Charles Schwab Corporation (The)

Hello, everyone, and Happy New Year. Welcome to the Schwab 2024 Winter Business Update. This is Jeff Edwards, Head of Investor Relations, and I hope everyone is still on track for their respective resolutions. While it is a new year, we are joined by the same venerable panel of presenters, our co-chairman and CEO, Walt Bettinger, President Rick Worcester, and CFO Peter Crawford. Obviously, a bit of a different structure to the Winter Business Update this time around to be 100% virtual. But you'll still get the same in-depth perspectives from the team regarding client trends and behavior, continued progress on strategic initiatives, and the tremendous opportunity we see on the horizon. Before diving in, let's quickly review the rules of the road for today. Q&A remains one question, no follow-up, though we certainly encourage you to jump back into the queue if additional questions come to mind. As always, please don't hesitate to contact the Schwab IR team to work through any clarifying or some of your more tactical questions. and the slides for today's update will be posted to the IR website following Peter's remarks. And certainly, last but not least, the forward-looking statements page, reminding us all that the future is uncertain, so please stay up to date with our disclosures. And with that, Walt.

Thanks, Jeff, and good morning, everyone. Thanks for joining us for our January business update. We're here in frigid West Lake, Texas, where I think it was 15 degrees when I hopped in the vehicle this morning to come to the office. But Happy New Year, and again, thank you all for joining us. So as we close the book on 2023 and begin thinking about 2024, it seems like a natural time to reflect on the year that just closed. It was certainly a challenging year for our clients, for our stockholders, and for us. Perhaps it was the most challenging in my time at Schwab, certainly the most challenging since the bursting of the internet bubble in 2000. And yet at the same time, I couldn't be more excited about the opportunities before us. In 2024, you're going to see an emphasis on execution, but with consistency around our strong client fundamentals and strategy. I recognize that 2024 is going to be a transition year from a financial standpoint, albeit one with steadily improving financial results throughout the year and a very strong exit into 2025. It's unrealistic to think that the challenges of 2023 simply disappear because the calendar flips over. But when I look ahead to 2025, 2026, and 2027, I'm quite confident that the power of our client franchise is going to shine in terms of financial results. There's much work to do in 2024 and beyond, and no one at Schwab is kidding themselves that everything is perfect right now. But my confidence is high. I'm incredibly encouraged by what I see, whether it's our positioning, our client relationships, the solutions that we offer our clients, or the focus of the entire organization on the future. If I could take you back in time to the mid-2000s, that was a period when Chuck first began speaking with me about the possibility of becoming CEO someday. And as a result of those discussions, I went on a listening tour of former very senior executives of Schwab. My goal was simply to ask them their views on the firm and our prospects for the future. It's important to keep in mind that many of them had been let go or terminated in the turmoil that followed the internet bubble bursting. They'd experienced this incredible run-up in the value of the firm, followed by the pain of multiple rounds of employee layoffs and a stock price that had collapsed from the 50s to mere single digits. And although each of them used different words, they all basically said the same thing. They were fearful that Schwab's best days were in the past. I tried to absorb their counsel and their feedback objectively. Of course, I was balancing the personal challenges that they had each been through as I listened to their feedback. But I fundamentally did not believe that the firm's best days were in the past. There were far too many strains for me to believe that. And over a few years, with a lot of hard work by many people, I believe it's pretty clear that we proved them wrong. as our stock price grew over tenfold and assets that clients entrusted us with grew similarly. I understand that today there are some who might be asking similar questions, but I am confident that our best days are ahead of us. In my opinion, after four decades in this business, there is no firm better positioned for the future. No firm has our breadth of client solutions, investing, trading, custody, advisory, workplace, and all delivered with an incredible value for investors and advisors. I expect us to make steady progress in both client flows and financial performance throughout this upcoming year, and then I fully expect us to deliver outstanding results over the following years. So, let's go ahead and dig into 2023. It was a year of many twists and turns for our investor clients as well as for our stockholders. And all the while, we made substantial progress on the largest acquisition-related conversion in the history of our industry. Coming off a difficult 2022 for investors, the first quarter of 2023 began with turmoil in the regional banking world. Investor sentiment bounced between negative and positive throughout the year before eventually ending quite positive. Equity returns were strong in 2023, although largely concentrated in a modest number of stocks. For Schwab stockholders, it was a difficult year. Our stock lost about 17% of its value. The core reasoning behind most of this decline is our commitment to proactively following our through clients' eyes strategy. Because throughout 2022 and 2023, we reached out to our clients and encourage them to move their yield sensitive or what we sometimes refer to as longer term investment cash into higher yielding alternatives. And they did to the tune of several hundred billion dollars. And as an aside, although these actions have temporarily impacted our revenue and earnings, we would do the same thing every time. The client loyalty that we build by being proactive will pay dividends in the long term. as clients continue to entrust us with their investment dollars. Progress on the Ameritrade conversion was exceptional, with about 90 percent of the client accounts and assets all accurately and successfully converted. And despite the substantial focus on this effort, we continued to make real progress on other client-related initiatives that helped set the table for future organic growth. Let's go ahead on this slide and take a deeper look into 2023 from the lens of our investor clients. The Open Market Committee of the Federal Reserve continued to recover from the mistaken transitory inflation viewpoint. They raised rates multiple times in 2023 before peaking at close to 5.5 percent as inflation began to ease directionally toward the Fed's long-term goal of 2 percent. And although equity markets continue to be volatile, ultimate returns were actually quite