Walt Bettinger:

Thank you, Jeff, and good morning, everyone. Thanks for joining us for our July business update. Earlier this year, we spoke about 2024 being a transition year for the firm. We define this year as transitional for a series of reasons. We were anticipating completing the last transition groups from the Ameritrade acquisition. And we anticipated that former Ameritrade clients would move from negative asset flows to positive levels of net new assets. We further anticipated that former Ameritrade retail clients would begin to utilize Schwab capabilities in the areas of investment advisory, financial planning and banking. We anticipated the investment advisers, who formerly used Ameritrade for custodial services, would also begin to bring net new assets to Schwab, and their evaluation of our service levels would improve rather dramatically. We anticipated that Schwab users of StreetSmart would begin to take advantage of the powerful trading capabilities in the Thinkorswim platforms. From a capital standpoint, we anticipated that we would organically build capital throughout the year toward our long-term objectives. And from a financial standpoint, we anticipated improving, albeit somewhat uneven, earnings results during the year with Q4 2024 delivering somewhere between $0.80 and $0.90, and then with strong growth continuing into 2025 and beyond. Halfway through the year, this definition of a transition year is being realized, again, as we anticipated. And all of these issues position us for a strong period of growth in client metrics and financial results in the coming years. So, with these critical indicators of success unfolding in such a positive manner, let's take a quick look tactically at how the second quarter of this year looked. Inflation showed some encouraging signs of moderating, closer to the Fed target of 2%, which continued pushing a select number of primarily technology stocks ever higher during the quarter. Investor sentiment remained solidly positive at quarter-end with investors purchasing stocks throughout the quarter and overall trading activity was a bit higher than in the prior year. Now as I stated earlier, as we anticipated, we completed the last client transition group during the second quarter. That's almost $2 trillion in assets, 17 million client accounts, and over 3.5 million daily average trades, all done with the attrition levels that are well below other integrations in our industry, as well as our estimates at the time of the acquisition, which were 5% to 6% asset attrition and 4% revenue attrition. And while it's still somewhat early, the client response to the combined platform has been even stronger than we anticipated. Promoter Scores for former Ameritrade retail clients are now increasing about 50 points nine months post conversion date. While the Promoter Scores for advisory services, including the former Ameritrade adviser clients, have returned to pre-conversion levels. Impressively, former Ameritrade retail clients who converted in 2023 are already bringing in assets on a net basis. However, their level of net new assets still remains below our target range. Clearly, this illustrates that we're reaching an inflection point as attrition continues to abate and we rebuild back to firm-wide net new asset levels in our targeted 5% to 7% range. And lastly, former Ameritrade retail clients are already making up about one-third of our overall enrollments in advisory solutions, an early illustration of the power of combining the two firms and their interest in Schwab's broader offering of wealth management solutions. The overall client engagement was solid in the second quarter with the equity buy-sell ratio at about 1.1, while daily average trades remained at relatively high levels for a second quarter and above the same period from last year. Meanwhile, we've seen a large increase in interest among our clients in our Managed Investing solutions. So overall, key client metrics continue to be solid. Net new assets year-to-date were over $150 billion, including Q2 asset gathering of about $60 billion, up 17% from the same period last year, again, still somewhat below our long-term goal of 5% to 7% to an economic cycle but growing closer to that figure as the impact from former Ameritrade client attrition begins to wane. New brokerage accounts were again almost $1 million -- I'm sorry, 1 million accounts during the quarter. Looking deeper at the types of clients we're attracting. These new-to-firm households continue to set us up well for the long term with almost six out of 10 new clients under the age of 40. And investment adviser clients of all sizes continue to entrust their client assets to our custodial services. For years, we've emphasized that Schwab Advisor Services is the premier offering for RIAs of all sizes, and we are equally committed to each segment of advisers. And these net new asset results are particularly encouraging as they reflect our success serving again every size adviser. Let me take a brief step back to take a more big-picture look at Schwab and the growth trajectory we've been on for over 50 years. From our origins as a discount broker, we have continually listened to client needs, as well as anticipated client needs, and added services and capabilities along the way. What is key is that we have always done so in a Schwab Way, through clients' eyes, at a great value and without the client having to accept trade-offs. We call that modern wealth management. And when we look to the future, we believe this formula will only serve to build our market share larger and larger. Of course, one of the key capabilities we have added along the way has been banking services to meet the needs of our clients on both sides of their personal balance sheets. Now some have asked us after the regional banking crisis of 2023 whether we remain committed to serving our clients' banking needs. And the answer is a definite yes. That said, we have studied our approach to offering banking services in recent quarters and wanted to share a few additional perspectives on how we see banking unfolding in the future at Schwab. Offering lending services to our retail clients and the clients of the investment advisers we serve is important. Arguably, it's critical as it meets client needs and deepens relationships in a meaningful way. Most of our significant competitors have the ability to assist clients with both their investing needs as well as their borrowing needs. We believe firms that do not offer lending services are at a strategic disadvantage that will show itself more and more over time. So, we are committed to offering quality lending services in a manner consistent with how we lend today, exclusively for our clients, residential mortgages, HELOCs for clients who have their first mortgage with us, and pledged asset lines. And to support lending for our clients, we continue to invest in both technology to make the application and approval process streamlined and efficient, as well as experienced bankers who can help shepherd the more complex loans through. From the standpoint of the investments we make at the bank for deposits in excess of those needed for lending to our clients, over time, and by that, I mean, years, not months or quarters, we would envision some shortening of our overall balance sheet investment portfolio duration. That could lead to some modestly higher earnings volatility through an interest rate cycle but should help reduce volatility of our capital levels and the need to access supplemental borrowing when interest rates potentially rise rapidly. One of our objectives is to increase our emphasis on attracting transactional bank deposits like checking balances with our award-winning checking product. This would serve as a means of increasing liquidity and further stabilizing our overall deposit base. And we envision the potential to increase our usage of third-party banks like TD Bank and others to achieve the following goals, deliver extended FDIC insurance for clients, lower our capital intensity, and improve liquidity, subject, of course, to obtaining economics from the third-party banks that make sense for us. Net, these various actions should lead, again, over time to a bank that is somewhat smaller than our bank has been in recent years, while retaining the ability to meet our clients' banking needs, lower our capital intensity and, importantly, protect the economics we are able to generate from owning a bank. So, while we see some modest changes in the way we manage and operate our bank, one thing you can count on, we will continue to operate our business in the Schwab Way, making decisions through clients' eyes, offering clients great value, and delivering service and advice to our valued clients without asking for any trade-offs. So Rick, let me turn it over to you for some more discussion on our efforts as well as results during the second quarter.

Peter Crawford:

Well, thank you very much, Rick. So, Walt and Rick talked about the exciting results we've already seen from the Ameritrade integration and the opportunities it enables, our strong momentum in the market and the success we have enjoyed in attracting a diverse mix of clients, the progress we have made in continuing to enhance our leading value proposition at the same time that we continue to drive greater efficiency throughout our business. And finally, our commitment to continuing that journey, combining ever greater efficiency with sustained investments in improving the client experience. For my time today, I'll review our solid financial performance in the second quarter and over the first half of the year. I'll provide some high-level perspective on what we're seeing with regard to our clients' transactional cash, and I'll share an updated scenario for 2024. The important point is that we are proceeding through what we've described previously, and what Walt talked about at the outset, as a transitional year. But frankly, at a slightly faster pace than we had anticipated just six months ago, with our organic growth rebounding towards historical levels, a continued moderation of client cash realignment activity despite seasonal pressures and the impact of very high investor engagement, sequential growth in our net interest margin, continued expense discipline with adjusted expenses basically flat year-over-year excluding some unusual items, and finally, a steady increase in our capital levels, both our regulatory levels and those inclusive of AOCI. And all of that sets the stage for what we expect will be more of a return to normal, the unlocking of our core earnings power and, frankly, a much simpler financial story in the quarters and years ahead, but one featuring strong growth in revenue and earnings in the back half of 2024 and over the next several years. As Walt mentioned, the first half of the year has been characterized by strong equity markets, increased client engagement and solid organic growth. We saw that reflected in external benchmarks such as the S&P 500 and NASDAQ, as well as key drivers of our business performance, including margin balances up 15% from the end of 2023, trading activity up slightly from the first six months of last year, and as Rick mentioned, a real surge in interest among clients for our advisory solutions. Our clients' transactional cash balances are typically pressured in the first half of the year by engagement in the markets in January and February and then tax season in April and early May. And that was no different in 2024. But even so, we continue to see a moderation of the rate-driven client cash realignment activity. Now that backdrop helped support solid financial performance in the second quarter, with revenue up 1% year-over-year to $4.7 billion. Adjusted expenses in Q2 were up just under 2% year-over-year, but that included several onetime and/or unusual items without which our adjusted expenses would have been down more than 1%. We produced an adjusted pretax margin of roughly 41% and adjusted EPS of $0.73. Turning our attention to the balance sheet. Total assets dropped by 4%, driven primarily by tax-related outflows and the continuation, albeit at a much slower pace, of the client cash realignment activity we have experienced for a little over two years. And the overall level of realignment within Bank Sweep and Schwab One in the quarter was down about 50% versus the same quarter in 2023. Now as I mentioned earlier, we have seen strong growth in margin utilization to start the year. And to support that activity, we directed about $5 billion of client cash from the banks to the broker-dealers. That caused our level of supplemental borrowing to rise slightly in the quarter. What I want to emphasize again, that this is a good thing. We are more than happy to absorb a bit more borrowing on which we're paying just over 5% to support margin loans on which we're earning just under 8%. And finally, despite rates that increased slightly during the quarter, our capital position continued to get even stronger. With our adjusted Tier 1 leverage ratio, again, reminding you that's the one that's inclusive of AOCI and, therefore, what our binding constraint would be if we lose the AOCI opt-out, at Schwab Bank now well over 6% and just under 6% for the Company overall. Meaning, we are marching steadily towards our new operating objective for capital. Now despite the influence of typical seasonal pressure to start the year coupled with atypically bullish, very bullish, investor sentiment, client cash balances have largely trended consistent with our expectations, despite rates remaining higher than the Fed and the market predicted earlier in the year. And all indications support that we are in the very late innings of client cash realignment activity. In fact, over the course of Q2, client-driven outflows from Bank Sweep despite the seasonal tax payments, have been less than the cash flow generated from our investment portfolio, which in the absence of any other actions on our part would have led to continued decline to supplemental borrowing. Now with new client acquisition and organic growth returning to our historical norms, and all signs suggesting that the Fed funds rate has likely peaked, meaning, in the absence of this catalyst, we expect the utilization of investment cash alternatives such as purchase money funds and CDs to stabilize and then eventually decrease over time, we believe we're nearing the point where aggregate transactional cash balances should flatten and then ultimately resume growing again. Now that solid start to the year lays the foundation for what we expect will be an even stronger end of the year, propelling us into growth through 2025 and beyond. We now expect our full year revenue to range between flat to up 2% versus 2023 or roughly in the middle of the mathematical illustrations you may recall we shared back in January. And as I shared back in May at our Investor Day, we now expect our adjusted expenses to be approximately 2% higher than 2023. And as a reminder, about half that change from the previous guidance is due to unanticipated onetime items such as the FDIC surcharge and the regulatory accrual, with the remainder coming from the increase in the SEC 31 fee, which is, again, is a pass-through expense and, therefore, P&L neutral. But to use the transitional word again, that annualized view masks the progression in earnings power by the end of the year. We're expecting flattish earnings from Q2 to Q3, but assuming the Fed cuts rates in September as is widely expected, we could see our NIM reach the mid-2.20s in Q4 on its way to approaching 3% by the end of 2025, which we believe will support adjusted earnings per share in the middle of the $0.80 to $0.90 range we outlined at the beginning of the year, with our earnings power building in 2025 and beyond. Despite long-term rates moving a little bit higher during the quarter, our capital levels are climbing steadily, and we continue to expect our consolidated adjusted Tier 1 leverage ratio to approach our slightly updated operating objective of 6.75% to 7% on a consolidated basis by the end of 2024, at which point it becomes more of a live conversation regarding whether and how we want to do further capital return, our number one priority for capital is always to support business growth. Now to the extent that we have capital in excess of what is needed to do that, we have, throughout our history, taking steps to return that to stockholders. That can be through increasing our dividend, which generally rises alongside earnings. That can be by redeeming outstanding preferreds to create additional dry powder for the future, especially preferreds that might be or might become relatively expensive, and that can also be, of course, through stock buybacks, which we do opportunistically. There is one additional consideration right now, which is to the extent that we have outstanding supplemental borrowing, we may choose to utilize some of the liquidity we'd otherwise use for buybacks to reduce some of that bank-level debt. Now doing that reduces our reliance on nonbusiness-as-usual funding sources, and given the relatively higher cost of the supplemental borrowing, it's likely more accretive to earnings in the near term, while preserving the capacity, the ability to implement stock repurchases at a later date. So by doing that, we can kind of have our cake and eat it too. Now those of you who have followed the Company for a while know that we don't tend to communicate bold, long-term financial targets. Rather, we continue to talk about our long-term financial formula, a relatively simple and straightforward formula that is based on our clear and straightforward business strategy, which we articulated, as you know, is through clients' eyes. And what makes that financial formula simple and straightforward is that it's based on a set of a pretty reasonable assumptions, for Schwab at least, around organic growth, revenue growth, expense containment and capital return, assumptions that we have delivered through the cycle over multiple decades. Over the last two-plus years, that formula has admittedly been obscured to an extent by the impact of rising rates and what that has done to client transactional cash balances. But with rates seeming to plateau and client cash realignment moderating, while organic growth returns to that historical level, we're nearing the point where that simple and straightforward formula, that simple and straightforward financial story should become more clear, one that without making some big leap of faith combined strong organic growth, strong profitability and substantial capital return. With that, I'll turn it over to Jeff to facilitate our Q&A. Jeff?

Operator:

[Operator Instructions] Our first question comes from Brian Bedell from Deutsche Bank. Please go ahead.

Peter Crawford:

Sure. So, thanks, Brian. So, the scenario that I outlined is based off the Fed cutting rates a single time in the rest of this year in September. In terms of deposit betas, I wouldn't necessarily assume that deposit betas are symmetrical. If you look historically, deposit betas tend to be a bit higher on the -- in the easing cycle than they are in a tightening cycle. And so, while we certainly haven't made any decisions exactly about what we'll do with deposit rates, I think that's a reasonable expectation. And we also would expect that as rates come down, the cost of any replacement supplemental funding that we have to access comes down as well. And we'd also expect that, on the margin, that rate cuts would, over time, bring about higher levels of clients' transactional cash as the incentive for them to utilize alternative solutions like purchase money funds and CDs become somewhat less.

Ken Worthington:

In terms of the use of third-party banks like TD, how much of your bank assets might migrate to third-party banks over time at sort of steady state? And how would you expect the economics to compare to the fees that you currently earn on a money market fund or in the Schwab Bank spread over rate cycle? And I guess lastly, given the Wells comments on Friday, is there a risk that using third-party banks might risk regulators having an opinion on the yields passed on to certain end-customers in the advisory or other segments of your business?

Operator:

Next, we'll go to the line of Kyle Voigt from KBW. Please go ahead.

Walt Bettinger:

Let me start by saying first -- thanks for the question, Kyle. Let me start by saying when we look at our Schwab client base, we continue to grow within that 5% to 7% organic growth rate that we target over the long term. When you look at the Company level metrics, what's keeping us from the 5% to 7% overall is, in fact, behavior of the Ameritrade clients. And the great thing that we're seeing is we are seeing a change in their behavior. And it's in line with what we would expect, which is, first, we need to stop clients from leaving the firm and from Ameritrade flows being negative. And I think we're in the process of that happening. Walt referenced the significant improvement in Client Promoter Scores. That's true both on the retail side and the adviser side. So, Client Promoter Scores are getting higher. As those Client Promoter Scores are getting higher, we're moving from outflows from our Ameritrade clients to inflows. What we then need to do is to move a client base that hasn't had client flows quite in line with where Schwab organic growth rate has been historically. We need to move them from being positive contributors to net new assets to contributing at the same level as Schwab -- as our Schwab organic growth rate. And the way we'll do that is by introducing our Schwab model to Ameritrade clients, the financial consultant, the relationship model, the service, the advice, the consultants that we bring on the advisory side. All of that, we believe, will help accelerate the Ameritrade net new asset formation. So, we're confident we can grow in the 5% to 7% range. We continue to do so on the Schwab side today. And we're right where we'd expect to be in terms of the process of moving Ameritrade clients from being net detractors in net new assets to now being slightly positive. And then, we anticipate by introducing our model to them to be able to grow them to the same level as Schwab clients over time.

