Charles Schwab Corporation (The)

Hello and welcome to the Schwab 2023 Fall Business Update. This is Jeff Edwards, Head of Investor Relations, and I'm joined today by our panel of presenters, Co-Chairman and CEO Walt Bettinger, President Rick Worcester, and CFO Peter Crawford. We have plenty to cover today, so I'm certainly going to get out of the way here pretty quickly, but let's touch on a few housekeeping matters. Similar to past events, I'll be helping facilitate Q&A and another friendly reminder to please adhere to the one question, no follow-up format. As always, please don't hesitate to reach out to your family IR team with any clarifying or other reconciling questions. The slides for today's business update will be posted to the IR website at the beginning of Peter's section. And finally, the forward-looking statements page in all its glory, which reminds us all that the future is indeed uncertain, so please stay in touch with our ongoing disclosures. And with that, I'll turn it over to Walt.

Well, good morning, everyone. Thank you for joining us for our October Business Update. Rick, Peter and I are excited to share good news with you as we review our third quarter. You'll hear about our tremendous progress in the conversion of former Ameritrade clients over to Schwab, our ongoing success serving clients and gathering assets, the significant opportunity for ongoing organic growth and marked improvement in some of the key indicators that have attracted outsized attention recently, including the pace of client cash realignment. But maybe most importantly, you'll hear about the consistency of our strategy, our ideal positioning in the fastest growing segments of the investment services industry, our ever-strengthening position as the low-cost provider, the world-class trust and confidence our clients place in us, our superior pre-tax profit margins even during one of the most difficult environments possible for our financial model and our commitment to disciplined ongoing investments designed to drive organic growth for many years to come. Now, certainly I understand that the overall backdrop of the environment today is decidedly negative. And I understand that for some, it might be easier to look at the near term challenges we face at Schwab. But I encourage you to consider the entirety of our position and the potential it creates for the future. So the actions of the Federal Reserve to recover from their mistaken transitory inflation viewpoint continue to reverberate across the financial markets. These actions are slowing the rate of inflation, but at a significant cost to the markets, to consumers, to investors, and to firms like Schwab. While short-term interest rates continued to rise over the past year, longer-term rates are now also rising. During the third quarter, investors began to feel this pain. They acknowledge it as investor sentiment plunged during the quarter, moving down into bear market sentiment. Of course, it's not surprising as both equity and fixed-income markets continued to suffer. Cash was virtually the only safe place to invest. An interesting perspective, as at Schwab, we have always believed that cash should be a key part of every investor's long-term investment portfolio. I think it's particularly important to look at the chart on the bottom of this slide and place ourselves in the minds of investors who viewed their bonds as conservative ballast against the expected volatility of equity markets. Even those who maintained shorter bond holdings of two to five years have seen substantial declines in their assets between 7 and 13 percent. Again, truly, there have been few places for investors to go in recent times to avoid losses other than in cash. And of course, at Schwab, we've been similarly impacted by falling bond prices and a rush to cash investments. But throughout this period, our clients have continued to trust us, continue to be loyal, and continue to recommend Schwab as a place for their friends and family to invest. And third parties clearly feel the same way. With Schwab Bank recently named by a wide margin, incidentally, the most trusted bank in the industry, by Investors Business Daily. And Schwab was ranked by J.D. Power as number one in investor satisfaction among full-service wealth management firms. I share these third-party endorsements not because we place undue weight on them, but as a reminder that our strong client positioning contributes to our optimism for ongoing organic growth. And the metrics back this up. Year to date, we've captured approximately $230 billion in core net new assets and opened well over 2 million new brokerage accounts. Of course, these firm-wide new asset figures reflect the expected attrition from the integration of Ameritrade clients. And of course, the July and August net new asset figures were impacted as some of the 7,000 REA firms from Ameritrade opted to find alternative custodians ahead of our Labor Day conversion by either their decision or in cases by ours. And while this attrition weighed on our net new assets for those two months, it was less than what we had allowed for in our original deal-related modeling, and it has largely passed. By looking only at clients who originally opened their accounts at Schwab, we've captured approximately $250 billion in core net new assets year to date, an increase of about 12% year over year. Again, illustrating the strength of the business, and that works out to an over 6% organic growth rate. So let me pivot here for a few moments, speak more in depth about the Ameritrade acquisition and progress on our integration efforts. We announced the deal in late 2019, merely a few months before the COVID pandemic hit. At the time of that deal announcement, Ameritrade had approximately $1.3 trillion in client assets, 12 million client brokerage accounts, and was processing about 1.3 million trades per day. By the time we got to year end 2022, those figures had grown substantially. to approximately $1.8 trillion in client assets, 16.6 million client brokerage accounts, and amazingly, about 3.6 million trades per day. Now, from the day the deal was approved by stockholders and regulators, we began an integration process that we refer to as best of both. It means that unlike in most acquisitions where the acquired firm's clients are merely ported over to the acquiring firm's platforms, we instead carefully evaluated the capabilities of both firms and built capabilities that