strong, with the S&P 500 rising over 20% and the NASDAQ composite increasing over 40%. Investor sentiment was also volatile throughout 2023. It recovered rather dramatically in the fourth quarter of the year from a strong bear sentiment in the third quarter and ended the year with a solid bullish viewpoint. But despite this mixed sentiment, our clients remained highly engaged with the markets and with Schwab. Clients were net purchasers of equities last year by a 1.2 to 1 ratio. And although trading activity was about 10% lower than in 2022, it was still much higher than pre-pandemic levels. And net flows into our retail advisory solutions were a very strong $33 billion. Last year was a solid year in terms of client flows for our firm, particularly given the volatility of the markets and the negative sentiment that existed throughout much of the year. Core net new assets were slightly above $300 billion, and core net new assets from clients who originally opened their accounts with Schwab were about $30 billion higher. The difference, of course, reflecting the attrition from certain former Ameritrade clients. Now, in terms of the Ameritrade conversion, we've converted approximately 90% of the accounts and assets. That totals about $1.6 trillion in assets and 15 million accounts. And we'll convert the balance in May of this year. There's no question that this conversion has been a success. Attrition continues to track below the estimates that we shared in 2019 when the transaction was announced. Of course, we hate losing any clients. but we're realistic that some attrition is to be expected, and also knowing that we would be proactively stepping away from serving certain former Ameritrade clients for a variety of logical reasons. Stepping back a bit to look at the bigger picture, we are committed to our through client-side strategy, and it underlines our no-trade-offs executions. We believe the backbone of organic growth is delivered by focusing on four areas, value, service, transparency, and trust with both our clients as well as our prospects. The ultimate measure of value for clients is the balance between the quality of service and guidance they receive and the revenue we earn that pays for this service and guidance. And we don't believe any investment services firm delivers a better value than Schwab. The quality of our service is well recognized. And I'm going to go ahead and speak on that a little bit more momentarily. And the revenue we earn averages less than one quarter of 1%. In fact, we've almost halved what clients pay us in one form or another over the past 20 years. And when you compare that to what investors pay certain wire houses or independent broker dealers or regionals, Schwab clients pay between approximately half or even in some cases close to a quarter of what they pay these other firms. Now, that difference adds up to an enormous drag on client wealth creation over the years. It's one of the key structural advantages that clients of Charles Schwab benefit from. And we've been recognized for many years as a leader in client service in the financial services world. And despite the complexities inherent in the Ameritrade conversion, we retained our world-class results in 2023 for client service. Our net promoter score in our retail business remained in the mid-60s, while our overall speed to answer phone calls was about 30 seconds, with retail averaging just below 20 seconds last year. Now, these metrics are very important as our reputation for service and creating client loyalty extends across all of our client-facing businesses. Delivering world-class services is a never-ending area of emphasis, requires training, investment in digital and self-service capabilities, as well as a philosophical deep belief in the nobility of service. Service has always been at the core of our success at Schwab. will always remain so transparency is also a hallmark of schwab whether it be defined as our open architecture approach to investing the clarity of any fees or charges assessed to our clients or the fact that we've been a leader in both guaranteeing the security of our clients assets as well as their overall satisfaction our satisfaction guarantee is unique across the industry it's provided our clients with the confidence they deserve as they make investment decisions. And although the payments we've historically made under this satisfaction guarantee are relatively modest, we believe deeply in the philosophy of guaranteeing our clients delight with our services and guidance. We often say at Schwab that we are less in the investment business than we are in the trust business. And this was never more true than in 2023. As clients wanted to access their client cash that we held at our banks, we ensured they had ample liquidity to move that cash into money market funds, bonds, treasuries, or other investments. And while this happened more quickly than we would have expected, given the unparalleled pace of Fed rate moves, our contingency plans worked as designed to ensure that we could always be there to support our clients. And as a result, during a period of heightened concern about bank stability across the industry last spring, our clients were able to have confidence in Schwab. We're honored that both J.D. Power and Investors Business Daily gave our firm and our bank the highest scores in the areas of investor satisfaction and trust, respectively, last year. And we're committed to maintaining and building trust with our clients in the years to come. Before I turn it over to Rick, I want to take a moment to remind everyone that our strategies, our philosophies, and our execution at Schwab are not random. We evaluate everything we do by screening it through a series of lens that apply our experience and knowledge about the investing industry, both today as well as where it's headed in the future. We categorize these viewpoints into three buckets, and they may look familiar to those of you who've dialed into our calls in the past. Broad trends, client views, and the competitive landscape. If I were to highlight the viewpoints on these three buckets, it would be, first, we are ideally positioned to benefit from growth in the areas of the industry that have grown the fastest in recent years and project the most organic growth potential for the future. Self-directed investors and traders, RIAs serving as a fiduciary to their clients, and low-cost, tax-aware investing. Next, clients are looking for firms that offer a breadth of solutions that are personalized for them and make sense within the context of a financial plan. Ideally, firms should be able to assist clients with both sides of their balance sheet, investing and borrowing. We believe the future will be won by firms that find the right balance between offering digital and mobile efficiency on par with non-financial services experience and, of course, paired with access to well-trained and credentialed professionals. Not surprising, given our viewpoints, we believe Schwab is optimally positioned for long-term organic growth. Rick, let me turn it over to you.