Dan Fannon:

Peter, I was hoping you could elaborate on your assumptions on what's going to drive the sequential growth really after being flat in Q3 to Q4, and specifically things like margin balances, which are growing, but as you said, are drawing more short-term funding. So curious about short-term funding levels plus some of the other assumptions in that Q3 to Q4 ramp.

Operator:

Next, we'll go to the line of Steven Chubak from Wolfe Research. Please go ahead.

Peter Crawford:

Yes. So, thanks for the question, Steven. So, I would say, I know we've gotten this question -- we've gotten this question a fair amount. And our thinking on repositioning trade hasn't really changed. We certainly understand the benefit of that on accelerating the paydown of supplemental borrowing, accelerating the net interest margin accretion, earnings accretion that we expect to happen over time. At the same time, we're very cognizant of, and very mindful, of doing anything that would jeopardize the trust our clients place in us, especially for the sake of, moving forward, something that we expect will happen on its own. And so that's why we haven't done that. So, I would say it's not something we, by any means, rule out altogether, but it's also not something we're looking to do in the near term.

Brennan Hawken:

I'd like to follow up on the question around the shift to third-party banks as a place for deposits. So just at a high level, I'm curious if you could explain to us the strategic shift here because we spoke about it a year ago at the last what used to be the winter business update, now is the Investor Day, although I guess -- well, in 2023, it was at a different timing. And there was a defense of using the bank subsidiary. So, what led you to shift there? And then maybe just like timing-wise, when should we expect this to happen? And how do you strike the -- you referenced that you want liquidity above the need to fund the loans. How should we be thinking about what the bank will actually look like once things settle out and you take this journey?

Operator:

Next, we'll go to the line of Benjamin Budish from Barclays. Please go ahead.

Peter Crawford:

Yes. So, I mean I think I would think about that in terms of the pace of cash flows off the investment portfolio as sort of in the $10 billion to $11 billion a quarter, somewhere in that range, as the portfolio -- the size of the portfolio goes down, that it's reasonable to expect that that level of cash flow goes down as well, sort of commensurate with that. But sort of -- and that's a general rule of thumb over the next several quarters, I think, is a reasonable expectation.

Alex Blostein:

Well, so a lot of these things we're talking about for the last several quarters are related to kind of self-help levers and improvement in the Company's earnings power ultimately start with improvement in the deposit trajectory of the business that will help supplement the borrowings, capital returns, et cetera. So maybe help us sort of refresh, now that you've had the business with Ameritrade for some time, how are you thinking about the normalized framework for growth in Schwab's deposits, sweep deposits, whether it's a percentage of net new assets or some other metric, but I guess also considering that, even if we do get rate cuts, the Fed funds rate and the market rate is still going to be probably meaningfully higher versus kind of the available deposit yield that you and the industry are offering.

Operator:

Next, we'll go to the line of Bill Katz from TD Cowen. Please go ahead.

Walt Bettinger:

Let me start with the Ameritrade part of the question. We brought over about $2 trillion of Ameritrade client assets. We're at $9.4 trillion overall. So, Ameritrade is clearly an important part of our business. Looking at the longer term, important to remember the enthusiasm we have for the combination of the strength of Ameritrade and Schwab. We were talking a lot about short-term dynamics around cash and net interest margin and things like that. We have an incredible franchise that we've just spent four years putting together the best of everything Ameritrade had to offer with the best of everything Schwab has to offer. And the behavior we're seeing from our clients is exactly what we would expect. We went from clients who experienced a lot of change and might have had dual relationships at Ameritrade and somewhere else, making the decision that this wasn't where they wanted to be. And so we did see some attrition. That attrition was well below what our expectations were. And now we're seeing what we'd expect to see in the next phase, which is client satisfaction from those clients that were moved, who had their experience change, improving dramatically. We're up 35 points in our advisory services business in terms of our overall client promoter scores following the conversion. And on the retail side, nine months after a client moves, their satisfaction is up 50 points. So, we have built a platform that both sets of clients love. And now what we get to do for the long term and for the foreseeable future is deliver our mission of making a difference in our clients' lives through a platform that's never been stronger on the retail side and the adviser side than it is right now today. And so, we're confident in our long-term organic growth rate. We think the behavior we're seeing is exactly in line with what we would have expected, and are very optimistic for our future growth.

Michael Cyprys:

Maybe just circling back to the Wells Fargo announcement. Maybe you could just help clarify for us the magnitude of cash that you have in fiduciary accounts, the types of accounts these represent where you offer the money funding equivalent yields, is this just retirement only? And then just more broadly, how do you think about the risk over the long term that industry practices evolve with more account types over time that capture these money fund equivalent yields?

Operator:

Next, we'll go to the line of Chris Allen from Citi. Please go ahead.

Peter Crawford:

Yes. Thanks, Chris. So, the 3% -- approaching -- NIM approaching 3% by the end of 2025, the primary driver of that is, again, the moderation of the client transactional cash realignment activity and the paydown of the supplemental borrowing. That is very, very accretive to our net interest margin. In terms of whether the comments that Walt provided have any influence over that, I'd just reiterate what he said, which is that is something that's evolutionary, not revolutionary. It's going to play out over multiple years. And so, it doesn't influence at all really the -- that more near-term outlook that we have for the end of -- towards the end of 2025. Thanks for the question.

Operator:

Absolutely. Our final question comes from the line of Devin Ryan from Citizens JMP. Please go ahead.

Walt Bettinger:

Thanks for the question, Devin. We certainly think we can expand our lending capabilities. And the way we're focused on doing that is by creating the easiest, most straightforward, client-friendly process in the industry. We've seen that within our pledged asset line program where it's now 1.7 days average cycle time to get a pledged asset line. It's actually less than a day for individual and joint accounts, but our more complex ones drive up the average time. 85% of those originations are now done digitally. These are major enhancements. And we're making other enhancements to our mortgage process, to the way we lend to our higher net worth clients and the experience they have. So, we're trying to build an experience that makes it such that our Schwab clients never want to borrow somewhere else, they want to borrow from us. So, we do think there is lots of runway to close that gap, and we're quite bullish on our -- on the opportunity here. Now, we are in an interest rate environment where there's not as much borrowing as we've seen historically, not as much rolling over of loans and things. But we are confident that we've built the process, the experience and the offer that we should be for our clients an exceptional place to borrow. And that includes our industry-leading rates for clients that have assets with us. Final comment I'd make is it's also a terrific way to add to the service that we provide to our adviser clients. Our advisers for years have been asking us to do more lending because they don't want to have to introduce another party into the relationship. And increasingly, we're able to meet their needs, which delights them, and we think we'll be able to do more of that over time.

Walt Bettinger:

Thanks, Jeff, and good morning, everyone. Thanks for joining us for our January Business Update. We're here in Frigid Westlake, 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 is 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 had 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 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 listen to their feedback. But I fundamentally did not believe that the firm's best days were in the past. There were far too many strengths 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 ten-fold and assets, the 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 in to 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 on 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-client size strategy. Because throughout 2022 and 2023, we reached out to our clients and encouraged 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 $100 billion. And an and aside although these actions have temporally 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% of the client accounts and assets all accurately and successfully converted. And despite the substantial focus on this effort, we continue to make real progress on other client-related initiatives that help 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%, as inflation began to ease directionally toward the Fed's long-term goal of 2%. 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 composites 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 tradeoffs execution. We believe the backbone of organic growth is delivered by focusing on four areas

Peter Crawford:

Well thank you very much Rick. So Walt and Rick talked about how our no trade-off positioning continues to resonate with both clients and prospects. The continued progress we're making with the Ameritrade acquisition, with the final transition group scheduled for May, our achievements and priorities around scale and efficiency, win-win monetization, segmentation, and our newer priority ease, and the large opportunity in front of us over the coming years. In my time today, I'll briefly review our 2023 financial performance, provide an update on client cash realignment, and share some thoughts on 2024. The important point is that in the fourth quarter and really over the last nine months, we continue to see notable improvement across the various tactical metrics on which there has been a lot of focus lately, including the pace of client cash reallocation activity, the level of supplemental borrowing we're utilizing, and our capital levels inclusive of AOCI. And what that means is that 2024 is likely to be somewhat of a transitional year from a financial standpoint, but with steadily improving financial results that bridge from what proved to be a challenging 2023 to what we believe is a very promising future ahead. And so while environmental factors may not allow progress to follow a strictly linear path, we believe we're moving ever closer to the point where the noise partially obscuring our long-term growth should dissipate and our relatively straightforward financial formula should begin to reassert itself once again powered by solid organic growth, our diversified business model converting that asset growth into strong revenue growth through the cycle; continued expense discipline, producing growing margins. And as our tangible capital levels continue to grow, the return of meaningful opportunistic capital return. In other words, a resumption of the proven model that you are all familiar with and that has delivered for clients and stockholders for over five decades. As Walt mentioned, 2023 was an eventful year for many of our clients and certainly a challenging one for our business model. And so not surprisingly, our financial performance was off 2022's record levels with a little under $19 billion of revenue and $3.13 of adjusted EPS. But despite those financial headwinds, we still produced an adjusted pre-tax margin of over 40%. Our fifth consecutive year doing so, which demonstrates the strength and resilience of our business model through a wide range of environments. Now turning our attention to the balance sheet. The big story last year, of course, was the roughly 30% decline in client cash on our balance sheet, of which over 80% moved in the first-half of the year. This was the outcome of clients moving some of their cash into higher-earning alternatives, as Walt mentioned, that was often with our active support and encouragement. And importantly, that money is staying at Schwab, as evidenced by the approximately $200 billion increase in purchase money funds and over $225 billion increase in fixed income in CDs our clients hold. And we supported some of that activity by utilizing temporary or supplemental borrowing, including both FHLB advances and Schwab Bank CDs. And at just under $80 billion at the end of the quarter, those have fallen by more than $17 billion from the peak level reached in May. And finally, our capital position continues to get even stronger with our consolidated Tier 1 leverage ratio rising to 8.5% and our adjusted Tier 1 leverage ratio, inclusive of AOCI, and therefore what our binding constraint would be if we lose the AOCI opt-out, at Schwab Bank now nearly 5.4%, meaning we are now meeting what will likely be the new quote well capitalized standard at our banks over four years ahead of the anticipated full implementation date. During last quarter's update, we talked about the slowing pace of client cash realignment over the preceding months. And in November, our clients actually added to their transactional cash balances. And then in December, we saw an approximately $15 billion increase in transactional sweep cash. Now, historically, December flows benefit from seasonal factors, but even so, when you compare December 2023 to December 2022, it is quite clear that this dynamic is receding as an important driver for us. You can also see that trend when you look at purchase money fund flows and specifically that minority of those net flows that are funded from client cash on the balance sheet. Now, as we turn our attention to 2024, our near-term financial performance will, as always, be shaped by external factors that are difficult to predict. Interest rates, equity market performance, and client trading activity. And then given the much larger sensitivity to client cash allocations, given where interest rates are today than they were, let's say three years ago, that will, of course, be a significant factor. So let's talk about this one. And given the importance of this, let's spend a bit more time here. There are really three main forces that will influence the trend of our clients' transactional cash during 2024. Any remaining client cash realignment from existing clients, the contribution of cash we attract from new clients, which I'll talk about in a moment, is the source of the greatest uncertainty moving forward, and seasonal dynamics that are generally similar every year, but can vary based on environmental conditions. We'll start with the behavior of our existing clients. And as we've discussed, we're clearly in the very late innings of the client cash realignment activity. You can see it in the monthly reporting we have shared, whether you look at total balances, balances per account, or cash as a percent of assets. And that high level trend is supported by various dynamics you see when you look under the hood. We're seeing stabilization of activity among both RIA and retail clients. Now we've talked about how cash realignment is an event, not a process. And we're seeing a decrease in both the number of those events and the average amount of the cash being realigned. Now while we have a high degree of confidence in our ability to predict the behavior of our existing clients, it's a bit harder to do so with new clients over a very short timeframe, like a year. Now, that contribution depends on the level of new clients we attract and the size of those accounts. And then how much of the net new assets comes in the form of cash and stays there, which will be influenced by investor sentiment, quantitative tightening by the Fed, inflation, savings rates, and so forth. And then you throw in that this is an election year, which normally brings an elevated degree of volatility, makes these predictions even tougher. And what this means is that while we have seen throughout our history that over time, cash balances grow with the growth in accounts and assets, over a shorter period, like a quarter or a year, it's harder to gauge exactly how much new accounts will contribute. And finally, the evolution of transactional cash over the course of 2024 is likely to be influenced by seasonal patterns, which follow a similar trajectory every year, but can vary in terms of their magnitude. That means we're seeing some cash getting invested into the markets in the first quarter. And given the large inflows we saw in December, the investment activity could be at an elevated start this year. And then we'll likely see a reduction in April as clients pay taxes before we cap the year with an anticipated buildup in December. So what does all this mean for our 2024 financial performance? Given the various moving pieces, we decided to bring back a concept you may recall we last used in 2019, which is to share with you a couple of mathematical illustrations around how our financial performance could unfold, based on what happens with certain and difficult to predict inputs. And those are trading activity. We looked at flat to 2023 levels, plus or minus 5%. And where transactional cash finishes the year relative to the 12/31 levels. Again, flat plus 5% or minus 10%. Those illustrations share a couple of common and pretty conventional assumptions. Most importantly, normal market appreciation and rates that follow the dot plots. And those illustrations could result in revenue that is plus or minus 5% there are 2023 levels or said another way, revenue that is 0% to 10% higher than our annualized Q4 2023 run rate, even with three rate cuts. We're planning, as we've shared previously, to keep adjusted expenses flat year-over-year. And that would result in an adjusted pre-tax margin of a little under 40% to somewhere in the mid-40s. Now I know it's tempting to pick the mid-point of the illustrations and interpret that as our outlook. That is not how these illustrations are intended to be used. This is just math. Using some metrics, you can track on an ongoing basis to evolve your own perspectives on our potential performance over time. And as we typically do, we have included in the appendix a set of sensitivities intended to help you make adjustments as you see fit. Now looking at the range of possibility, it doesn't apply much of any growth in terms of full year adjusted EPS. But given the consistent pay down in the higher cost supplemental borrowing, it suggests strong sequential momentum in revenue and in earnings. With a potential exit velocity heading into 2025, that is at least 20% better than where we ended 2023. And with increasing momentum as we progress through 2025 as well. Let's drill a little deeper into the expense story. Schwab has been and always will be a growth company, a company that continually invests in improving the client experience. At the same time, we're a company that recognizes that one of our biggest competitive advantages, as Walt mentioned, is our industry-leading cost structure, which is measured as EOCA. Achieving both of those requires careful balance and discipline. And in 2024, even as we're holding spending flat, we're still making significant investments that Rick talked about that will help sustain our long-term organic growth, boost our revenue, and increase our efficiency during 2024 and beyond. Our current revenue and earnings are being pressured, of course, by our utilization of the higher cost funding in the form of CDs and FHLB advances. Those are very much a temporary funding source. And as we pay off those, we continue to see a path towards a net interest margin in the 2.20% to 2.50% range by the end of this year and approaching 3% by the end of 2025 even if rates fall roughly 200 basis points from where they are today, as the dot plots would indicate, with a potential for it to expand further moving forward as we reinvest our securities portfolio at higher market rates than what we currently earn. Now while we pause our buyback in order to build our capital levels, capital return remains a very important part of our financial formula, given our very high return on capital and negligible credit exposure. Our capital levels have already reached the so-called well-capitalized threshold, even if AOCI is included. And we'd expect our consolidated adjusted Tier 1 leverage ratio to reach the upper 6% range by the end of 2024, at which point we'll be in a position to at least consider resuming opportunistic buybacks. Both Walt and I talked about 2024 being somewhat of a transitional year from a financial standpoint, but we also talked about the steady improvement we expect to see throughout the year. In some ways, I hate to use the phrase coiled spring, but I think that's exactly what is being set up as we move into 2025, as we complete the Ameritrade integration, creating a true best of breed platform and unlocking both revenue and expense synergies. We continue to advance our strategic agenda even as we maintain flat expenses. Transactional cash balances inflect and we begin to see sustained growth. And all that plus continued business momentum creates an opportunity for a return to sequential revenue growth and accelerating momentum toward the end of the year and into 2025. And that paves the way for a return to our long-term financial formula. One that is powered by our position as the premier asset gatherer, producing consistent 5% to 7% organic growth through the cycle with industry-leading client loyalty and a leadership position in the two fastest growing segments within wealth management. One that has a proven ability to expand margins through the cycle with the potential for even more dramatic margin expansion in the years ahead, back above 50% as revenue benefits from paying off higher cost borrowings and expenses benefits from harvesting the remaining expense energies. And one that can combine that strong organic growth and revenue growth with more meaningful capital return as our capital levels inclusive of AOCI march higher. And so when you take a step back and look at our potential financial performance, your perspective depends on your time frame. In the immediate term, we have been dealing with some pressures that have constrained our financial results. But those pressures are temporary, not permanent. So long-term opportunity, the long-term potential remains significant. And as an organization that has a long time horizon, that is what fuels our optimism, our confidence, and our excitement for what lies ahead. And with that, I'll turn it over to Jeff to facilitate our Q&A. Jeff?

