advantages we have built continue. And I'm quite confident that the fog temporarily shrouding our firm will lift and sunny days will return in the coming quarters.

Rick? Mr. Thank you, Walt. And hello, everyone. Our efforts remain squarely focused on our three strategic areas. scale and efficiency, win-win monetization, and client segmentation. In our time today, I'll highlight the progress we've made in each focus area and talk through the opportunities that we see ahead. Starting with scale and efficiency, integration has been and remains our number one priority. Over Memorial Day weekend, we completed the largest brokerage conversion in the industry, moving more than 5 million client accounts from Ameritrade to Schwab. Thanks to the dedication of an incredible team, the conversion was a success. No material issues occurred despite the fact we migrated 11 times more clients than our previous February conversion weekend. Client engagement has been strong with 1.3 million clients logging into Schwab within the first week following the conversion weekend. In fact, Schwab's second largest market open occurred with no issues on the Tuesday immediately following Memorial Day. And by the end of the day on that Tuesday, our service levels had returned to normal with us answering calls at an average of seven seconds, just a day after the conversion. More broadly, client and asset attrition within our conversion groups have been below expectations. While we are still in the middle of what has been a successful client conversion, we remain laser focused on seeing it through to completion in the months ahead. We are on track to migrate the remaining Ameritrade clients in three additional transition groups in September, November, and in the first half of 2024. One of the exciting parts of our conversion is the combined capabilities for our clients, whether they are a retail client or an advisor client. And I'd like to start by sharing the benefits on the retail side. We have invested in our web and mobile experiences at Schwab to ensure we have the best of the features and functionalities of both firms. Our former Ameritrade clients will have access to the full spectrum of portfolio and wealth management solutions that we have had at Schwab. Ameritrade clients will also be able to access our banking capabilities, our branch network experience, and our exceptional client service. The branch network experience includes providing access to planning and wealth management capabilities that were not a focus of Ameritrade's. We believe that will help Ameritrade clients consolidate at Schwab rather than rely upon a second firm. Now, let me discuss the benefits to Schwab's retail clients. One of the biggest enhancements for existing Schwab clients will come when we make thinkorswim available to them later this year. Hinker Swim is one of the crown jewels of Ameritrade, and it's widely considered to be the premier trading platform in the market today with its unique combination of powerful tools and dedicated service from experienced trading professionals alongside education for all levels of experience. And all retail clients will have this at our competitive pricing representing our true no trade-offs approach. The same is true for our RIA clients. Ameritrade advisors will migrate to Schwab over the September conversion weekend, but they already have access to meaningful aspects of our RIA experience. Ameritrade advisors already participate in our flagship industry events, including impact. They've started to benefit from our leading business consulting offer, including participating in our annual benchmarking study and the executive leadership program. And we've included them in our RIA industry advocacy programs while also giving them access to resources like our strategy desk, which educates advisors on how to use various options strategies through one-on-one consultations, as well as our block desk, which helps advisors to optimize their best execution process. And as we look to Labor Day weekend, preparations for conversion are well underway and advisors are engaged. 80% of firms who only custody with Ameritrade have already begun to credentialize themselves. Over 20,000 Bay01 users have accessed Schwab Advisor Center to test drive our platform. Over 5,000 firms to date have attended at least one educational webinar session. And we are spending the summer helping firms get familiar with our technology, our investment offerings, and our people so they are ready to do business at Schwab after Labor Day weekend. And after conversion, all advisors will enjoy the full benefits of our combined offer, a custodial platform that is designed to help RIAs of all sizes grow and succeed. Schwab advisors will benefit from award-winning platforms and capabilities like ThinkPipes, iRebel, and from Model Market Center technology. And Schwab Advisor Center will incorporate VEA01's most popular features and functionality. Ameritrade advisors will have access to the breadth of Schwab's offer, including Schwab Charitable and Schwab Bank. We believe there will never have been a stronger custodial offer in the market than coming out of the conversion weekend. Turning now to win-win monetization, clients are continuing to come to Schwab for advice, and we've seen strong flows in our full-service wealth programs and our managed investing solutions. Schwab Wealth Advisory had $5.9 billion in net flows for the first half of 2023, an increase of 89% compared to last year. And notably, some of these inflows are being driven by a meaningful increase in flows from existing advisory clients, which combined with a strong client promoter score, demonstrates the value clients see in the offer. It is also worth noting that 20% of flows into Schwab Wealth Advisory in the first half of the year were from Ameritrade FCs, validating our belief that there is a large untapped demand among Ameritrade clients for more help and advice, a significant asset and retention opportunity, which we are excited to capture in the years ahead. My interest in the Wasmer-Schroeder strategies continues to be strong, with $2.8 billion in net flows for the first half of the year. In just a few years, Wasmer Schroeder strategies have gone from zero to 31% of our managed account solutions assets at Schwab. This clearly demonstrates our ability to drive win-win monetization as clients have benefited from lower cost fixed income strategies than they had previously, and we are benefiting from outsized flows in fixed income. Ameritrade clients migrating to Schwab are showing appetite for our advice offers. When we look at net flows into our managed investing solutions here today, more than 280 million came from legacy Ameritrade clients after they migrated to Schwab. Finally, we continue to build on our Schwab personalized indexing offer. In June, we rolled out a new digital experience for our RIA clients and gave them more flexibility to tailor their clients Schwab personalized indexing portfolios. Advisors are also now able to digitally onboard their clients into our direct indexing offer and have access to a new digital dashboard that highlights the performance of each account. Turning now to client segmentation, just last week we launched two new branded client experiences to meet the unique needs of our retail self-directed clients with more than $1 million and those with more than $10 million in assets. The new experience for clients with $1 to $10 million is called Schwab Private Client Services, and the experience for our $10 million-plus clients is Schwab Private Wealth Services. Our goal is to meet the needs of these clients across several key dimensions, relationships, service, operations, product, and price. The differentiated experiences will include access to a dedicated Schwab consultant who can help them manage their financial life, access to dedicated service teams access to a range of wealth management specialists, discounted mortgage pricing, special client events, and more. Our high net worth clients already represent more than two thirds of our retail client assets. And as you can see on this page, they also represent the areas where we have the greatest growth potential as these are our fastest growing retail segments. Meeting the needs of key client segments as we are doing with these new experiences will continue to support our long-term asset growth. We've spent quite a bit of time in this forum talking about the opportunities for growth that we see ahead. I've described in some detail how our strengths have positioned Schwab to sustain an organic growth rate of 5 to 7 percent over the long term by attracting new assets from existing clients and attracting new clients to Schwab. These strengths include a client base that is in the peak of wealth accumulation. Dedicated relationships, our commitment to RIA growth, our brand, our acquisition model, and our workplace pipeline. As Walt shared earlier, our 2023 year-to-date organic growth rate remains in this consistent range, north of 5 percent. And we are well positioned for this to continue. As we've shared in prior quarters, we have an attractive $3.5 to $4 billion revenue opportunity ahead in wealth management as we increase advice penetration among retail clients and grow our lending offer for all clients. I'll wrap up where Walt started. Our through clients' eyes strategy remains our North Star. With clients at the forefront of every decision we make, we are successfully delivering on a historic integration while making progress on our strategic focus areas. At the same time, we are adhering to the financial discipline that is the hallmark of our all-weather business model by identifying opportunities for cost savings and efficiencies that will allow us to reinvest in our clients and reward our stockholders. With this approach, we are on track to harness the tremendous long-term growth opportunities that lie ahead. And with that, I will turn it over to Peter.