Charles Schwab Corporation (The)

and welcome to Schwab's 2024 Fall Business Update. This is Jeff Edwards, Head of Investor Relations, and I'm joined today by a slightly larger contingent of esteemed presenters, including Co-Chairman and CEO Walt Bettinger, President Rick Worcester, new CFO Mike Verdeci, and Managing Director Peter Crawford. Today is certainly a little bittersweet, as the team is certainly excited to provide their perspectives about all the exciting things happening at Schwab right now. But today also marks the final business update for Walt and Peter. I don't believe I'm going too far out on a limb to say that we're all going to miss having both of them in the room with us each quarter, especially Walt, who has helped set the energy and pace for these business updates for well over a decade and a half. I'm certainly going to reach out to Mr. Fowler to see if he's still planning on hosting quarterly business update watch parties for those former Schwabies who are interested in joining from his undisclosed location. Given the larger group today, we should have a familiar but slightly different cadence to the session. Walt will kick things off with some opening remarks, and then he and Rick, who will be stepping into the CEO role come January, will provide insights around our clients and overall strategic picture. And then given the recent CFO transition at the beginning of the month, we thought it made sense to allocate the financial update between Peter, who will focus on three Q results, and Mike, who will touch on our thinking as we enter the final stretch for 2024. And then this time around, we will save a few extra minutes at the end for some closing remarks from Walt. Some quick housekeeping reminders. The slides for today's business update will be posted to their usual spot on the IR website at the end of the prepared remarks. Q&A remains structured as the one question, no follow-ups, and let's be mindful of those multi-part questions, though we certainly encourage anyone to re-enter the queue if another question comes to mind. And as always, please don't hesitate to follow up with IR with any additional questions. And finally, the thread that links us all together through the years, the eternal wall of words regarding our forward-looking statements, reminding us that the future is indeed uncertain. So please stay in touch with our disclosures. And with that, Walt, please start us off.

Thank you, Jeff. And good morning, everyone. Thanks for joining us for our October Business Update. I've had the honor of speaking with all of you at these updates dating back to 2005, when I assumed responsibility for our investor services or retail business. Of course, as Jeff indicated, going forward in my role as executive co-chair, I won't be participating in these calls. So I want to take a moment and thank all of you for your interest, your thoughtful questions, as well as the insights you shared with me over the years. Through all the ups and downs that changing economic and competitive environments lead to, I've always respected your professionalism and integrity. So thank you. So let's go ahead and dive right into our discussion. The third quarter was an important quarter for us during this transition year. Some might refer to it as an inflection point, although only time will tell on that perspective. Nevertheless, Rick, Peter, Mike, and I have a series of positive developments to share with you today. In the quarter, we made strong progress across virtually all key areas. Former Ameritrade clients are continuing to generate positive net new assets. That's the second quarter in a row. Our clients are growing transactional sweep cash balances. We've made meaningful progress in paying down supplemental funding. We're experiencing ongoing strengthening in firm-wide net new assets. Clients are enrolling into our retail advisory solutions at record levels. All these facts, along with other key metrics, illustrate the health of the franchise and fuel our solid optimism for the future. The third quarter did see some choppiness in the markets. Overall, our clients remained solidly engaged And we continue to make progress on key areas of focus across the firm, which Rick will spend some more time on. I think at this point, any questions about our long-term growth trajectory should seemingly be fading. During the quarter, inflation eased, and as the Fed began to lower interest rates, equity markets responded by reaching all-time highs. Investor sentiment remained bullish during the quarter. Overall trading activity was solid, including some modest softening late in the quarter as our traders digested the future of rates, as well as an equity market at all-time highs. Client engagement was quite healthy across our full spectrum of capabilities, whether it be trading, banking services, advisory solutions, custody for RIAs, as well as asset management. For the quarter, trades were up about 4 percent from the prior quarter, while margin balances grew over $1 billion to end at $73 billion. Managed investing, or retail advisory flows, broke another record, totaling $15 billion during the third quarter. Net new assets were also quite strong during what is sometimes a slower quarter, given that the summer months are included. Net new assets more than doubled from the third quarter of last year as former Ameritrade clients continued to generate positive, albeit still modest, net asset flows. And during the quarter, clients entrusted us with almost 1 million new brokerage accounts. Slide 9 here is particularly important for those who track our net new assets closely and have been trying to ascertain our progress back to our long-term track record of five to seven percent organic growth when we acquired ameritrade we recognized that we would be benefiting from a one-time large lift in client assets but along with it would be the noise of attrition that we estimated at five to six percent of assets ultimately applied to nearly a two trillion dollar client base What we saw during the third quarter as more of that attrition faded into the rearview mirror was that year-to-date net new assets for this year crossed over the trajectory of net new assets in 2023. We all know that net new asset levels can be fickle as multiple factors influence them, from investor sentiment to market performance, interest rates, and even the level of promotional cash for assets temporarily offered by some competitors. But when we dig through the various factors that do influence net new assets, we remain quite confident in our plans to build our way back to our historical ranges. This confidence is further supported by the response from former Ameritrade clients. As these clients become more familiar with the Schwab platforms and service experience, we are seeing an increase in client promoter scores or client satisfaction, whether it be retail or RIA clients. Their engagement across the business in our various solutions is further evidence of the success of the integration. And consistent with our best of both approach to the Ameritrade integration, legacy Schwab clients are now taking advantage of the thinkorswim trading platform at a robust level. Consistent with prior years, we continue to be recognized by a variety of third-party sources for our quality of services, our overall client offering, as well as our reputation. We were particularly proud of the fact that Investors Business Daily named Schwab Bank as the most trusted bank. Given the negative press and at times misperceptions regarding our bank over the past 18 months we were especially pleased with this particular result rick let me turn it over to you to review some more details of our progress serving clients and building the franchise and i'll close this out as jeff indicated after the q a session with just a few final observations thank you walt and good morning everyone