would maintain and leverage the best of both firms' services and platforms. This approach was consistent with our through client size strategy, and we believe it also sets up the combined firm in an ideal position for long-term organic growth after the integration is complete. So where are we today? We've completed three of five total transition groups. These groups make up about 80 percent of the total Ameritrade retail clients and 100 percent of the RIA firms who previously custodied their client assets at Ameritrade. To date, we've executed this integration with a level of accuracy and service that I have not previously seen in any conversion. During the three conversions to date, our speed to answer client phone calls has averaged less than one minute. And with our largest conversion over the Labor Day weekend now completed, we are averaging 45 complaints per one million of converted accounts. I just want to reemphasize that. Forty-five complaints per one million of converted accounts. Just to put that into context, Client escalations during the mean stock activity in early 2021, there were approximately 200 escalations for 1 million accounts. Now, clearly, there is an adjustment period for some of our clients as they familiarize themselves with new processes, new websites, new mobile apps, and we continue to make enhancements in every one of these areas. Now, the work is far from done. But even the most negative observers have acknowledged the skill and attention to detail that is going into our integration efforts. And clients are responding. Former Ameritrade retail clients are rewarding us with levels of loyalty and retention that are far better than we anticipated when we announced the acquisition back in 2019. And similarly, attrition from former Ameritrade RIA custodial clients is also below our estimates. Even taking into consideration the substantial amount of assets that we actively moved away from because we felt these firms did not either fit our risk profile at Schwab or who would be better served by converting to an alternative custodian given the RIA firm's emphasis on maintaining a substantial sales commission driven business model. Excuse me. And as we've communicated, almost all RIA attrition occurs before the conversion date because a firm considering leaving Schwab would not want their employees and clients to learn our new processes and technology, only to switch to a different custodian and have to relearn all new processes and technology at that new custodian. We carefully tracked all RIA firms and their engagement with the many seminars and planning events that we offered prior to the conversion weekend. And not surprisingly, those firms who took advantage of these programs, which make up the majority of the client assets, have had the smoothest path to conversion. Lastly, the vast majority of active former Ameritrade RIA firms are operating their businesses, placing trades, and already opening new accounts on the Schwab platform. Where RIA firms have offered us suggestions for enhancements and improvements, we're fast at work making these, and we're grateful to the firms for their ideas. When we complete the final two transition groups, we are confident that we will have the broadest, most robust offering in investment services for individual investors and the advisors who serve them. From industry-leading advisory solutions to world-class trading platforms, banking solutions at exceptional pricing, award-winning digital content and investor education, including the newly renamed Schwab Network, 24-7, 365 phone service combined with almost 400 branches for in-person planning and service, value pricing that is supported by what we believe is the lowest cost structure in the industry, and a rich history of client benefiting disruption. Rick, before I turn it over to you, I want to take a moment to review a slide that I've shared in the past. Despite the environment, despite the noise, we are supremely confident in our positioning for long-term growth. As I mentioned earlier, we are ideally positioned among the fastest-growing segments of investment services. Our competitive advantages are unmatched, and our current domestic market share is modest at approximately 12 percent. I truly believe the opportunity before us is quite bright.

Rick? Thank you, Walt, and good morning, everyone. I want to spend our time today talking about how we've driven 5 to 7 percent organic growth historically and how we plan to drive it in the future through our model of generating 3 to 5 percent of NNA growth from our existing clients and 2 to 3 percent of growth from new clients and a return on our strategic focus areas. Our through client size strategy has allowed us to generate 3% to 5% growth from existing clients. When clients turn to Schwab, they know they will get industry-leading value, exceptional service, and transparency in every interaction they have. By treating clients the way they want to be treated, we build trust and we're able to deepen relationships and capture a greater share of wallet. You see this in the $51.2 billion in year-to-date NNA we see from existing retail clients, and the $43.4 billion in year-to-date NNA we see from existing advisor clients. We have also been able to consistently drive 2 to 3 percent asset growth from new clients. This is due in part to our diversified acquisition model, which includes leveraging the strong personal relationships created by our branch footprint and our RIA service model. earning referrals from our delighted clients, and deploying data-driven marketing campaigns, and investing in complementary acquisition channels, including our workplace business, which I'll talk more about shortly. Year-to-date, this has driven 744,000 new-to-firm households to our retail business, approximately 60 percent of whom are under age 40 and approximately 240 advisor and transition teams. The third part of our growth recipe is our continued investment in our strategic focus areas. I'll start today with scale and efficiency. We shared with you in July that we are taking steps to enhance our flexibility and efficiency with an annual run rate expense savings target of $1 billion plus. Walt spoke earlier about our Ameritrade integration, and one component of our expense savings will come from capturing $500 million in remaining Ameritrade expense synergies. Another $500 million-plus in annual savings will come from streamlining our operating