Operator:

Thank you. [Operator Instructions] Our first question in queue is from Ken Worthington from JPMorgan. Please go ahead.

Walt Bettinger:

Thanks, Ken. I think when you look at NNA in very short periods of time, you have to really evaluate sentiment more so than what the market did. When I spoke at the end of the third quarter last October, sentiment was very negative. And although it slipped by the end of the year, that's a late change within the year. And so when you have negative sentiment historically, when we look at longer time horizons, you're going to get lower levels of NNA. And so I think it's not what the market does. It's what the sentiment of the investor is. We don't see any reason to believe that net new assets are likely to be constrained over a longer period of time relative to historic levels. Our promoter scores, when we look at that, as they're reported on the retail side remain very, very strong. On the advisor side, we have retained virtually all of the advisors that we wanted to retain post integration. So I don't see anything on the horizon that would tell me that long-term you're going to see some form of extended softening in NNA. But short run, you have to look at sentiment and you also have to look at investment options. As rates are higher, people may bring a bit less money to their investment account as opposed to maybe leaving it at a bank where they might just be buying CDs or something of that nature. But nothing structurally gives us cause for concern.

Steven Chubak:

Hi, good morning. I have a question, a firefighting question, just on the NIM glide path, Peter, that you had offered. So you had previously talked about that 3% NIM, exiting ‘25. You reaffirmed the target here despite the additional cuts in the forward curves. I was hoping you could speak to some of the inputs still supporting that 3% NIM target with the rebasing and rate expectations and the NIM tailwind of $0.80 to $0.90. What is the jumping off point that we should be applying that against?

Operator:

Thank you. Next we'll go to Kyle Voigt from KBW. Please go ahead.

Peter Crawford:

Yes, thanks. Thanks, Kyle, for the question. So I think it's reasonable to think that the betas could be a bit higher on the way down than they were on the way up. At 45 basis points in bank suite, we're paying a rate today that is significantly better than what traditional banks are offering on checking accounts. They're still paying, I think in many cases, 1 basis point or 2 basis points for accounts that have similar liquidity features or in some cases even inferior liquidity features. And so I wouldn't necessarily assume that the deposit betas on the way down will be symmetrical to where they were on the way up necessarily.

Brennan Hawken:

Good morning. Thanks for taking my questions. Just a couple questions, Peter, for the path and thinking about NIM and the scenarios. Number one, I think you referenced that these scenarios are based on the dot plot, but you also referenced the forward curve. So maybe could you clarify which rate assumptions underpin the scenarios that you laid out? And also, how should we think about forecasting the interest-earning assets? You referenced $11 billion to $12 billion of principal? Is that the pace that we should be thinking about through much of 2024 until that wholesale borrowing is paid down? Thanks.

Operator:

Thank you. Next we'll go to Dan Fannon from Jefferies. Please go ahead.

Peter Crawford:

Yes, so we saw, you know, I think if you look at the end of the year with our -- we target in the banks kind of a 5% to 6% overnight liquidity at the banks. That position roughly doubled at the end of the year. We always like to build up extra liquidity. If you look at our prior years, we did the same thing to make sure we have a lot of excess liquidity heading into what is, again, typically the seasonal investment season. So we expect to draw down those liquidity levels. And that will help to support the seasonal activity that we're seeing. If you look at prior years, over the course of the last several years, you can kind of gauge a sense for that seasonal activity. And I would say this month is progressing kind of consistent with that. So without getting to sort of specific numbers in terms of what we're seeing month to day, I would say it's consistent with what we've seen in previous years and consistent with our expectations. But again, it's not only really clear that the seasonal activity that we see in January through March and then the tax season in April, this isn't client cash realignment. This is just activity that we see every single year as clients build up their cash balances at the end of the year and then deploy those into the markets in the first part of the year and then deploy those to the IRS, I guess, in April.

Alex Blostein:

Hey, good morning everybody. Thanks for the question. Just another quick follow-up on the funding dynamic. So I appreciate it might be difficult to predict client behavior with respect to transactional sweep cash on new assets, but maybe give us some color on the trends you've seen in transactional cash as a percentage of that new client assets. Call it over the last maybe six months or so just to help us kind of with the starting point, because obviously that's a really important dynamic when it comes to rebuilding the cash balances and deposits?

Operator:

Thank you. And our final…

Operator:

Absolutely. Our last question comes from Devin Ryan from JMP Securities. Please go ahead.

Rick Wurster:

Devin, thanks for the question on AI. I think it will have a meaningful impact in three areas on our employees, on our efficiency, and on our clients. Let me start with employees, I think AI can be used to make our employees even more effective with our clients, to provide them with the ability to have an answer that is really strong and in particular for our newer employees that are coming up to speed, the ability for AI to make them as efficient or as effective as a more experienced employee. I think will be powerful both for the employee and for our clients that are receiving the thought from that person. So I think there's a lot of benefits in helping make our employees more effective with clients. There's clearly an efficiency opportunity in AI, and here with 1,000s of phone reps that we hire each year, at some point, we likely will have the opportunity to hire less in a particular year, because we've made our reps both on the phone, on chat, in our branches even more effective and efficient, because we're powering them with information and putting it at their fingertips. And then I think there's a lot of client benefits that will come from AI. We have what I believe is the world's best trading platform in thinkorswim. And a lot of clients invest years and years into building out their platform, into building out their alerts and what types of signals they're looking at to drive what they may want to buy. And I think the opportunity for our clients to leverage an AI-driven research platform will provide them with even greater insights into how they trade, into what positions they might want to put on, into what risks they may need to be aware of. And so I think AI will directly impact clients in the future. So what I think about both making our employees as effective as possible, becoming as efficient as possible, and driving great, fine outcomes. I think AI will play an important role in all three.

Walter Bettinger:

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 pretax 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. 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. First, it’s not surprising as both equity and fixed income markets continue 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%. Again, truly, there have been a 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 Investor’s 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 RIA 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. 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, these 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 referred 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 build capabilities that would maintain and leverage the best of both firms’ services and platforms. This approach was consistent with our through clients’ eyes 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 3 of 5 total transition groups. These groups make up about 80% of the total Ameritrade retail clients and 100% of the RIA firms who previously custodied their client assets with Ameritrade. To date, we’ve executed this integration 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 for 1 million of converted accounts. I just want to reemphasize that. 45 complaints for 1 million of converted accounts. Just to put that into context, client escalations during the meme 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. And as we’ve communicated, almost all RIA attrition occurs before the conversion date because the 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 pass – path to conversion. And 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 advisers 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 we 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%. I truly believe the opportunity before us is quite bright. Rick?

Peter Crawford:

Thank you very much, Rick. So Walt and Rick talked about how despite a difficult environment, we’re continuing to earn the loyalty and trust of our clients and driving strong organic growth. The enormous progress we have made with the Ameritrade acquisition and the exciting potential that the combination presents for our clients and our stockholders, the other significant growth opportunities we’re pursuing and how we’re working hard to capitalize on those opportunities, continuing to invest in enhancing our platform even as we take steps to strengthen our industry-leading cost advantage. In my time today, I’ll briefly review our third quarter financial performance, update our 2023 scenario and offer some early thoughts on 2024 and beyond. The important point is that in the third quarter, we saw notable improvement across several "tactical metrics" on which there has been a lot of focus lately. We might argue too much focus in the context of our ability to create value over time. And I’m referring specifically to the pace of client cash reallocation activity, our capital levels, the level of supplemental borrowing and the trajectory of our net interest margin. When you combine these developments with the measures Walt and Rick shared that demonstrate our strong business momentum, it reinforces our confidence in our ability to move through this part of the economic cycle as we have so many times before and emerge from this period a larger, stronger and even more resilient company. As Walt mentioned, the third quarter was a challenging one for many of our clients and for our business model. And so not surprisingly, our financial performance was off last year’s record levels with a little under $5 billion of revenue and $0.77 of adjusted EPS. And yet, that bottom line performance was better than the second quarter of this year. And with an adjusted pretax margin of over 41%, 30% on a GAAP basis due to the large restructuring charge this quarter, we are navigating from a position of strength. Turning our attention to the balance sheet. Bank deposits were down 7% sequentially due to client cash allocation decisions. But following a brief uptick in that activity in August, the pace slowed dramatically in September. As a result of that slowing activity, we were able to further reduce the amount of supplemental funding we have outstanding. We issued a little over $2 billion in debt to supplement our parent liquidity. And assuming the markets continue to be constructive, we will likely issue a bit more debt primarily to build up extra liquidity ahead of some debt maturities we have early next year. And our capital position continues to get even stronger with our consolidated Tier 1 leverage ratio rising to 8.2%. And our adjusted Tier 1 leverage ratio, inclusive of AOCI and therefore, what our binding constraint would be if we lose the AOCI opt-out at Schwab Bank now into the mid-4% range, and that’s using average assets, it’s more like 4.6% today on a spot basis, as it steadily climbs towards 5% by the end of the year, meaning that we will be in a position to meet the newly proposed regulatory requirement organically and several years ahead of the anticipated full implementation date. I know there’s a lot of commentary. There has been a lot of commentary about the increased client cash allocation activity in August, activity which seemed to buck the clear trend of deceleration we’ve been experiencing over the previous several months. We said at the time that it felt more like an anomaly. And now having closed the books on September, we have a number of tangible proof points that indicate that outflows are easing, and we’re getting closer to the return of sweep cash growth, including the fact that the overall pace of realignment activity decelerated in September to the lowest level we have seen during the current cycle. We experienced our first month of bank sweep deposit growth since before the hiking cycle started. And both the absolute number and size of client realignment events dropped further from the level we shared last quarter. And all this in spite of an increase in rates across the curve. And while we saw increased flows into purchase money funds, we caution you again not to use those daily flow numbers as a proxy for overall deposit flows. Only around 20% of the purchase money fund purchases lately have been funded with bank sweep in Schwab One with the remainder coming from equities, fixed income or oftentimes money coming from outside Schwab that’s been attracted by our very competitive yields and low expense ratios on those funds. And now we’re now halfway through October, and the trend has largely continued with overall transactional cash balances, including again Schwab One and the IDA in line with the September trend despite delayed tax payments by many of our clients in California and elsewhere. As we have said many times, that trend is not surprising, but it is encouraging. And it brings greater clarity towards our core earnings power. During Walt and Rick’s sections, they talk about some of the measures that demonstrate how we’re continuing to win with clients, metrics such as client promoter score, net new assets, new accounts and our organic growth rate, the deal-related attrition that has been lower than our initial expectations and advice flows. And those are clearly the most important predictors of our long-term success, and all portend a bright future. But the more tactical balance sheet metrics have all trended in a positive direction as well. And we believe we are well on our way towards those indicators returning to more normal levels. The level of supplemental borrowing has continued to fall as the ongoing cash flow generated from our investment portfolio has been more than sufficient to support the slowing deposit bank sweep outflows. And we’d expect this level of temporary borrowing to drop substantially over the next handful of quarters, paving the way for us to resume reinvestment activity in 2025, which, assuming rates follow expectations, will provide a meaningful boost to our net interest margin. Speaking of net interest margin, assuming rates followed the dot plot, we still anticipate it building through 2024 and approaching 3% by the end of 2025. Despite rising interest rates, our adjusted Tier 1 leverage ratio at the banks and for the consolidated corporation rose roughly 40 basis points during the quarter, approaching the level to be considered well capitalized several years before that measure is slated to become our regulatory ratio. And we’d expect those ratios to continue to increase due to continued strong capital formation, the accretion of the unrealized marks back to equity and a reduction of our balance sheet as we pay off the remaining supplemental borrowings, bringing back the potential for opportunistic capital return over time. So what does all this mean for the rest of this year and 2024? Our outlook for this year is pretty similar to what we shared back in July. As client cash allocation activity continues to abate, we still expect to see a return of transactional cash growth later this year. We should see a stabilization of revenue and then a resumption of growth over time and full year 2023 revenue is expected to decline a bit more than the previously mentioned 7% to 8% range. So ultimately, trading volumes and market levels will influence how things shake out. On the expense side, we still expect our 2023 adjusted expense growth to be somewhere in the 6-ish percent range, inclusive of the $160 million onetime FDIC charge that, of course, was not contemplated when we set out our initial spending plan at the beginning of the year, meaning that our other spending is tracking at least 300 basis points below the range we communicated back in January, as we adjust and optimize our expense base consistent with Rick’s earlier comments. Now turning our attention to 2024. We’ll share specific scenarios at our winter business update. But needless to say, the revenue outlook will be shaped by a range of factors, including, of course, path of interest rates in the equity markets, the pace of deposit growth and the level of client engagement. But our expectation is it will make substantial progress in reducing our usage of FHLB advances in CDs. Rick described the work we’re doing on the expense front, and we’d expect that to result in 2024 adjusted expenses that are no higher than 2023. And finally, we’d expect to continue to grow both our regulatory capital ratios and our adjusted Tier 1 leverage ratio, boosting that lateral ratio back above 6.5%, several years before it becomes a formal requirement. There is no doubt that we have been navigating through a difficult environment, but it should be apparent that the core pillars of the multi-decade investment thesis for Schwab are as strong today as ever. We are the premier asset gatherer with industry-leading client loyalty, a strong competitive moat and a leadership position in the 2 fastest-growing segments within wealth management. We have multiple ways to convert that asset growth into revenue growth, including growing advice with both Schwab and Ameritrade clients as well as a long-term NIM tailwind as we eventually reinvest our securities portfolio at much higher prevailing rates. We continue to manage expenses with discipline with $1 billion or more of remaining expense synergies and other efficiency opportunities. And we are a company that has shown the ability to couple strong organic growth with opportunistic capital return, a combination which we’re confident will reemerge in the years ahead. Now admittedly, that powerful combination has been obscured recently by some of the fog as Walt described it back in July, but this fog continues to clear with deal-related attrition abating, allowing our net new assets to return to our normal levels, which are anything but, client cash allocation activity slowing, supplemental borrowing decreasing and our NIM rebounding, expense growth slowing and poised to slow further as we prepare for the significant remaining expense actions in the quarters ahead and our capital levels building despite the headwinds posed by increasing rates. I talked earlier about long-term predictors of success versus more tactical near-term metrics. But when you step back to look at the whole picture, you see a healthy, resilient company with a lot of momentum and a lot of opportunity in front of that. With that, I’ll turn it over to Jeff to facilitate our Q&A.

Operator:

Yes. Thank you. [Operator Instructions] And our first question comes from Ken Worthington with JPMorgan. You may go ahead.

Peter Crawford:

Thanks, Ken, for the question. So our expectation is that we will continue to prioritize paying down the supplemental borrowings. That is the fastest way to get to that 3% NIM that we talked about by the end of 2025. So what that could mean is that we could be seeing deposits grow, transactional cash grow even as interest-earning assets are declining because our focus is really on paying down those supplemental borrowings. So that would be – you could see a scenario where interest-bearing assets are declining, but NIM is growing and actually net interest revenue is growing even as that is happening.

Operator:

Thank you. Our next question is from Patrick Moley with Piper Sandler. You may go ahead.