Picking up on where Walt left off, we've been able to achieve this industry recognition because our through-client-size approach remains the foundation of our strategy, and it will continue to drive our long-term growth through the cycle. In the near term, we deliver for clients through our four strategic focus areas. And in the third quarter, we advance initiatives in each area that you see on the screen. Starting with scale and efficiency, We've captured 95 percent of our Ameritrade run rate expense synergies and expect to capture the rest by the end of the year. In an industry where pricing matters to clients, having a low-cost position is a huge competitive advantage, one we're committed to maintaining. With our cost discipline and ongoing investments in our operations and infrastructure, we're continuing to lower our cost to serve clients. In 2024 to date, Our adjusted expense on client assets, or EOKA, fell to 12 basis points, down from 16 in 2019. Our second focus area is win-win monetization, which is all about how we attract and retain assets by meeting more of our clients' evolving financial needs. Wealth management is one of our key areas of focus, and clients continue to turn to us for advice across the spectrum of our solutions. Year-to-date managed investing net flows are up 65 percent compared to last year. In the third quarter, new and existing clients added $11.5 billion to our full-service wealth offers, which include Schwab Wealth Advisory and Schwab Advisor Network. This is 75 percent more than the prior year quarter. Clients continue to turn to Schwab Wealth Advisory in record numbers. We also recently began introducing a discretionary option for Schwab Wealth Advisory clients, which will help us meet even more of the comprehensive wealth management needs of investors. Clients continue to have strong interest in our other wealth offerings, including our Wasmer Schroeder fixed income strategies, where year-to-date net flows are up nearly 60 percent compared to last year. Clients are also increasingly turning to us for their borrowing needs. powering strong growth and adoption of our pledged asset line, or PAL. PAL balances reached a record $15.7 billion, an increase of 16 percent over last year. Notably, former Ameritrade clients represent 44 percent of PAL balance growth. Our account originations are up 57 percent year over year, and we expect if rates fall, the amount drawn on the PAL will increase. The increased adoption is in large part due to the digital enhancements that we've made to the process. Nearly 90% of PALs are now digitally originated and more than 40% of retail applications are now initiated by a financial consultant compared to less than 5% just a few years ago. This makes it easier on our clients and helps FC deepen relationships with our clients. The entire process from the time a client opens an application to when they can access their loan takes on average just one and a half business days and only minutes for most loans. This industry leading offer is delighting our clients and client promoter scores have increased roughly 30 percentage points in this product since 2021. With client segmentation, We're focused on serving distinct retail and advisor client groups with tailored solutions specific to their unique needs. RIAs have been and remain an incredibly important client segment for Schwab. We have the same goal as the RIAs we serve, to make a meaningful difference in the financial lives of our clients. And we are committed to continuing to help our advisors grow, compete, and succeed in pursuit of this mission. We have a world-class custody business and we'll continue to invest in it to provide RIAs of all sizes with the open architecture platform and unmatched resources, services, and education that they have come to expect from us. I'm thrilled to have the opportunity to dive into this in more detail at our upcoming impact conference next month. Turning to our retail business, we know that relationships matter. and we're investing to give more of our clients access to a dedicated financial consultant. Our ultra high net worth clients have been a particular area of focus as they have some of the most complex financial planning and wealth management needs among our client base. We've added additional expertise for this group, including wealth consultants and tax trust and estate experts. We've also enhanced our approach to service and operations for this client group, all of which has been well received by clients as evidenced by their high client promoter scores. We plan to launch retail alternatives to this client segment this quarter, which will be an important milestone for clients. Traders are another distinct and very important client segment for us. I believe that the combination of Schwab and Ameritrade has produced the strongest trader offer in the industry, and we are continuing to enhance our capabilities including investments in our mobile experience, our platform, and our research and education. Our fourth strategic area is the brilliant basics. With the size of our client base, the most attractive opportunity we have for growth is to delight our existing clients with every interaction they have with us so that they trust us with more of their assets, conduct more of their financial lives here at Schwab, and refer others to us because we are delivering each day on the client experience. In our retail business, our average speed to answer the phone was less than 40 seconds in the third quarter. Year to date through the third quarter, the client easy score for our service teams is 92 percent. That's the highest score we've earned from clients in four years. And the vast majority of incoming calls are addressed without the need to transfer the client call. In advisor services, our client easy score, which is a client's real-time rating of how easy it was to complete a specific task or transaction, was 89 percent in the third quarter. And in our workplace business, we were ranked number one by J.D. Power in participant satisfaction for our retirement plan digital experiences. I'm confident in our ability to deliver for clients today, and I'm energized by the opportunity to do even more as we look ahead. And as we look to the future, not just next quarter or next year, but through the cycle and for the long term, through clients' eyes will remain the foundation of our strategy. Through clients' eyes means we will relentlessly focus on serving the needs of individual investors, workplace clients, and RIAs and the clients that they serve. Through clients' eyes is what will continue to drive the virtuous cycle and fuel our growth well into the future as we invest in the brilliant basics scale and efficiency and serving more of our clients needs across client segments i do want to take just a moment here to express my gratitude to walt for his vision his leadership his focus on our clients and the integrity and selflessness in which he has led our company that vision is not changing as he transitions into his new role as co-chairman And I'm moving to my new role as CEO in the new year. I'm grateful to be stepping into this role in a period when our client capabilities have never been stronger and we are operating from a position of strength. And with that, I'll turn it over to Peter.