Thank you, Walt, and good morning, everyone. Schwab is in a position of strength to deliver on the client expectations that Walt just spoke about. I'll spend our time together this morning talking about how we delivered for clients in 2023 within the strategic focus areas that you see on this page. I'll also share more about the investments we're making to continue building on our strong foundation so we can do even more to help our current and future clients meet their financial goals, which in turn will bolster our organic growth and our competitive positioning. I'll start with scale and efficiency. Our number one priority in 2023 was to execute the largest integration in the history of the industry. And it has been a tremendous success. As Walt highlighted, we brought about 90% of Ameritrade clients to Schwab, representing $1.6 trillion in converted assets 7,000 RIA firms, and 15 million total converted accounts. While clients are getting used to navigating a new experience and a different way of doing things, they are also seeing the breadth of capabilities on our combined platform. We also focused in 2023 on reducing expenses. We captured approximately $500 million in annual run rate expense savings through streamlining our operating model, position eliminations from predominantly non-client facing areas as well as reducing our real estate footprint the remaining 400 million in ameritrade expense synergies will be realized in the second half of 2024 following the completion of the integration when we think about win-win monetization we think about meeting more of our clients total financial needs including more holistic solutions lending capabilities and access to high quality, fairly priced products. This attracts and retains client assets and at the same time improves our economics. We generated strong results in our advice business with a 29% year over year increase in net advise flows, including 12 billion in net flows into our proprietary full service wealth management solution Schwab Wealth Advisory. This is a record for our firm. Wasmer Schroeder net flows were $6.7 billion, a record for the offer and a 90% increase over the prior year. And when it comes to direct indexing, we've enhanced our Schwab personalized indexing offer with expanded customization capabilities, a new account-level digital dashboard, and digital enrollment. We launched our fully digital pledged asset line, or PAL, for RIA clients, that gives advisors the ability to submit a PAL application in minutes, and clients can get approved in hours for straightforward applications and in just days for complex situations. We also launched Schwab Investing Themes, which allows self-directed investors to buy and sell themes of securities that align with their personal interests and values, all available through Schwab.com as well as our mobile app. Finally, Our goal in the third focus area is to see through clients' eyes to meet the unique needs of each of our client segments. Highlights from the last year include introducing our specialized asset-based segments for retail high net worth and ultra high net worth clients, which we call Schwab Private Client Services and Schwab Private Wealth Services. These tailored offers meet the unique needs of these clients who represent about 70% of our retail assets. Schwab Private Client Services includes access to a financial consultant, dedicated service, expanded access to specialists, as well as products and fee discounts. Schwab Private Wealth Service delivers all that, plus prioritized service, enhanced support, expedited requests, priority access to wealth specialists and exclusive events, pricing benefits, American Express statement credit, bank benefits, and more. We also in 2023 launched Schwab trading powered by Ameritrade, a reimagined trading experience made possible by the combination of the best of Schwab and Ameritrade. All clients can now access the thinkorswim trading platform, giving them access to a unique combination of powerful tools and dedicated service from experienced trading professionals alongside education, for all levels of experience. We also, in 2023, enhanced our offer for all RIA clients. All clients can now access ThinkPipes, our ThinkPipes trading platform, which offers real-time charting, pre- and post-trade allocations, and complex options functionality. In addition, we launched Ameritrade's iRebel and Model Market Center on Schwab Advisor Center, and are taking a measured approach to ensure a seamless onboarding experience for new iReval users, with general access rolling out early this year. Finally, we acquired the Family Wealth Alliance to expand our capabilities to serve both single-family and multi-family offices. As we look ahead in 2024, we will continue to focus on and make investments in our key strategic focus areas to drive our organic growth fuel our virtuous cycle, and help clients achieve their financial goals. One thing I'll point out about this page is that given our focus on continuing to make Schwab an easy place to do business, we are adding a fourth pillar to our strategic focus areas called ease, which is about delivering exceptional and easy experiences to our clients. With 35 million client accounts, serving our clients exceptionally well will be a big driver of our organic growth. When we think about scale and efficiency, we're laser focused on successfully converting the final Ameritrade client transition group and then capturing our remaining