model, which includes eliminating positions from predominantly non-client-facing areas and reducing our real estate footprint. As we've previously shared, these actions are expected to result in a non-GAAP expense charge of $400 million to $500 million. a portion of which you saw in our results this morning, with the remainder to follow either later this year or in 2024. With these actions, we expect year-over-year expense growth to be roughly flat, even while we continue to invest aggressively in client products and service. It's this investment that leads to the win-win monetization I'll talk about now. One area we are investing in, and one I've discussed in this forum several times, is wealth. I've said it before, there is a bull market for advice. Today we have approximately $530 billion in retail assets receiving ongoing advisory services. Not only do these clients see Schwab as a place to get advice, but our advice offers have among the highest client promoter scores across all of Schwab. With the investments we've made and continue to make, more and more of our retail clients are turning to us for wealth management as they move into a life phase where they need advice. You can see this in our managed investing flows where we've seen year-to-date record highs in Schwab Wealth Advisory, Wasmer Schroeder, and Schwab Personalized Indexing. Year-to-date net flows in the Schwab Wealth Advisory are a record $9.2 billion. up nearly 60% over last year. The third quarter was also a record quarter for Schwab Wealth Advisory, with $3.3 billion in flows coming into our flagship wealth solution. Year-to-date net flows into Wasmer Schroeder are a record $4.5 billion, up nearly 130% over last year. While we believe we are still in the early days, clients and FCs are starting to learn about the potential benefits of direct indexing. and the combination of tax benefits and personalization are attractive to them. Lending is also an increasingly important part of the wealth management relationship, and we've recently launched a fully digital onboarding experience that lets advisors access a pledged asset line or a PAL for their clients. The new PAL process reduced the time to submit a PAL application to just minutes and enables clients to be approved in just one to two days. Growing Pal is a win-win opportunity. It's good for the advisor because it helps them retain assets and compete with banks. And it's good for Schwab because of the positive spread to securities. Now, I'll turn to another area where we have a win-win monetization opportunity, and that's our workplace business. Our workplace business meets the needs of individuals who become investors through their employers and includes our retirement plan business and our stock plan business, among others. This business is strategic. as it allows us to introduce millions of workplace participants to Schwab, many of whom are investing for the very first time, providing us with a pipeline of future retail and advisor services clients. Workplace connects more than 5,500 employers, 2,700 advisory firms, and 2.5 million investor households to greater Schwab. In fact, today, one in three new to firm households at Schwab are originated through our workplace business. We retain 50 percent of eligible rollover retirement assets, and our stock plan business contributes about 10 percent to retail NNA. And finally, nearly 20 percent of workplace households have a broader relationship at Schwab, and when they do, they have four times the assets through those relationships. With workplace, we have an opportunity to fuel NNA growth for Schwab into the future, through our grow, retain, and extend approach. To do this, we are making investments to more fully integrate our workplace digital experiences so participants can benefit from all we have to offer on Schwab.com, mobile, and with our broader retail offer. And we're investing in our technology. This will require a multi-year investment and will provide a deeper dive and more specifics about this opportunity at future updates. I'll turn now to our third strategic focus area, client segmentation. Last quarter, I talked about our two new branded client experiences within retail, Schwab Private Client Services and Schwab Private Wealth Services for our 1 million plus and 10 million plus clients, respectively. This is all about delivering differentiated experiences across relationship, service, operations, product, and price. the launch has been very well received by our clients. This quarter, I'll talk more about our trader offer. Traders are one of our most highly engaged client segments. On average, compared to non-trader retail clients, they bring in 6.5 times the NNA and have 3.8 times the household assets and generate 2.8 times higher ROCA. We're continuing to invest in this offer to provide the world-class trading experience traders expect. Just today, we launched our reimagined trader offer, Schwab Trading powered by Ameritrade. With this new experience, we're combining the best of Schwab and Ameritrade by giving all of our clients access to the thinkorswim and Schwab trading platforms. Unparalleled trading education, including many elements of Ameritrade's trader education offer, and specialized service. Traders at Schwab have access to all that Schwab has to offer, wealth management, banking, and more. In fact, our virtual active trader branch includes active trader financial consultants who focus on both trader coaching and wealth management to help meet the unique needs of qualifying traders. We think this offer sets the bar for what a trading experience should be. Putting it all together, with our through client size strategy, we are well positioned to consistently generate 5 to 7 percent organic growth from both existing and new clients. And there is an opportunity ahead as we start to see returns on the investments we've made in our strategic focus areas. As we've shared in prior quarters, we have an opportunity to close the share of wallet gap between Ameritrade and Schwab clients, and we have an attractive opportunity to delight our retail clients with our wealth management and to delight both our retail and advisor clients with our lending offerings while growing our revenue. And I'll wrap up where Walt started. Our relentless focus on serving our clients' needs creates a clear path to organic growth and delivering long-term value to our clients and stockholders. And with that, I'll turn it over to Peter.