Peter Crawford:

Sure. So yes, I don’t remember – recall the exact percent of the assets that were – or purchase money fund balances that were coming from bank sweep. But I can say is August, I think there was a couple of things, there was in part a reaction to the Fed’s increase in late July and some of the headlines maybe that, that captured. We also saw actually net inflows into equities. So there’s definitely an investor sentiment aspect to it. In terms of going forward, I mean, our expectation is that when the Fed increases, it has a small, but decreasing and temporary impact on deposit flows. If people are yield-sensitive, the cash is yield-sensitive and Fed funds is 5.25, they’ll move. It doesn’t make a huge difference whether it’s 5.5. I think it’s more about the headlines, frankly, as that creates that may prompt some people to move. But I want to emphasize that a high-for-longer scenario is a very good scenario for Schwab for our business model. While in the near term, that rate increase can lead to a little bit more and deposit activity, that higher rate over the long term means more – a higher yield on the roughly 1/3 of our interest-earning assets that are tied to floating rates. That’s things like our margin lending and the cash, the segregated cash and the cash we have at the parent, the cash we have with the bank, et cetera. So after sort of a high-for-longer scenario, which it seems to be what we’re easing our way into here, it is a good scenario for us because that impact on transactional cash balances is short-lived.

Brennan Hawken:

Good morning. Thanks for taking my question. Peter, I would appreciate if we could maybe try and square Slide 31 and where you talked about the client cash rate alignment versus when we run through the calculation for the September monthly data based on the various cash disclosures, percentage of client assets and whatnot, if I adjust out CDs and the money funds out of there so just getting what should be the bank sweep, BDA and the broker dealer cash, it looks it’s down similar to a decline that we saw in July. And so how do I square that with the Slide 31? Does Slide 31 just not include the broker-dealer cash? Is that the delta? Can you help me understand that?

Operator:

Thank you. The next question is from Kyle Voigt with KBW. You may go ahead.

Peter Crawford:

Sure. So I would expect that we’re going to have a mix of CDs and FHLB going forward. There are advantages of each. The CDs today are a little bit lower cost, and we like the idea of paying our clients and clients of other brokers. The nice thing about the FHLB is that it’s very – you can really dial in the maturity than the exact amount. You can also prepay FHLB. So if we see growth in deposits, we have the ability to prepay those FHLB advances. So I’d expect it would be a mix. We like the fact of having a diversity of funding sources going forward. But I think either way, I think we’d expect both of those balances collectively to trend down, as I said, over the next several quarters.

Walter Bettinger:

Sure. Thanks, Jeff. I referenced in my prepared remarks about our best-of-both approach in which rather than following a traditional integration, which is simply moving clients and the acquired firm over to the platforms of the acquiring company, instead, we look to bring over a series of capabilities, whether it’s thinkorswim that I think now is available to all Schwab clients as of today, things like iRebal and thinkpipes. But maybe even to go beyond that just quickly, every brokerage conversion that I am familiar with in the history of our industry involved simply bringing over account assets and then a limited amount of demographic data, things like address, social security numbers, things like that. We took a very different approach. In addition to bringing over the most basic information that others would always bring over, we also brought over transaction history. I think – I believe it was 4 years of history. We brought over historical documents, all of the documents that the client would have had at Ameritrade, open orders, client preferences, watch lists, things like cash sharing and move money instructions. So we just took a very different approach. And I think that, that is part of what has contributed to the extraordinarily low level of client complaints that we have seen as, again, I referenced in my prepared remarks. And so I just would roll this all back into the big picture of our through clients’ eyes strategy that we’ve approached this integration that these are exceptionally important clients that we look to serve for many, many years to come. And despite the environment that we happen to be in, make the right long-term decision. It’s fascinating to hear all the discussion around client cash realigning because client cash realigning is cyclical, but our through clients’ eyes strategy is not. And as we work our way through the very tactical issues being raised today and the near-term issues, I think the power of Schwab is going to emerge and once again, reward our clients as well as our stockholders in a manner we have many, many times in the past.

Daniel Fannon:

Thanks. Good morning. I wanted to follow up on NNA. I get the outlook and the guidance, and certainly September was improved. Can you talk about the backlog today for potential advisers and how that compares to previous periods? And then with the Ameritrade integration now mostly done, should we not anticipate much in terms of movement in NNA as a result of that? And also, if you could maybe clarify on some of those outflows, how much was Schwab’s decision to walk away from that business or client decisions?

Walter Bettinger:

One of the things that’s very important when we talk about NNA is we put it in the context of the $1.8 trillion of assets that are coming over as part of this acquisition. If I can remember properly from 4 years ago, we estimated something like 5% to 6% asset attrition and about 4% revenue attrition. And we are substantially outperforming those numbers. But the reality is 5% to 6% of what is now $1.8 trillion is a meaningful number. And so when you compare attrition from this acquisition and you apply it to monthly net new asset figures, you’re going to get a decline in monthly numbers. It’s just math. But as Rick indicated accurately, this is waning, and the RIA side was all concentrated in a couple of months before the conversion. So we feel exceptionally good about where we are. Despite the very few RIAs who Rick identified, who did choose regrettably to go somewhere else. But that was a small number overall, and a significant amount of the attrition were clients that we had previously terminated relationships with who maybe switched over to Ameritrade or as I mentioned, run a commission-oriented business that really doesn’t fit with our model. We work much better with advisers who have decided to principally go fee and get largely out of the commission side.

Steven Chubak:

Good morning. So it’s certainly encouraging to see the capital build, the NNA acceleration in September. I think the one element of – area of concern for investors continues to be the sweep cash dynamics. And while bank sweep deposits increasing in September, certainly encouraging, total sweep cash was down $9 billion for the month. And Peter, you alluded to the fact that you’re seeing similar trends in October versus September. How should we interpret what the total cash sweep decline will be, not exclusively the bank sweep deposits? It feels like there’s some bifurcated trends between payables and bank sweep deposits. Hoping you can unpack that better.

Operator:

Thank you. Our next question is from Alex Blostein with Goldman Sachs. You may go ahead.

Peter Crawford:

Yes. So in terms of – when we think about principal and interest off of the investment portfolio, it’s tracking now at about $4 billion or so per month, so roughly $11 billion to $12 billion per quarter, maybe a little bit more in the next quarter, but somewhere in that range over the next 5 quarters. So that provides a meaningful amount of resources, liquidity to pay down those supplemental borrowings when you add that together with, of course, the net new assets that we attract for new accounts. That’s – those are the 2 of the bigger drivers in terms of paying down those supplemental short-term borrowings. In terms of the right amount of liquidity, I would think about this in terms of parent liquidity. I mean, we raised debt to keep liquidity at the parent. We do that primarily to support the activity, our client needs at the broker-dealers. And so we have through – as we’ve been going through these conversions, we have wanted to operate with a little bit more parent liquidity, given – to make sure we’ve got ample resources through these conversion weekends. And so we are running with a higher level of liquidity now than we might expect to have after we pay out. And we also have the debt maturities in the early part of next year. So we want to make sure we’ve got the funds necessary to pay off those maturities. So once we get done with that, we’ll be comfortable with the level of liquidity that we have at the parent.

Michael Cyprys:

Hey, good morning. Thanks for taking the question. I wanted to circle back to your commentary on the Workplace business. So I was hoping you could help size the business just in terms of assets and accounts, how much does that represent? And maybe you could talk about how much that has contributed to NNA in recent years as well as some of the steps that you’re thinking about taking to broaden this client acquisition funnel over the next couple of years?

Operator:

Thank you. Our next question is from Brian Bedell with Deutsche Bank. You may go ahead.

Peter Crawford:

Yes. No. Thanks, Brian. No, that’s mostly the – or I should say that really is the impact of the accretion of those marks back to par. With the duration on our available-for-sale portfolio of just over 2 years, you’re looking at roughly $600-ish million per quarter in terms of amortization. So that’s – even in a flat rate scenario. So that’s really what’s going on there.

Peter Crawford:

Sure. Well, thanks, everyone. Appreciate the time you spent with us this morning, and appreciate all the questions. I just want to close by picking up on some comments that Walt made at the outset. And he talked about how it’s easy to focus attention on the near-term challenges we have faced. We’re clearly not blind to those challenges but nor are we fazed by them. We feel a great deal of confidence in our current position, our strategy and the loyalty we have built with our clients. We feel also a great deal of optimism about the opportunities ahead of us to serve our clients even better, to continue growing, to learn from our experience this year, but also to put in the rearview mirror as we continue to deliver for our clients and our stockholders in the years ahead. Thank you very much again, and we look forward to speaking with you in January.

Walt Bettinger:

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 ZIRP. Or 0 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 [technical difficulty] -- the low-cost provider today and poised to widen this advantage over the next 18 to 24 months, and 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 -- 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 five million trades per day and with purchases exceeding sales by about 20%. 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% of our total asset base. In addition, clients have opened approximately two million new accounts year-to-date. Key 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 continue 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 independents with Schwab as their primary custodian and the average advisor manages about $90 million who converted to independents. 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 Clients' Eyes 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. Now 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?

Peter Crawford:

Thank you very much, Rick. So Walt and Rick talked about how our Through Clients' Eyes strategy continues to power strong client growth, enabling us to take significant share within the wealth management category. The progress we're making with the Ameritrade acquisition and integration and our excitement about what the combination means for our clients and our stockholders. Our plans to further our industry-leading cost advantage, both through the remaining Ameritrade integration efforts and other expense reduction actions and how we're continuing to advance our broader strategic agenda. In my time today, I'll talk about how our second quarter financial performance, which was down from the very high bar we set in '22 due largely to temporary factors. Also provide an update on the slowing pace of cash realignment activity, a trend which reinforces our confidence that we're already past peak usage of temporary supplemental funding. And as the amount of that higher cost funding decreases, our core earnings power will be unlocked. And finally, I'll share an updated outlook for 2023 and some early thoughts on certain aspects of 2024 which we expect will reflect a continued return to normal for the company. Now what I believe should become clear is that while our near-term financial performance has been impacted by client cash allocation activity, activity that we have supported and even encouraged, that activity is moderating as one would expect, which means that the potential trajectory of our longer-term financial performance should be getting increasingly clear. And as it does so, you should see the benefit of our continued growth, our tireless drive for greater efficiency and the resilience of our diversified business model. As Walt mentioned, despite the volatile environment and somewhat more muted investor sentiment, we have continued to drive healthy organic growth throughout 2023. Now if you look at our financial performance in isolation, you'd say it was a very strong quarter, nearly $5 billion of revenue and adjusted pretax margin of well over 40% and over 36% on a GAAP basis our 33rd straight quarter over 35% and $0.75 of adjusted EPS. But relative to the second quarter of last year, of course, revenue and earnings were lower. And this is almost entirely the consequence of client cash allocation activity, which has led to lower interest-earning assets and greater usage of higher cost supplemental funding, primarily CDs and FHLB which we have utilized to support this activity. Utilization, which is temporary in nature and therefore is not expected to weigh on our long-term financial performance. And in fact, assuming stable client engagement, we believe our net interest margin this past quarter should represent a trough for the year. Thinking of interest-earning assets or assets in general, bank deposits were down 7% sequentially due to client cash allocation decisions, but we saw a significant decrease in the pace of that activity from April to May and then May to June. Our liquidity position remains quite strong, and our capital position continues to get even stronger with our consolidated Tier 1 leverage ratio rising to 7.5%. And what we're calling here are adjusted Tier 1 leverage ratio, which is inclusive of AOCI. And therefore, what our binding constraint would be if we lose the AOCI opt-out that ratio at our three banking subsidiaries all topping 4% by the end of the quarter. Again, those aren't our regulatory capital ratios yet, but we expect they will be at some point in the future. And you can see we're well on our way to meeting those new regulatory requirements well ahead of the likely deadline. Now we shared in our last SMART report the dramatic reduction in the pace of client cash allocation activity from April to May. And in June, we saw a further slowing in the pace of deposit flows. And the reduction would have been even more significant or not for a large reversal in client equity allocations from sales in May to net purchases in June. Now that broader trend is encouraging, but not surprising, and it's reinforced by specific data points we see when we look under the hood. We're seeing fewer and fewer individuals making their initial purchase of an investment cash solution, a purchase money fund or CD or treasury security. And since the clients with larger cash balances moved first, again, not surprisingly, the average size of those initial purchases has also come down. In June, and this is really important. In June, we also saw a net deposit increase for our Advisor Services business. And that's significant because in this and in previous cycles, Advisor Services has tended to be a leading indicator of what will happen with Investor Services, realigning first as rates start to rise, and now slowing substantially. And as I said, actually increasing slightly their Schwab One and Bank Sweep balances in the month of June. And that's again despite of net equity purchases. As you all know, we have supported this client cash allocation activity first to be a range of organic sources, cash on hand as well as cash that comes in via new accounts and also with principal and interest payments from our securities portfolio. But to the extent that those three sources have been insufficient, we have utilized a mix of temporary sources, including CDs and short-term funding from the FHLB. Barring an unexpected increase in deposit outflows from clients engaging more actively in the equity markets, the pace of that activity has now dropped to a level that we can cover with those organic sources. In fact, we have not initiated any new short-term borrowings or CDs since late May, which means that we have already seen a decline in that supplemental funding. Again, that encompasses CDs, FHLB and repo of $12 billion since the peak in late May. And as client cash realignment continues to slow and eventually reverses, we'd expect those supplemental funding balances to continue to decline over the next 18 months and be mostly paid off by the end of 2024. And this means that they should not really be a factor in our earnings picture in 2025 and beyond. Looking out to the rest of the year. As client cash allocation activity abates, we'd expect to see a return of transactional cash growth later this year. And then as we continue to pay off the higher cost funding sources while driving strong organic growth, we should see a stabilization of revenue and then a resumption of growth, leading to a year-over-year revenue decline of roughly 7% to 8%. With our net interest margin expanding from here to reach a level in the mid-to 10 basis points by Q4, assuming the dot plots from a couple of weeks ago, so two more 25 basis point Fed increases. On the expense side, we've already taken steps to trim our spending levels this year such that we now expect our 2023 adjusted expense growth to be somewhere in the 6-ish percent range, inclusive of $160 million roughly million onetime FDIC surcharge. Meaning that our other spending is tracking roughly 300 basis points below the range we communicated back in January as we have adjusted and optimized our expense base consistent with Walt's earlier comments. Now turning our attention to 2024. We expect to see strong growth in revenue and profitability driven by an expansion of net interest margin into the upper 200s as we see a return of core deposit growth and pay off the vast majority of the supplemental funding we've accessed and the realization of at least $1 billion of net run rate expense synergies, including more than $500 million, pardon me, in net 2024 reductions relative to the outlook we shared back in January. And that would imply that 2024 adjusted expenses could be similar to or potentially even a little below 2023 levels. From a capital standpoint, our plan is to continue to conserve capital for the immediate future and we see a clear path towards growing our consolidated Tier 1 leverage ratio, inclusive of AOCI, back to our operating objective at some point in 2024. At which point, we could be in a position to return -- resume more opportunistic capital return. And then looking even longer term, we continue to see a significant opportunity for continued NIM expansion even after we realize the benefits of paying off the supplemental funding. And that comes from investing new money and reinvesting principal and interest from our existing securities portfolio at rates that are much higher than we are in today. It's important to note this would still happen even if rates fall from their peak as the dot plots currently suggest. I've spoken at length this morning about some of the dynamics that are temporarily weighing on our financial performance. And as those dynamics stayed into the background, we remain very confident that our financial formula will reassert itself to drive long-term earnings growth as it has for multiple decades. It's built on our Through Clients' Eyes strategy and no trade-offs approach which positions us to drive sustainable and consistent organic growth. And even as we've worked our way through multiple rate cycles, made disruptive moves like cutting equity commissions to 0 and acquiring Ameritrade, we've been able to convert that strong organic growth into client asset growth, revenue growth, and through ongoing expense discipline, expanding margins and then through efficient capital management, drive mid-teens plus EPS growth through the cycle. That has been the financial formula for Schwab for much of our history. And as we emerge from this unique period, we're extremely confident it will continue to reward our long-term stockholders for years, decades to come. With that, I'll turn it over to Jeff to facilitate our Q&A. Jeff?

Operator:

[Operator Instructions] And our first question is from Ken Worthington with J.P. Morgan. You may go ahead.

Peter Crawford:

Yes. I'll take that one. Thank you, Ken. So I'd say fundamentally, the -- we remain very, very bullish on the revenue synergies. And as you point out, the -- certainly a significant portion of those revenue synergies are coming from moving the BDA balances from TD Bank over to Schwab Bank's balance sheet over time. And those continue despite the fact -- the way that we have renegotiated the IDA agreement, that's a more of a near-term dynamic, the long-term implication of that, the long-term planning has not changed, which is that we'd expect to move those balances over to our balance sheet and realize those revenue synergies from doing so. But that's only a part of the story. And I think the other part of the revenue synergies are -- we're very, very excited about. And those come from allowing the legacy Ameritrade clients to have access to Schwab's broader array of wealth management solutions, lending, advice, et cetera. And Rick talked in his comments about some of the early signs of progress of interest in those solutions. If you look at the penetration rate of advice among their legacy retail clients within Schwab, it's about 19%, Ameritrade, it's about 6% or 7%. And we think that's a huge untapped need, we know those clients are interested in that advice, and we're very, very excited about that opportunity, which we think will unfold over multiple years.