expense synergies. We'll continue making investments in artificial intelligence to empower our teams to serve clients even more effectively. And finally, we will invest in automation and systems modernization over the next several years allowing us to drive greater efficiency. Win-win monetization remains an important opportunity where we can both delight clients and boost our revenue. Looking ahead, we'll continue to make investments to enable clients to keep more of their financial life with us, including a continued focus on lending capabilities that meets the needs of more clients across both IS and AS. We'll enhance our wealth and advice offerings, including making continued investments in Schwab Wealth Advisory. We'll continue to build on our momentum with personalized investing solutions. And we'll continue to broaden the breadth and depth of product offerings with new offers like alternative investments. And we continue to do work to integrate the workplace experience more into Schwab, allowing our workplace clients to benefit from all we have to offer at Schwab. Within client segmentation, we'll remain focused on meeting the unique needs of our client segments, including our higher net worth clients, traders, and RIAs. Part of this is providing differentiated client experiences, just as we've done this year with the new retail high net worth and ultra high net worth offers that I spoke to earlier. This also means enhanced service models, specialized capabilities, our powerful trading platform, and our tailored education. Our fourth focus area is ease. With the size of our asset base, we can drive growth by simply delivering easy and exceptional experiences to our existing clients. This is where you'll see us continue to invest to make Schwab the easiest place in the industry to do business. And it's important to remember something Walt highlighted earlier. Our client's frame of reference for ease is not just other financial services firms, It's the experiences they have on Amazon or Uber or DoorDash, and that's the measure of ease we are striving to accomplish. We want every experience a client has with us to be an exceptional one. That means we'll continue to make enhancements on all of our channels. We'll continue to digitize client workflows and to make sure our clients have access when and where they want it, whether that's on Schwab.com or the mobile app, or when they call or chat with our service teams or walk into a branch. We believe that the combination of these efforts will help power our long-term organic growth. Guided by our seeing through client size strategy, we are well positioned to retain our clients and to win new ones, fueling our organic NNA growth over the long term. I've spoken about Schwab's unique strengths in this forum in the past. We have a top one or two position in the two fastest-growing segments of financial services. Our strengths will help us attract assets from our existing clients, including our younger client base, valuable dedicated relationships, strong RIA growth, and our emphasis on ease. We'll attract new clients through the combination of the strength of our brand, our proven retail acquisition model, and our continued commitment to serving RIAs. with the four strategic focus areas i just talked through we'll be able to meet evolving client needs while making it easier for clients to keep more of their financial lives with us helping us attract n a over the long term schwab's future is bright and before i turn it over to peter i'd like to spend just a couple more minutes talking about some of the exciting opportunities ahead one of our biggest opportunities is to fully harness the powerful combination of Schwab and Ameritrade. While it is still relatively early days, when we look at our Ameritrade clients, we know they are already benefiting from the breadth of Schwab's capabilities, including both lending and wealth. Ninety-five percent of former Ameritrade FCs have helped a client find a solution to their needs by enrolling them in a Schwab wealth solution. And former Ameritrade FCs accounted for about 20% of our record Schwab Wealth Advisory net flows in 2023. Today, former Ameritrade client advice penetration is at approximately 10%, which is above historical levels. Schwab clients are benefiting as well. We launched the new Schwab Trading Powered by Ameritrade experience in October, and at year end, more than 80,000 Schwab clients had created new thinkorswim accounts. And about 20% of new to firm retail clients opted to access a thinkorswim account. The opportunity ahead for us is tremendous. We have about a 12% share of the market, and we serve the two fastest growing segments. I just spoke about our early wins in increasing Ameritrade advice penetration. As we continue to win here, we believe we have a $500 billion-plus share of wallet NNA opportunity ahead of us. And we believe the win-win monetization opportunities I've spoken about represent a $3.5 to $4 billion wealth management and bank lending revenue opportunity. To wrap up, our through client size strategy continues to guide us into the next chapter. We're in the final stages of the Ameritrade integration and we made meaningful progress across our key strategic focus areas in the last year. Looking ahead, we are well positioned to continue our healthy organic growth and the opportunities in front of us remain highly attractive, both for Schwab and for our clients. And with that, I'll turn it over to Peter.