Dan Fannon:

Thanks. Good morning. Peter, understanding that the client cash has been -- sorting has been slowing throughout the quarter. But your outlook for resumption of deposit growth is prior to year-end. Just curious, normally, you have positive seasonality with cash build around December. Are you assuming growth in deposits ex the normal seasonal benefit?

Operator:

Thank you. The next question is from Brian Bedell with Deutsche Bank. You may go ahead.

Peter Crawford:

Yes. So I mean I think -- I guess I would say, answer this a couple of ways. I mean when we think about LCR, what we really focus on is the LCR and there is certainly there's LCR at the banks, but there's also LCR at the parent. And when we look at the LCR at the parent, that's really driven more by what's happening on the broker-dealer side. That tends to be the -- we have -- and so that is a function of what's happening with margin balances, free credit balances and so forth. Within the banks, we certainly have ample access and ample liquidity, a very, very liquid portfolio there. We have been running a little bit higher levels of cash. I'd expect that as we continue to put some distance between now and where we were back in March and sort of the -- some of the stresses around the banking system, we'll continue to let those cash levels decline, and that will be a contributor to paying down some and retiring some of the CDs and the FHLB. So I would say that would probably be the bigger factor is continue to let those cash balances decline back closer to our operating objective, which is more around 5% or 6% of deposits.

Michael Anagnostakis :

Good morning. It's Michael Anagnostakis on for Steven. Just maybe another one on the balance sheet here. Now that it feels like a dust has settled from the banking crisis. Is selling down a portion of the securities portfolio is something you're considering to pay down high-cost borrowing sooner? And from a regulatory perspective, would your lower Tier 1 leverage inclusive of AOCI preclude you from crystallizing those losses? Thank you.

Operator:

Thank you. Our next question is from Michael Cyprys with Morgan Stanley. You may go ahead.

Rick Wurster:

So I would say that we have lots of opportunity in driving advice penetration. And the reason being that -- our clients are increasingly looking to us for advice. They want help and guidance in all measures where we survey clients. They're asking for more help and guidance, and we'd like certainly for Schwab clients to turn to us for help and guidance. We want to provide what they need. We've done a lot to try to bolster our offerings, and I'll share a few things. The first thing we've done is we've taken our proprietary Schwab Wealth Advisory offering, which is our wealth full-service wealth management offer to clients, and we've invested in it tremendously in the past couple of years. And we've seen the returns to that. As you can see by the 90% increase in flows -- 89% increase in net flows that we reported as well as the really strong Client Promoter Scores that we consistently earn in that offer. So the investments have been paying off, and we've seen an acceleration of growth there. And as I mentioned earlier, a lot of it has come from Ameritrade clients who didn't have access to a program like this previously that are now turning towards it. So that is all encouraging. We also, as you are aware, bought Wasmer Schroeder a few years ago, we're seeing just tremendous growth in the fixed income space for clients that want help and guidance there. And then we are encouraged by what we're seeing in Schwab Personalized Indexing. We believe 5, 10 years from now, taxable assets that will be the primary location that clients save or invest in taking share from ETFs over time. And we're at the forefront of that, driving down the cost for clients to participate in that as well as the minimum asset tax. We've democratized access to personalized investing, which is very much in line with our heritage. And then finally, what I would say is our SAN program, our Schwab Advisor Network program continues to grow. And gain really strong flows on our platform. We want to make sure clients have access to whatever help and guidance they need, whether it's a Schwab proprietary offer or something through our advisor network, and we continue to see robust flows there. The combination of all that is growing at Schwab, and it's also growing among Ameritrade clients. So we think the future is really bright in wealth. We've invested a lot in it. And thankfully, we're seeing the returns to those investments, both at Schwab and among our Ameritrade clients.

Alexander Blostein:

Hi. Good morning, everybody. I was hoping you could provide a little bit more color on sort of how net new money is allocating cash once they get into Schwab. So as you think about your organic growth kind of in that 5-ish, 6-ish% range recently, what percentage of the cash that comes across actually goes into the Schwab Bank versus into some of the higher-yielding options? Thanks.

Operator:

Thank you. The next question is from Brennan Hawken with UBS. You may go ahead.

Peter Crawford:

Yes. We certainly have considered and looked at that. And I think there's still a number of dimensions of that, that are to be determined. And so the implications are a little bit up in the air. But I would say the bottom line is none of the implications we think are going to be in any way disruptive. I mean they'll be very manageable depending on how it's -- the TLAC is calibrated, whether it's calibrated at the G-SIB level or it's calibrated at sort of lower level. Based on the analysis we've seen, we could have either enough debt already or have to issue a very modest amount, I mean, sort of a couple of billion dollars, $2 billion, $3 billion of incremental debt. So again, when you think about the carrying cost of that, it's quite modest. So we don't see that as being a sort of a significant factor moving forward.

Benjamin Budish:

Thanks for taking the question. I wanted to double check on the incremental cost synergies you talked about in the slide deck, you mentioned that the 2024 expense growth of kind of flat to negative is based on the assumption that you realized those savings. Is that sort of the plan that the remaining $500 million plus the additional $500 million will all be realized over the course of '24? And then how do we think about the risk that expense growth could be? Slightly positive or just the kind of parameters around which we might think about modeling next year's OpEx growth?

Operator:

Thank you. The next question is from Chris Allen with Citi. You may go ahead.

Rick Wurster:

Yes. We've got some exciting developments on the lending side. One of the things we're thrilled to do is launch a digital Pledged Asset Line experience here during the month of July to our advisers, and we anticipate that will be among the easiest and fastest pledge asset line experience in the industry. We'll do the same in retail. We'll follow with retail. And there's a number of other things we've done on the lending side to make it easier for our higher net worth clients to get a mortgage through Schwab. We've also done things you've seen. I'm sure with our investor advantage pricing, which makes taking the loan through Schwab if you're a client and have assets with us, again, among the lowest cost places to get a loan. So we see the opportunity for meaningful growth here. Lending environment clearly is challenging. So we're not seeing the returns to those investments just yet that we might otherwise have seen. But what's important is we are laying the foundation for when the lending environment is appealing more and more clients will turn to Schwab for their lending because we've made it easier, we've made it more seamless, we've made it even less costly, and there should be no better place to take a Pledged Asset Line or a mortgage than through your relationship here at Schwab. So we feel confident that when the lending environment improves, we're going to be there.

Patrick Moley:

Yes. So I just wanted to go back to the $500 million of incremental cost saves. Wondering if you could elaborate a little more on the areas that those cost saves are coming from? Walt mentioned real estate savings as a driver. And I know last week you announced that you were downsizing, you're closing offices in I think it was over 10 cities. I just wondering if you could maybe quantify the impact from that reduction in the real estate footprint? And then maybe how much of that was already baked into the AMTD integration cost saves that you guided to? And how much of that is maybe newer? Thanks.

Operator:

Thank you. The next question is from Kyle Voigt with KBW. You may go ahead.

Peter Crawford:

So the way I think about it is in terms of when we think about it, we think about sort of the principal and interest payments of the securities portfolio, and we use that as a mechanism to support the cash realignment activity and then also to pay down some of the short-term borrowings. And that's tracking about $5-ish billion per month, $15 billion per quarter as that portfolio shrinks, that, of course, that month -- those monthly cash flows will decrease modestly. But even in through next year, we still expect that to -- those monthly -- that monthly activity to be $4 billion plus $4 billion to $5 billion, somewhere in that range over the course of 2024 as well.

Operator:

Thank you. Our last question is from Devin Ryan with JMP Securities. You may go ahead.

Peter Crawford:

Yes. So you're right. So securities lending revenue does move around, it can move around month-to-month day-to-day, frankly, based off of oftentimes demand for a relatively small number of hard-to-borrow stocks, and that's really what we focus on is the hard-to-borrow stocks. We're the largest lender in the industry for those hard-to-borrow stocks. And many times, they are event driven, whether it's a SPAC or de-SPAC situation or IPO or whatever it might be. I think over time, I guess I would say two things. One is over time, I do -- we would expect that securities lending revenue to grow with the growth in margin balances because that creates more inventory and the growth in our total client assets. At the same time, we see a significant opportunity to continue to grow sec lending revenue sort of irrespective of what happens with balances. We talked previously about the combination of the green and blue sec lending capabilities on the Ameritrade side has access to more hard-to-borrow stocks. But on the blue side, on the Schwab side, we have had some more advanced capabilities, such as a fully -- a more mature fully paid program. And so we're very, very excited about that combination and continue to unlock the significant opportunities that combination provides and for example, making more of our clients aware of the fully paid opportunity. So I think that -- we see that as a revenue synergy from the combination and a great opportunity moving forward. Okay. And I think that is -- I think that we said that was our last question. So let me just close this out here as we're getting to the bottom of the hour. There's no doubt that the last few months have presented some challenges for our clients, our people and our business. And Walt spoke at the outset about the metaphorical fog that has obscured I think the enduring quality of the Schwab franchise. And as we're sitting here today in this 100-degree Texas heat, it feels like that fog is starting to clear and as it does, I think what you see as a company building loyalty among clients that is among the highest in the industry. Producing consistent 5% to 7% organic growth, positioned strongly in the two fastest-growing segments in wealth management. Delivering consistent profitability highlighted by a 42% adjusted pretax margin during one of our toughest quarters in a long time and pursuing a lot of opportunities with the Ameritrade integration and beyond to drive growth and to deliver even greater efficiency. And as I hope you've gleaned over this past hour, we remain very confident about the path forward and our future, and we look forward to discussing our continued progress with you at our next update in October. Thanks, everyone.

Jeff Edwards:

All right. Good morning, everyone, and welcome to the 2023 Schwab Winter Business Update. I'm Jeff Edwards, Head of Investor Relations. For our long-time 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. 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 are very familiar have interacted with over time in person, but maybe over the last couple of years here, we've been a part maybe you've only seen virtually. So we're looking forward to it. The agenda is very similar to years past. Walt will kick us off and as well followed by Mr. Rick Wurster, our President; Joe Martinetto, aka Professor Martinetto, will follow and talk a little bit about the Ameritrade conversion and some of the updates on technology. We'll then do a double-click into the business with Jonathan, Stacy and Bernie join us to talk a little bit about wealth and advice. And then finally, Mr. Peter Crawford, CFO, will finish the day 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. Grayson down here you see coming down the aisle, so please raise your hands, 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 that there is ample opportunity for everybody to ask hopefully multiple questions to make sure you get all those questions answered. For everybody, virtually, please go to 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 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.

Richard Wurster :

Hello, everyone. Welcome to Westlake. It's nice to see so many of you in person. One of the questions I'm often asked by analysts is, can we sustain the healthy levels of organic growth that we've delivered historically now that we're a much larger company? So I'm going to talk about that topic in two parts today. I'm going to talk about what we can rely upon from our virtuous cycle, which we think is the ability to continue that growth. And then secondly, I'm going to talk about our strategic focus areas and the role they can play in accelerating both our organic growth and our revenue. We're in a position of strength today. With over $7 trillion of client assets, we are the leading provider of investing in wealth management capabilities of any publicly traded firm in the United States. And as Walt just mentioned, our growth is supported by the fact that we're focused on the two fastest-growing segments of our market. Underlying our growth is our combination of value, service and choice. You see that in the retail channel, the ability to walk into our branch to call our 24/7 line or to deal with our outstanding digital experiences, all with products and services priced at great value. In the RIA space, we provide unmatched practice support. We provide unmatched custodial experiences in terms of our digital and technology capabilities that we provide to RIAs at custody with us. And all of that comes with a commitment to no custody fees for RIAs of any size. And in workplace, it's about our solid platforms that are supported by our industry-leading service. You add that all up, and we have a healthy greater than 1.5 TOA ratio. Now for those that have been covering the company for a while, you may recall us reporting numbers closer to 2. And you can rest assured that our Schwab numbers remain at those levels. But I also want to anchor you to the new numbers that we'll report going forward, which are the integrated Ameritrade and Schwab numbers, still a healthy greater than 1.5. And I also want to provide some context for why Ameritrade has historically had lower TOA. What happens with Ameritrade is clients have been attracted to Ameritrade for their trading capabilities. They bring cash in, ready to execute a trade. They grow their wealth over time with Ameritrade. And at some point, their needs change and they want more full service wealth management support. And so they take some portion of those assets or all of those assets and they TOA them out to a fuller service firm. And so the assets come in, in cash and TOA out in securities, creating a lower TOA ratio. So that's why as we report our TOA ratio going forward, you should expect it to be closer to the 1.5 than the 2 that you've seen from Schwab historically. But therein lies an opportunity. Those clients that have come to Ameritrade to trade that have built wealth there, we're going to expose them to our relationship model. We're going to make available our broader wealth support, and we're going to try to keep as many of those clients in the Schwab family as possible because we know when they're at Schwab, they don't have to make any trade-offs. We have a strong market share today with 12% market share, but there's still lots of room for growth for many years to come. The virtuous cycle has been what has driven our growth over time. Walt has said for many years, if we do right by clients, if we see through their eyes, clients will do more business with us. And this is proof that, that approach has worked. When you look back over the long run, we have consistently delivered 3% to 5% of organic growth from our existing clients. That's our existing clients choosing to do more business with us because we've done right by them. Whether it's them investing their dividends and interest with us, we're bringing their hard-earned savings to invest for the future. We've reliably generated that 3% to 5% from existing clients. We've also been able to attract 2% to 3% of organic growth from clients new to the firm. You add that all up, and it's the 5% to 7% growth Walt shared earlier that we consistently and reliably delivered. So now I want to take a moment and talk about why we're confident that we can continue to drive that growth from our virtuous cycle in the future. And it starts with existing clients. Our client base is young and getting younger. Our average client age is under 50, and 57% of our clients that came in new to Schwab last year were under 40 years old. That puts them squarely in the accumulation stage of their life, meaning they're going to need to contribute more assets to save for their future. The other element driving our future growth from existing clients is dedicated relationships. We know that when we have a dedicated relationship with a client, that client is a more engaged client. They have higher Client Promoter Scores, greater satisfaction and as a result, higher retention, and they bring us more net new assets. In fact, they bring us 2.5x more net new assets than those that did not have a relationship. And we continue to invest in and expand the number of clients at Schwab that have that dedicated relationship fueling our future growth. And then third, in our RIA business, as the RIAs who custody with us have success in growing their businesses and as their existing clients bring them assets, that's fuel for our organic growth. So you can see from this that we feel like we're in a really good position if we see through clients' eyes to sustain our level of organic growth from existing clients. In terms of new clients, our recipe is what it's always been. It's about our brand, putting clients first. It's about being a trusted financial services provider as we have been for the past 50 years. It's about our diversified acquisition model. It's about our sales teams, our marketing efforts, referrals, being able to walk into a branch. It all attracts clients to Schwab. It's our workplace pipeline, a business that's an increasingly strategic for us and one that should bring new clients to Schwab. And then finally, it's our commitment to the RIA industry. As more advisors choose to go independent, as the leading provider of custodial services, that will fuel our growth. So we think, as we look forward, we're a much bigger company. This shows -- this to us is evidence that the virtuous cycle will continue to drive that 5% to 7% of organic growth that we've seen historically far into the future even as a much larger company. I want to now pivot to talk about our strategic focus areas and the acceleration they can provide both to organic growth and to our revenue. We've talked a lot about the benefits of the Ameritrade acquisition. It's clear, it's the expense synergies, we've been clear about. The enhancements to our clients, we've been clear about. Our clients are really going to benefit from bringing the best of Ameritrade and Schwab to them, both in the advisor, channel and in our retail business. One of the things I'm particularly excited about is the runway of growth that Ameritrade will provide to us. At Schwab, we have a little more than 50% share of our clients' assets here with us at Schwab. That's 1.5x the share of wallet at Ameritrade. Many of my Ameritrade colleagues will say to me, we're #1 at being #2. And what Ameritrade meant by that was that their clients tended to have a primary financial relationship. And then they would have some of their trading assets with Ameritrade, but they always had that primary relationship. As we introduce clients to our relationship model, our broader set of capabilities, our advice, our financial planning, we believe we can move into that primary financial relationship position and grow our share of wallet with Ameritrade clients. And if we can do that, that's a more than $0.5 trillion of net new asset opportunity for us. And importantly, it's clients that stay in the Schwab family and benefit from all that we have to offer. So it's a real win for clients and it's a win for us. I want to now talk about wealth. I'd like to [say] market for advice. And you can see that on the left-hand side of this page, more investors are willing to pay for advice. We have a really strong wealth platform today. Neesha's going to describe it in a lot more detail later. She'll also describe the enhancements we're making to take what's a strong platform and make it even better for clients. We see room to grow here. 19% of retail assets at Schwab are in an advice solution. As Walt talked about earlier, those consistently -- those clients consistently have our highest Client Promoter Scores and are among our most satisfied clients. They're also ones that were helping along their financial journey and making a real difference in their financial life, fulfilling our mission as a company. You'll also notice on this page that only 7% of Ameritrade assets are an advice solution. We see opportunity to grow both of these numbers, and we also see an opportunity to close that gap between the 19% and the 7% as we introduce the breadth of advice capabilities that we have at Schwab to our Ameritrade clients. For each 1% we can move the needle, first of all, it's more clients that we're helping and making a real difference in their financial life, most importantly. And in addition to that, it's $125 million to $200 million of annual revenue. I want to now talk about direct indexing. Direct indexing is a capability that we think over time will take share from both mutual funds and ETFs. It's a capability that we think to be a market leader is going to take 3 success criteria. We think it will take being a leading indexer. It will take strong digital capabilities because in order to personalize the portfolio, it's going to have to be done in part digitally. And we think it's going to take relationships. And we think it's going to take relationships because many clients aren't aware of the benefits of personalized indexing today. So that one-to-one discussion about how it may benefit an individual client is going to be really important. As we think about those three characteristics, indexing capabilities, digital capabilities and relationships, we believe there is no firm better positioned than Schwab to be a market leader. And as we're a market leader, there's a number of benefits that will accrue to our clients. Over the long run, they should be able to achieve better after-tax returns. And they should be able to personalize their portfolio in a way that meets their needs and allows them to commit to their portfolios for the long term, helping drive better financial outcomes. It's also a space where we can bring our no trade-offs approach and our value orientation to clients and helping make a real difference in their lives. I want to now talk about lending. Lending is an area we've been focused on doing more. And it started with our preferred rate program that we've introduced in the past few years, something that's been very well received by clients as those clients that keep assets with us have been able to access industry-leading interest rates. We've also invested in the past couple of years in making the experience of taking a loan or a poll at Schwab easier to accomplish. This is an area where we think we have more room to grow. Clients come to us for the asset side of their balance sheet. But today, only 0.6% of client assets are in a lending solution. So far fewer are coming to us for the liability side of their balance sheet. And that presents us with an opportunity, an opportunity to do more for the client, to integrate their financial life, to give them a more holistic view of their financial life so that we can help them along the way to their financial dreams. And if we do that, if we can deliver in that way for clients, you'll see for us, we've had 0.6% of total assets in lending solutions. When we look at our peers, that number is about 3.5%. If we can close that gap and do more for clients, that's a $1.5 billion to $2 billion of annualized incremental revenue that we could accrue at Schwab. But again, it's also, we think, happier clients because we know the clients that do have both a lending and investing relationship with us are happier clients and also have higher retention, stay with us longer. I want to now talk about our third strategic focus area, client segmentation, and I want to focus on two segments in particular. First, I want to focus on traders. And you can see from the metrics on the page that the trading segment is a very valuable segment to us, which is why we continue to invest to make sure that the strength of our combined trading platform and the thinkorswim platform that we're bringing on from Ameritrade continue to shine. So we're investing in thinkorswim. We offer differentiated service for our trading clients, and we have an outstanding trading education group, which provides education to traders of all skill levels, helping them to be as successful as possible. On the right-hand side of the page, you'll see our efforts with higher-net-worth clients, an area where we are competitively strong as you can see with our 2x TOA ratio with wirehouses, which is where we tend to compete for these clients. This is an area we've invested in over the past few years, and we'll continue to invest. We've invested in differentiated service experiences, differentiated product to meet the unique needs of higher-net-worth clients and differentiated wealth advice to help clients in that wealth bracket to meet some of the challenges that they may face, all with the goal of making them better off in their financial life. So I'm going to wrap up with where I started. The question I'm most commonly asked by analysts is, can we sustain the level of organic growth that we've driven historically and that Walt shared with you earlier? And the answer from us is a resounding yes. Yes, we can. It starts with the virtuous cycle, driving 3% to 5% of new organic growth from our existing clients and 2% to 3% from new clients. And we can accelerate that via organic growth through the opportunity with Ameritrade that I described earlier and a $2 billion to $4 billion-plus revenue opportunity through both wealth and lending. And it all starts with seeing through clients' eyes. When we see it through clients' eyes and do right by them, that leads to enhanced growth and sustains what you've seen from us historically. And with that, Walt and I are looking forward to taking your questions.

Richard Wurster :

I would say, first, it's going to take time. This isn't going to happen overnight. We already have a very strong wealth business that is growing. You'll hear from Neesha later the investments that we're making for the long term. So we see it as a long-term opportunity there. On the lending side, we've done a lot to enhance our capabilities in the past few years. As the lending -- it's going to take those capabilities, which we think are ready for growth, but also probably a different lending environment. And when the confluence of those two things happen, I think you'll see an acceleration in our client lending activity.

Walter Bettinger :

Yes. So certainly, I think in the retail side and the advisor side, we have a very, very powerful scale. We would probably be 1 or 2 on the retail side if you incorporate non-public companies. And of course, 1, if you look at public and from a purpose-built platform for RIA custodian, I think we would likely be considered a very strong #1. We have more opportunity in the workplace environment where we have a very strong approach in 401(k) with both a bundled and an unbundled approach and then in the equity comp side, but there's probably more opportunity there to expand scale. Those are often more corporate- or company-driven decisions as opposed to the investor side and the advisor side. I think technology is definitely going to play a role. But to me, if what you're really getting at, Michael, is the idea that someone could leverage technology to make a leap above others in scale, I don't envision that because we're all investing in technology to drive all of our costs down. So as we would evaluate our scale position, technology is going to help those who are less subscale to us, but it's also going to help us and is helping us. And so the relative efficiency of businesses is likely, I think, to continue to be there as we all make meaningful technology and digital investments. The other thing that I think is important in that is that our business model, although it has a significant part that relies on relationship, also has a very significant part that is less relationship-oriented. And so if we're competing against firms that have the majority of their revenue driven off interpersonal relationships, there's only so much scale that can be driven from that because of the compensation for those individuals. Good question. Good long-term perspective thinking. Thanks, Michael.

Walter Bettinger :

Yes. I mean I think in the short run, you have more variables because we've had such a tremendous swing in interest rates, right, from a ZIRP world to the most rapid increases in rates that we've ever experienced. We went from an incredibly strong equity market in 2021 to 2022. But that's all short term. I think when we flip it around and look at the long-term perspective, I really don't think things have changed that much. Investors still need to plan for their future. They're still saving for retirement. They're still saving to put children through college, providing for other family members. All those factors remain the same. And I think what is important over the three years since we've been together in person is, the strength of our franchise has only grown as we've made investments, as we've leveraged our capabilities, as we are bringing together Schwab and Ameritrade, our offering to clients and prospective clients has never been stronger. So sure, short term, from a financial standpoint, there's more volatility. But from a long-term standpoint, clients are going to returning to Schwab for their needs, I think we're better positioned than ever to deal with them. And I think even long term, financially, we're in a better position, again, illustrated in 2021 and 2022. So 2021, the trading aspect of Ameritrade really helped lift our revenue and helped us, in a ZIRP world, deliver record results. And then it turned in 2022 where trading was a bit softer than in 2021, but as rates start to move up, the Schwab part of the economic model really kicked in and helped us deliver record results. So again, I agree, Rich, short term, we see volatility. Long term, we really like our positioning. And we think the combined Schwab-Ameritrade also delivers a lot of benefits financially for our stockholders.

Richard Wurster :

Sure. Do you mind -- just go through the 3 again because I want to make sure I hit all 3.

Walter Bettinger :

So let me start with direct indexing. I think on direct indexing, the big opportunity in the near term is with higher-balance clients. And the reason that, that's where the opportunity is, is because the tax impact at direct indexing has the biggest impact on those clients. And so we came out at $100,000 minimum, which the big direct indexes were at a $250,000 minimum. So we think that was a disruptive move and brings a lot more clients into the fold who can benefit from the tax benefits. I think that as we move forward, as this space evolves, I do think the minimums will come down. And I think the primary reason for that will be the desire for personalization because I think what you'll find is the lower-balance client -- the idea that you want personalization will appeal to any wealth level. Now there's some people at wealthier levels that may have concentrated positions. And you can do some really interesting things for wealthy clients in building a more personalized index portfolio because if you have a lot of exposure to Schwab stock, you could build an index that not only takes out Schwab but is built from a factor standpoint to be almost the opposite of Schwab so that you can, with your Schwab stock, get back to the index level performance and think about it holistically. So there's a lot you can do for wealthy clients, but also for less wealthy clients. So I do think the minimums will come down over time, and we've been building our capabilities to be able to do that in terms of our fractional share capabilities. Just more work to be done, but I think the industry will move in that direction over time. I just don't think it's important to do so today. We're at a phase where we're still educating that first wave of movers and those are going to be our higher-net-worth clients, and that's where we want to keep our focus. On the advice side and the Ameritrade, I'd say a couple of things. I mean, I think it goes back to the -- what I mentioned earlier that Ameritrade colleagues will tell me they were #1, being #2. So most of their clients that came to Ameritrade for trading actually had full-service wealth advice relationships. They just weren't with Ameritrade. So it's clear to us that there is interest among the client base. And I would just say, 10 or 15 years ago, people used to say similar things about Schwab. You probably won't be able to grow advice. People come to you for transactional reasons. And of course, it's grown markedly over the last 10 to 15 years. And I think our Ameritrade clients are in a similar position. So we are confident. And we've already seen the benefits. I mean, I think 46% of our Ameritrade financial consultants have already opened an account in Schwab Wealth Advisory, which is a pretty remarkable number given they're not even fully Schwab -- embedded in Schwab yet. And they've had some higher hurdles to overcome to introduce that to their clients in a Schwab financial consultant. So that's a pretty remarkable number. So we see a lot of promise there. And then on the lending side, I can't remember the challenge you mentioned, but do you mind reiterating the challenge you saw on the lending side?

Richard Wurster :

Yes. Well, that's the opportunity for us, and we've introduced the ability for our relationship people. So Schwab Wealth Advisory for the first time is now able to talk to clients about their -- the lending side of their balance sheet. And it's a focus of the branch network, which Jonathan will talk about. So there's -- we have every reason to believe that we can engage more with clients on the lending side. It hasn't been an area of huge focus in the past for a whole lot of good reasons, but there is an opportunity there in the future. And the reaction to what we've done so far has been quite strong. And when you see client engagement with our lower -- with our interest rate program, which has really lowered the cost of lending for our clients to keep balances with us -- it's been very positive thing with clients. And you see it in our Client Promoter Scores that have both the asset and liability side with us, you see it in the retention numbers. It's stickier relationships.

Benjamin Budish :

Ben Budish from Barclays. I wanted to follow up on what you were sort of talking about -- with Ameritrade and earlier in the presentation, you mentioned an opportunity to kind of gain wallet share. I was wondering if you could drill down in that a little bit more. Are there certain -- you mentioned a lot of Ameritrade clients might use Ameritrade for trading but have a separate wealth management or advisory relationship. Is it simply a matter of sort of getting the advisory piece as well or are there other types of assets that you could bring over, things like 401(k)s or IRAs, just other kind of products said you could kind of point and click, move over? If you could just kind of drill down on that a little bit.

Richard Wurster :

No. Go ahead, please.

Christian Bolu :

Christian Bolu, Autonomous. So just on the competitive landscape, your growth -- organic growth of 5% to 7% has -- over the last decade has definitely been impressive at your scale. But over that same period, a lot of competitors, wirehouses, independent brokers, have grown faster, actually doubled the organic growth. Just curious how you actually think about competitive landscape relative to peers. Is Schwab losing market share on a relative basis? Is some of your historic competitive advantages, are they beginning to diminish? Just curious to think about it relative to those peers that have grown much faster of accelerated growth through the last decade.

Unidentified Analyst:

Could you talk about the role of alternatives in clients' portfolios and what you guys are doing on that front?

Jeff Edwards :

Last question here from the web. In terms of -- as you think about growth, how do things like additional inorganic or M&A and/or international play into the future of the firm over time? And this is a question from Bill Katz at Credit Suisse.

Walter Bettinger :

I think we're at the end of our Q&A time. So again, I just want to thank all of you for being here today in person, thank all of you who are participating remotely. It is wonderful to be together. I can't wait to do it again. I'm very confident it won't be three years. And Rick, thank you for giving me the chance to share the stage with Q&A. I'll step off, and I think you'll introduce Joe.

Joseph Martinetto :

Thanks, Rick. Good morning, everybody. So I was flipping through my e-mails this morning, and I saw one with the intriguing title of hot topics in accounting this week. And I've grown inwardly and I pushed the delete button. And I reflected for a minute that this presentation may sound a little bit like that e-mail to many of you, Joe is going to go talk about technology infrastructure. So I really want to reframe it a little bit. My two objectives today, one is to maybe get you a little bit excited about the opportunities in front of us to continue to drive scale and efficiency into the business for the long run while continuing to deliver great client experiences. So I think that's maybe a little bit more exciting. The second part is to give you an update on where we stand on the integration. And so if you still feel a need to grow and I'd ask please wait until after the prepared remarks, and then we'll take people's temperature then. So let's jump in on where we are on the integration. So we are into year 3 of work on integrating the firms at this point. And we've been doing a substantial body of work in the background to prepare for the client conversion, which is upcoming. We have done tremendous amount of work scaling the infrastructure on the Schwab Blue platform to allow us to bring over all of the accounts and positions and clients onto that platform. We've also been doing a bunch of testing of all the work that we've done. Walt made reference to the quality of the outcome that we're starting to get out of the testing at this point. We've got very high success rates, which gives us a lot of confidence that when we actually start to migrate the clients that we're going to be able to do this as effectively as possible. We have been doing work on the client side on a couple of different dimensions. So a piece of it is we've been bringing over different products and services onto the Schwab platform. So those of you that are Schwab clients may have noticed changes in the trading platform over the course of the last several months as we've been bringing on some of the best-of-breed capabilities that were on that Ameritrade platform that weren't on the Schwab platform. So when we do bring the clients over, they're going to get an experience that's pretty similar to what they had prior to the conversion. We've also been doing work to ensure that when the clients come over that they have a great experience in the process of that transition, and we'll spend a little bit more time talking about what that's going to look like on subsequent slides. But the goal here is to try to make it as easy as possible for those clients to get themselves set up on the Schwab platform so that we can, to the extent possible, pull some of those questions forward before conversion and get them addressed before the clients come over, so that when they actually are converted that they don't then find themselves in sort of a cold experience, forced to call in, and experience probably some challenging service experiences as we see a spike in activity on some of those most critical conversion dates. Rick made reference to the fact that we've been doing some work to start to make some of the products and services available to the client set. I think we're incredibly excited about the opportunity in front of us to continue to do more of that. Frankly, some of what we've done has been basically meeting demand, but we've done it in a way that probably is far more manual than what we're going to be able to deliver once we get the clients on to the Schwab Blue platform. And the last thing, Walt made reference to the fact that despite all of our best efforts, we know that there are going to be some glitches that are going to happen in the process of moving the clients over. So we've invested significantly in building out enhanced client experience or enhanced service experiences and training our people to be able to meet the needs of those clients as they do come over and also bringing on some third-party services to help us make sure that we've got some ramped up capabilities that we'll be able to meet some of the most basic client service requests and doing it in a way that's cost efficient for the long run so that these are essentially kind of meeting spike needs in terms of call volumes but not embedding them into the long-term cost structure of the company. So we are on the verge of actually starting to move clients over. The first tranche is scheduled to come over on President's Day weekend in February, a couple of weeks from now. So what we have done here is broken the clients up into 5 different transition groups. So if I use the phrase like TG 1, TG 2, excuse me, it's just kind of embedded in the way I'm thinking about it at this point. We have, in total, somewhere between 18 million and 20 million accounts that we're going to be moving over, over the course of this entire integration. And the number moves around a little bit because clients are still opening new accounts. We're still doing work to clean up accounts on the platform. So -- but still between 18 million, 20 million, give you a sense of the scale of what we are achieving here. We have a relatively small group that we're moving in February. It's about 0.5 million accounts. It's intended to be more of a test group. So it's a relatively smaller group of people who are maybe not quite the most active users of the platforms, but it's an opportunity for us to move the assets, bring them onto the platform, test the service experience, make sure all the technology is working the way we expect before we engage in some of the larger transition groups later in the year. We have a big group scheduled for the Memorial Day weekend, which is predominantly the non-advised retail client group. We've got another group scheduled for Labor Day, which is the advised client group plus the advisors. And then we have another tranche scheduled for November, which is the bulk of the traders coming over the tossed users. We have one more group of traders, those most active people that use things like futures and ForEx, that we have moved into a small tranche in the first half of 2024, and that will be the last group of clients that we'll move. We've -- I guess, it's been a while since we actually spoke in person. The war in Ukraine impacted some of the resources that we're working on some of the conversion as a result of having brought some of that. And with the TD Ameritrade acquisition, that group is no longer available to us. And as a result, we've had to do some quick shuffling to identify resources and replan some of the transition. But we're still on track to have the vast majority of clients moved over by the end of this year with a small group into next year. Because of the way we've scheduled it in that small group, we don't believe that it's going to have an impact on our ability to recognize synergies from a timing or a total dollar perspective, and I'll summarize that here in the next page as well. But we do believe that we're ready. We have done everything necessary to -- on the testing side to make sure that we are as prepared as possible. We have started client notifications and have now sent out over 10 million communications with a lot more to come this year. As people move into their time schedule, as we get closer to their transition group, they'll get a series of communications that will prepare them for what's coming and what it is we need them to do. We have built out capabilities like a Welcome Center to let people come in and get a sense of what's available on the Schwab platform. We've also built a client conversion hub. So the purpose of the client conversion hub is to get the clients to engage with Schwab and come in and set up their credentials in advance of that transition. So we get them to come in, establish their user name and their passwords. So that's all set up before they actually get to the conversion window so that we don't have a bunch of people calling in on day one saying, how do I access my account. The upside for them for doing that is they will get what we call a future view. So they will get a chance to then look at the entirety of their household as we have mapped it inside of Schwab. The TD Ameritrade platform was a very account-based platform. So it was one log-in per account. At Schwab, we're more of a household base. So we will pull all of your accounts together into a household view. Once the clients establish that credential, they get a chance to come in, see what that household view looks like. And to the extent that they have other accounts that they want to identify and get linked to their household, they'll have an opportunity to do that as well prior to conversion. So we've done a lot of good work to try to take as much friction out of this as soon as possible to ease that transition process for the clients. On the dollar side, we're still on track to achieve the expense synergies that we have communicated, and we have gotten about 2/3 of those costs out of the system already. We have plans in place to be able to recognize the remainder of those by basically end of 2024. The savings that we'll see this year will probably be relatively modest. There's a small amount, I guess, a full year impact of some savings that we got last year. There's some smaller impacts as we bring the clients over on to the Schwab platforms. There are some places where we're more efficient on the operating side. So we'll start to see that as we migrate clients over the course of this year. But the bulk of the remaining savings are really going to come from decommissioning the duplicated platforms, and that can't happen until we get all the clients over, and there's a body of work to happen in 2024 to achieve that. But that's all programmed into our plans now for the remainder of this year and into next year. On the revenue side, we feel equally as good about the long-term projections. I'd say from a macro perspective, we have actually benefited from account acquisition and asset acquisition that's been better than anything that we had in the original business case for the transaction. Here in the near term, we may have been feeling a little bit more pressure around interest rates and what it's doing to some of the balances is the biggest driver of the revenue synergies over the long run is tied to the BDA transition. But when we look at it over a long period of time, and we have a number of years to run still on that BDA, we still feel good about where we are in terms of being able to recognize the totality of the revenue synergies that we talked about. And I would highlight that while we have started to do some basic work around things like offering banking products and services and we've done a few other things to make things like managed investing available, but it's still a pretty clunky process. Even with that clunky process, we've had really good feedback from the clients. I think Rick dimensionalized some of the opportunities that we think might be out there for us. Some of those numbers were not included in these revenue synergy numbers. So if anything, I would say that we probably have some upside out there related to some of those opportunities that we haven't put into the synergies. Switching over to some of the -- rest of the technology stack. We haven't been sitting on our hands while we've been working on integration. We have been continuing to do a lot of work in the background on some of the things that we have talked about over a number of years. We have had to restructure some of this work as a result of doing the integration. And while -- you can see that there's really 3 or 4 things here that we've talked about historically as being sort of independent programs. This has almost become a singular body of work that was necessary to accomplish to be able to affect the transition of all the clients and to build the scale that was necessary to deliver that. You can see on application modernization, which is really the move to pull a lot of the capabilities off of that old monolithic mainframe system and put it on to a distributed environment where we could scale it more efficiently. We're about 3/4 of the way through that body of work with the remainder of it expected to deliver over the course of the first half of this year. So that program is wrapping up basically on time and pretty close to on spend levels in terms of what we expected. We continue to see real benefits there in terms of some of the choices we've made. Really what we've done with the new environment that we've built is created a set of technology that's capable of being cloud-hosted. And we've, in essence, put it on a private cloud inside of our own data centers. So I'd say we have been a little bit interrupted in terms of some of our thinking around cloud migration. Because of the integration, we've been more focused on making sure that the platform is scaled and ready to accept the additional volumes. But there's still an opportunity out there to continue to migrate additional capabilities to the cloud. Even with that, we've identified a number of workloads that we have already been in process of moving, and I'd say they really fall into two main categories. So one of them is things like account log-in where you get big spikes in activity at points in time over the day, where it's pretty inefficient for us to build enough technology to deal with that volume that comes in over 3 minutes at market open, and you got to carry that capacity for the remainder of the day. Those kinds of workloads scale really efficiently in the cloud. And so we're prioritizing work like that as we think about some of our first moves to the cloud. I'd say the other part is things where capabilities are developing in the cloud that are becoming increasingly difficult to acquire and run on-premise. A lot of the analytical tools and the data tools that are now available at a lot of the cloud providers are really just superior to what we're able to build and deliver in our own platform. So a lot of the work we've been doing is establishing our client information and other databases out on the cloud and data warehouses to allow us to take advantage of those kinds of analytical capabilities going forward. So work has continued to progress on the things that are maybe most important in terms of cloud impact, but there's a lot of work left that we're going to be able to continue to think about. Scale and resiliency. So that movement to a private cloud structure has allowed us to build out a much more -- it looks a lot like the way modern cloud is hosted internally. So we've gone to this own region approach. So we've got multiple regions where we're running multiple zones inside of each region. That has given us not only the capability to scale effectively, but it also has given us the capability to manage the way we adapt when we see system challenges. So one of the things that's mentioned up here is legacy retirement. One of the things that we have done for years when we have system problems, we used the code base called [host fallback] which was a completely separate mainframe-based application, which had a really limited set of capabilities on it. So when we had to go into host fallback, we were limiting what our clients could do. They could trade and see balances with things like money movement, and a lot of the more advanced asset management capabilities we've built over the years really weren't enabled in host fallback. And so today, with what we've built in terms of the way the infrastructure runs, we're going to fall over from a zone within a region and then across the regions a lot more elegantly than what we used to have to implement with host fallback. And as a result of that, the clients should notice a lot less when we have system problems and have basically access to all the capabilities when we're going through that transition process. So it allows us to retire that block of host fallback code, as an example of some of the kinds of things that are happening in the background as we continue to make progress on modernizing some of the core infrastructure. So as we look forward, we are not done with some of the opportunities. You might be surprised to see that the #1 opportunity we highlighted here is Ameritrade integration. But when you think about what we've done with integration so far, we really gave ourselves a set of constraints that were driven by how much we were going to spend to get the integration done, the time frame that we needed to execute that conversion in. Now, obviously as we’re in the timeframe we're willing to get it done. And so as a result, we had to opt on the amount of synergies we were looking to achieve. When you put all those things together, we made decisions that we thought were smart decisions as we were working our way through the integration approach. But that optimization frame meant that there was a series of things that we didn't tackle that give us future opportunities to continue to drive more efficiency as we look to some of the things that are still sitting out there. Public cloud migration, number two. There's still tremendous opportunity for us to look to move more workloads into the cloud. We're running a much larger and more complicated on-premise data center structure than we would like to run for the long run. The cloud really becomes the solution for how we get some of that workload off of the on-premise structures and lets us start to rationalize some of that over time. Efficiency and automation and the operations component. So some of that is very similar to the comments I made on Ameritrade integration. We made choices as we were thinking about how we were bringing these workloads together to try to make sure that we were going to achieve the synergy targets that we had committed to. But now with the volumes that we're at as we start to bring this work together, there's a lot of workloads that we can go through and continue to bring additional automation to. It's just a matter of now taking the resources that have been working on integration and starting to migrate them toward working on that further automation. And then finally, broker-dealer modernization. So those of you that have followed along for enough years might remember that broker-dealer modernization was actually a component originally of what we were trying to do with application modernization. And we pulled it out of that body of work as we migrated more towards some of the integration efforts. So the core here is to take that old core mainframe application books and record system of the broker-dealer and migrate it to a modern -- a more modern platform solution, probably a SaaS-based solution, as we look out into the marketplace and see what's available today. That not only drives additional expense benefits, but it also gives us an opportunity to take advantage of some capabilities that we don't have inside of the Schwab platform today. So things like multicurrency capabilities or multi-firm capabilities that we just don't have, given us an opportunity to think about where we might go with products and services in a way that it's not a to us on the platform that we have today. So it's a cost save, but it's also an opportunity for us to continue to build additional products and services to deliver to our clients. So there's a great body of work here that we're starting to try to figure out exactly how we're going to tackle it and sequence it, but we see a number of years of continued efficiency here that we're going to be able to deliver long beyond just the core integration work. So with that, I see hands coming up. We're opening the Q&A. Let's go ahead and get started.

Joseph Martinetto :

Sure. So I think we got to be a little careful here. So cloud doesn't come for free. There is investment that has to be made to be able to do the migration to the cloud. And we are not talking about moving everything that we do in terms of technology workloads on to the cloud. So that is not the goal. We are looking to take the things that make the most sense to run on the cloud and move them there. But we expect that we're going to be running on-site data centers for the foreseeable future. There's a certain amount of workload that's going to make sense for us to continue to manage on our own. So it's definitely an opportunity to use to continue to bend that cost curve. I think some of the bigger savings will actually come more on the physical side of data centers and data center infrastructure. Because of what we've done with the integration, we're running quite a number of data centers now, including some are owned and some are leased. But we've had to take on additional space just to be able to house all the hardware, get enough power and enough cooling to run everything that we see coming out of post-integration. And so rationalizing some of that workload will allow us to rationalize some of that footprint and continue to bend that cost curve. What I think probably important to think about is, like I talked about some of the integration work as being a single body of work. I think some of this optimization work is also going to be taken in the same kind of frame. On any given system, it may feel like a step-function change. But for a company as big as ours and given everything we spend in technology, it's probably not going to feel like a step-function reduction, it's going to feel more like a portfolio of work that's going to allow us to continue to drive some incremental scale consistently over time. So I think bending the cost curve is probably the right way to think about it. It will allow us to slow that pace of growth as we absorb new volumes and continue to drive efficiency into the processing that we're doing. Peter is going to have more to say about what the long-term prospects are for expenses as we look out a number of years. And so I think it's all kind of baked into his numbers. And so I'll defer the more specific answer to his presentation, if that's okay.

Joseph Martinetto :

Yes. So starting with attrition. The business case embedded a pretty modest 2% kind of number. So we are not expecting a material amount of attrition. We're going to measure it as best we can through the process. The risk probably comes at the time of conversion that as those clients get those notifications, that is probably the point where if we're going to see attrition, it's probably going to be as we're moving those specific books of business. We're doing everything possible to make sure that we're communicating with those clients, following up with those clients, giving them a great experience, trying to make it easy. Right now, I would say we are way ahead of the game in terms of client acquisition versus any attrition numbers that we embedded in the model, but we are probably going into the window where if we're going to see attrition present. As they are business folks, maybe you want to ask them is if they get up on stage to talk about what they're doing and how they're seeing it. But for right now, I think we're feeling pretty good about the attrition number based on the feedback we've been getting. From the process side, I'd say this is maybe a little bit different of an acquisition than something, I'll drop here, a little more like the USAA, where -- that was we bought a book of business. It happened over a weekend. We couldn't do anything with those clients prior. We converted their accounts, their assets. We opened for business. We had them set up their credentials on day one. That was a rockier kind of experience because of the nature of that transaction and the limitations on our ability to work with those clients in advance. Here, we own both broker-dealers. So we can essentially subsume those accounts. We already have the clients. We have the client account agreements in place. We can transfer those across the organization without having to novate new paper, right? They're not going to be new account forms. There's not going to be new sign-ups. There's not going to be -- it's not paper-based, right? We essentially have taken care of all of that in the process of reviewing the account agreements already. We've been doing a number of things in the background to try to pull work forward to make this easier on us and easier on the clients. We have actually gone through a process now where we have created every TD Ameritrade account and formed all of the households. So we are now running all of that infrastructure on the Schwab Blue platform. So all of that is set up and ready to go. The accounts are ready to receive the assets over the course of the transition weekend. And the clients, as I said earlier, are going to get that notification window and the opportunity to start to interact with that process much earlier and, we hope, much more seamlessly. We do know that there would be some clients that won't do that in advance and will, therefore, need to either go through that process after conversion or will call us and say, "Gee, I tried to log on and I can't get on. What do I have to do?" And we'll have to help them get their credentials established. And we have, as we said, trained 11,000 Schwab employees. We have brought on a substantial block of third-party resources to help us deal with that. We have done everything that we can foresee. Again, I can't say it's going to be completely seamless, but it should be as well engineered as we can possibly make it. We have cleaned up over 3 million client records just trying to make sure that when people come across, their accounts won't be restricted because we'll have to put a know-your-client block on it because we don't have all the information. We've gone through, we've contacted the clients, we've got the information, we've cleaned that stuff up. We are down to really small numbers, measured in like thousands of accounts that we think right now we still might have some kind of lock on. But when you think about 18 million to 20 million accounts moving and maybe something less than 10,000 accounts to where we're still working to refine client data, and we still have the majority of the year to work on some of that. Like I said, we have done everything possible to try to make sure this goes as smoothly as it possibly can.

Joseph Martinetto :

Yes. So I mean you saw one of the primary cloud initiatives was to move our databases over onto cloud database. Some of that was to be able to take advantage of some of the advanced analytic capabilities that are available in those environments that are hard to stand up independently. So I think we've been doing the work to prepare ourselves to take advantage of those more advanced analytics. I'm a fan of AI, but I don't know that it's necessarily necessary. There's a lot of other advanced analytics that you can drive before you even get to AI that will let you be able to deliver superior client experiences. We've got some instances where we're already doing some of that work. We've got capabilities that we've built over the years like Next Best Conversation, so our service professionals based on the cues that they're seeing, get a series of prompts that are delivered to them to try to make sure that they're navigating through the right things that the clients might have an interest in. We have things like the Schwab intelligent assistance, an online chat bot that's being driven by a lot of those same kind of capabilities. So we've been building up some of those core capabilities. I think we'll be able to accelerate into some of that where we see the opportunity. Some of it may be AI, some of it may be more just kind of boring advanced analytics that we all kind of know how to deploy. But really, the primary unlock here is to get that database established in the cloud where we can start to use some of those more advanced analytics.

Joseph Martinetto :

I'd say nothing beyond what we had already anticipated as part of the transaction. So we have been working to -- so margin rates were different. We have been working to kind of normalize the margin rates as we've gone through this process of rate increases. So that gap has decreased somewhat, but there's still a little bit that's going to have to get recognized as the clients move over because the Blue schedule is below the Green schedule. Some of that's intentional so that when clients come over, they will see that they get a price improvement. So we've done some of this to be able to deliver an enhanced experience to the client at the time that they've moved. But we've, in some respects, tried to minimize the impact that's going to flow through financially. Although some of that is still going to get recognized over the course of 2023 as we bring the clients in, it was anticipated, but this is the year it hits.

Unidentified Company Representative:

Let's pick up where we left off. Please welcome Jonathan Craig -- all right.

Stacy Hammond :

Thanks, Jonathan. As you've heard many times already today, the external environment has created some headwinds. And as expected, our new client outcomes have moderated as a result and yet we continue to perform at pre-pandemic levels. So in 2022, we acquired 1.2 million new clients. Those are clients who entrusted us with their money to help them grow and manage their wealth. And it was the third highest year in terms of new clients that both Ameritrade and Schwab have ever seen. In addition to continuing to acquire a large number of new clients who entrust us with their money, the profile of the clients that we're attracting has been consistent and very attractive. So of almost 60% of the new clients that we acquire are under the age of 40. And at the same time, maybe on the other side of the coin, we're seeing a significant increase in the number of new clients who are funding to affluent, defined here as 250,000. So we saw a threefold increase in the number of clients who upon becoming new clients fund affluent. There are a couple of data points that we look at to understand the profile of the new clients that we're attracting. I'll point out a couple of them here. The first, you've heard many people already today talk about TOA ratio. When we see more new clients funding with securities than cash, it's a signal to us that we are winning business from competitors because that is already invested money. When we're winning cash, it feels like we are winning new money to market. And we're starting to see an improvement. Of course, in '20 and '21, we saw a lot more cash. Now we're starting to see more funding via TOA. We're also seeing initial funding increase, and that's probably also a function of the fact that it's already invested assets. But we've seen more than 100% increase in initial funding rates. And finally, and this shouldn't surprise any of you, as I'm sure it's similar to your behavior as a consumer. We continue to see an increase in the number of new clients who are opening via mobile or web rather than physically in a branch in person. This success is driven, as you've heard a couple of times already today by a diversified acquisition strategy that has remained consistent. Similar to an investor's diversified portfolio, each lever in our acquisition strategy serves a different purpose and balances one another. I'll share a little bit more about marketing in a minute here, but it's one of the most significant contributors to our new client outcomes, driving about 40% of our outcomes consistently over time. Whether it's a financial consultant inviting a prospect to a ballgame or whether it's one of our phone teams, picking up the call -- picking up the phone and making a welcome call. We know that people are central to our value proposition. And in fact, earlier, I referenced that we're seeing an increasing number of new clients opening accounts online. Well, if a new client opens an account in a branch, we see 6x the average funding of an account that's opened online. That is, of course, both a function of the type of person who is attracted to walking into a branch. And it is also a function of the relationship and the conversation that the financial consultant can have with the new client. Our relationships with employers introduce Schwab to their participants, which in turn creates affinity so that when those participants have needs beyond their 401(k) or their stock plan Schwab could be there to support their financial wellness. And as the workplace business grows, of course, the opportunity for retail growth. And finally, as Jonathan just referenced, core to what we do is delivering an exceptional client experience. And in turn, when we do that, our clients refer us. They talk to their friends about their experiences at Schwab. With the addition of Ameritrade's trading capabilities that you just heard a fair amount about and also their incredibly robust educational content, each lever in the acquisition strategy becomes stronger. We have more things to talk about in marketing. Our people have more ways to help. We have more things to offer our participants in workplace. And finally, we have more reasons to love us so that they will refer us to their friends. I promised I talked a little bit more about marketing, which is a significant contributor to our new client growth. And our approach is central to our success. It starts with very clear design targets, which allows us to be focused not only in our messaging, but also in our media buys. And of course, with the addition of Ameritrade's trading capabilities, we see tremendous opportunity ahead to be a lot louder in terms of our trading capabilities targeting active traders. So just like each lever in our acquisition strategy serves a purpose so does the channels through which we communicate with prospects and existing clients. And what I'd like to do is use a consumer trend that we're seeing to illustrate how those channels play together. So Jonathan referenced earlier that we're seeing increased engagement in our educational and market insight content. This isn't super surprising, given what's been happening in the market. But we've seen interest in content absolutely triple. So while we do use paid media to amplify our education and our experts voice, -- we also focus very much on the experience that you get when you come to Schwab.com. So you come to consume the education, but then it's our responsibility to ensure that you stay engaged by serving up an experience that makes it obvious as to what your next step should be. We also are expanding our owned channels. Many of you have probably increased your podcast consumption over the past several years, and we want to be where investors are. And so we now have a podcast. Jonathan referenced this earlier as well, where we've seen just incredible interest from prospects and from existing clients. And finally, of course, we use Earned media or PR, also to amplify our experts voices. Perhaps more important than how we do what we do is the -- that was what we do. Sorry, the channels is how we do it. And consistent with our challenger heritage, we're continuously disrupting ourselves to figure out how to market and how to market relative to our competitors. So I'd like to spend a minute talking a little bit about how we use measurement, creativity and innovation to set ourselves apart from the category. So Jonathan referenced our marketing synergies earlier. And with media inflation, it's more critical than ever that every dollar that we spend is as efficient as it can be and analytics is the way that we achieve that. I'll just touch on a couple of examples here of some of the analytics that we use. The first is relatively new, which is called a multi-touch attribution model, and that enables us to see how all channels, whether they are offline or online, work together to deliver outcomes. The reason why this is so important is that with cookie redaction, most advertisers lost their ability to see the prospect or client journey and seeing that journey is how we deliver efficiency. So what we've done is created a solution where we have a privacy compliant first-party tag, the reason why the cookies went away was a privacy issue. And we are building a model where we will be able to see how touch points from the branch network to schwab.com to digital advertising, work together and contribute to every new client and every dollar that new client brings to us. Our marketing mix optimization model is an econometric model that we use regularly to help us refine our media allocation across channels and also to help us anticipate outcomes. We're constantly improving the model. It has controlled variables like the number of branches that we have or what's happening in the external environment. And we add predictors of outcomes. For example, this year, we added personal savings rate, which probably is no surprise to you, tends to be a pretty good predictor of our outcomes. We also changed our media buy based on what we see from the model, and I referenced earlier, podcasts and education, where we have recently increased our media spend in audio and in what we call native, which is where we distribute our education to where investors are seeking to consume education. And like many things at Schwab, our approach to marketing is a little different than the category. We do engage in all of the [indiscernible] channels. They are workhorses for us, but we do it in a way that sets us apart from the competition. So taking advertising as an example, a lot of competitors in our category advertise the category, they advertise financial planning or the benefits of wealth management. We believe that we have to advertise in a way that is tangible and uniquely solves an unmet client need. So recently, we launched a campaign called Humans. I referenced earlier that our people are central to everything we do at Schwab. And each video in the humans campaign demonstrates our shared commitment to serving clients and brings to life a tangible point of differentiation, many of which Jonathan referenced in his presentation, whether it's our service or our satisfaction guarantee or in the case of Jim Tides, one of our financial consultants who tells the story about his father's business and how important it was to him to be clear and transparent with his clients about how much they were paying. He talks about what price transparency is important to Schwab and how that informs his approach to his practice. I'm also sure many of you recognize our friend Carl. Carl, is our antihero. He is the broker that represents what our competitors cannot do so that we can crisply articulate what we can do. And both humans and Karl consistently test in the top 5 in the industry in terms of TV advertising. Getting a little jump through there, sorry. Finally, lots of people have probably been to a golf tournament with a financial services firm. I'm sure you've stood there and watched on the fairway. This is another place where we continually innovate. Let's start with the fact that we named the tournament that we sponsored the Charles Schwab challenge in -- consistent with our heritage. We wanted to telegraph what it is that we stand for through the tournament. We also viewed the tournament with all kinds of innovations that were driven by both the players experience and the guests of the financial consultant's experience, whether it was a moment of silence because the tournament takes place over Memorial Day or the car that everybody loves to talk about, traditionally, you get a Tartan jacket and a trophy when you win a golf tournament, we kitted out a car that stands for something unique at Schwab that the winner of the tournament received and drives away with, which has been just tremendous from a media bus perspective. And finally, our competitors tend to host large events. They tend to focus it on the category. They want to talk about what they do. We do that, too, but the way in which we do it more creatively is we tap into clients' passions. So an example of this is that for Schwab investing themes, we are tapping into people's passion for beer, which seems like a rather obvious one, but we have different types of beer that tie to the different themes that enables us to then have a conversation about why you might be interested in renewable energy. This, of course, is just one example, but one that shows tremendous engagement because we're listening to the client. I mentioned earlier some of the innovations that we've done when we see consumer behavior changing or when we see the media landscape changing. I'll start with -- we do use traditional channels, but we're also looking for ways to engage with prospects in high engagement categories. You may be surprised to learn that 65%, 2/3 of adults use some gaming platform. And Jeff Kleintop, our Chief Global Investment Strategist, is one of that 65%. So he recently held a session on Twitch with the gamer, the purpose of which was not to equate investing in gaming. The purpose of which was to go to a place where investors are highly engaged and educate them about portfolio diversification, asset allocation and risk tolerance in a place where their eyes were glued to the screen. It's a great example of how we go through where consumers are. We all run advertising in traditional media. You see it when you open the Wall Street Journal or when you turn on CNBC. But again, we're looking for environments where we know that eyeballs are watching with their full attention and a really great example of this is holiday movies. So we actually inserted our brand digitally into 3 holiday movies recently on Hallmark and interestingly found that brand recall was higher from those holiday movies than some traditional advertising. Again, it's our insight that, that is a place where people are giving their undivided attention. And finally, last example here, you've all been to a restaurant with a financial services firm, while we upped our game, and we wanted to bring to life what is special about our financial consultants. So we hosted a barbecue cook-off in Atlanta and Denver. And each financial consultant had their own special sauce that brought to life what is different about them. and what the financial consultants love about this is that it enables them to connect in a very human way by something that marketing can deliver. So what do I want you guys to take away before we get Jonathan back up here for questions. What I hope you take away is that even in this difficult external environment, we continue to deliver consistent growth and it's because of our consistent acquisition strategy that is diversified so that in any environment, each one of the levers works uniquely. And finally, with the acquisition of Ameritrade, our value proposition only gets better, and we will, of course, continue to get better at what we do. So John, do you want to come on up and we'll take some questions.

Michael Cyprys :

Mike Cyprys from Morgan Stanley. Just a question on the client experience. Where would you say Schwab and the industry is today in terms of the client experience compared to, say, leading industries on that front? And as client expectations are in part being formed from outside of financial services, how might Schwab and the industry close the gap there? And what actions might we see from Schwab over the next year or two on that front?

Michael Cyprys :

Because the message has been very clear, and you've had good results, but the $100 million that was cut, and I was just looking at the advertising expense, and you can see it down. So where did that -- where was that cut? And I think I have an idea, but just where was it cut in? What do you see? Were there any impacts? And just a follow-up, Jonathan, on the -- and being disruptive. Where are we? Are we fully -- are we at 8 out of the 10 and being aggressive there? Are we still near 3 or 4, and that's still to come.

Stacy Hammond :

Yes, I was going to say. So I mean you did hear from Jonathan, that the marketing synergy was incredibly significant. However, I believe that it's the power of the combined value propositions that will make every dollar will be able to speak to both affluent clients who are seeking a wealth manager and to traders or somebody who's simply looking for a place to place a trade. We're also delivering significant efficiency account, which gives me confidence that we're buying in the appropriate places in the appropriate way and sharing the appropriate messages.

Michael Cyprys :

Cabot, KBW, the merittrade reps, and they're already offering Schwab lending products, for example. Just wondering, as the conversion happens this year, what additional opportunities does that unlock in terms of additional solutions that those reps can sell or our clients can get access to that'll continue to drive that increase in cross-selling?

Michael Cyprys :

Number one is we've over a couple of different sections. We've gotten a few questions just about maybe initial reactions from yourself and the broader leadership team around the market structure proposal. So maybe if you had any quick commentary on that.

Unidentified Analyst:

Great. One more from Devin Ryan at JMP Securities. And this could be for you or Stacy. Embedded Finance is becoming a bigger theme across financial services and meeting clients where they are, as Stacy spoke to. How is Schwab positioned for this and maybe a little more insight into some of the opportunities you see on this front ahead?

Jonathan Craig :

I think we're -- I would agree, we will go to where the clients are and at the same time, often investing involves a multifaceted conversation tools, relationships in a lot of cases, that eventually leads to coming in a branch or a full show.com experience, but we'll go out to them where they are, and that's all tied to ease.

Bernard Clark :

Our bias towards action when we all stand up about 15 minutes before we're supposed to be up here and lean against the wall and do circles. And we just like to be on the move and it's a little hard standing still anymore, but great to be here. I think Rich said it well in one of the breaks. This is often about what's up here, but it's more about what's down there when we're having conversations. And I hope to be able to turn this conversation around some of our performance in advisory services and with independent advisors into a conversation. So get your questions ready. There's a lot going on. And certainly, the one thing that's very, very consistent in the space is the success of it. Everything else seems to be changing, very much an evolving landscape. But -- and it didn't occur to me when I first asked for this. Everybody likes to talk about what we are and who we are and print articles and talk about that we're not there for something or we are there for something else. And so we thought it was really, really important as we were about to welcome in all of these new TD advisors that we told them who we are. And so I said to Tracy help me with this presentation. So let's start with the pledge that we put out there. What didn't occur to me at that point in time, and I was so happy we started with the pledge was the fact that when I launched the pledge, it was with all a few in February of 2020. And that just -- when I was sitting there thinking to myself, that must have been when we first put the pledge out. So it was that porpoAnd the 3 years that were mentioned in -- since we've been together living in this place. The a little box that we look at on our screen. But I want to remind everybody we have a pledge out to advisors, and it's so critically important because these are businesses. These are people who entrust their franchise to us as the custodian, and they don't know us, some 7,000 or 8,000 of them that are coming over. And maybe they've read some of the articles or have been told some of the stories about who we are, and that was the whole purpose of the pledge. What are we going to do now that we've taken this large share of the marketplace and how are we going to help them continue to grow their franchises. So most importantly, we are there for every advisor that's serious about being in business. We're not there for clubs and people who are just sort of kicking the tires or maybe have some powers of attorney on accounts. But if you're serious, we want to be in business with you. My job has never been to tell you when you're successful or what size you're at when you're successful -- so we have a lot of small firms. In fact, 80% of our firms are under $200 million. And we have far more small firms at Schwab before we even engaged ourselves with TD Ameritrade. That's important to remember. So there's no asset under management minimum we have. There's no custodial fees, and we don't plan on putting custodial fees in. Starting to hear through the industry about custodial fees as the economics get more challenged. And for some of those who don't have the opportunities that we have that don't have a bank, don't have the breadth of services and don't have the scale, they're starting to talk more about having asset management fees or custody fees, we have and will not have those. And we have no intention to introduce a minimum, I want to say this very clearly, nor do we have any intention of putting in a custody fee for advisors? -- best-in-class technologies. Christian asked me the question when we started , did you just embrace all of the TD technology? I think there was a belief out there that TD had a superior technology to what Schwab had. And I think in some cases, it was true. And in some cases, it wasn't. So you'll hear me talk more about this, but we took a look at both platforms independently and honestly and try to make sure we kept the best of both of what we were seeing. And we kicked the tires and all the APIs, and we'll talk more about that in making sure we could bring the services to advisors that they really needed. The best and brightest service professionals, I'm going to lay claim because I've been in this business for a long time now at Schwab. We have the best people. We have always known that this is a relationship business that never alluded us for a moment and making sure that we hire the best, retain the best and kept them in sea as long as we could before we had to promote them into even more broader roles to pursue their careers. We've been good at doing that. And technology is an augmenter really of those people and a deep relationship. After all advisors are in the relationship business, and they expect us to be in the relationship business with them. Practice management. We started this a decade ago, critically important, making sure that we're helping clients to grow their businesses. That's how we grow. Most of our growth is organic, as you can see from the numbers. And so making sure that we're out there, helping them to think about their futures, thinking about their successors, thinking about how they create firms that are multigenerational, has long been part of what we're doing. And I'm pleased to say that many of our TD colleagues now as they've joined us are recognizing, hey, that platform, we thought we had that as well yours a little better. You've got a little more than we had, and so it's all become additive. And then we talked about an account opening process that would be digital. Now -- the good news about this line item is it's not what I really I'm going to talk about further into this conversation. This was about making sure people understood we're not going to make you get wet signatures when we do this transition. This was about the ease of coming over that you've heard Joe talk a lot about, you've heard Jonathan talk about, which is a process that is well underway with advisors. That's what we meant by saying a digital process. I'm going to talk to you about a digital process we've now created for all the business that clients are winning and how successful it's going to be in the industry and it's going to revolutionize how you bring a new client to the firm and how easy we can make that for you to do it. I do want to stress that point, though, about as you talk about the transition. I'm not going to spend a long time on the integration. It is important to recognize that because these are businesses, our integration with advisors started 2 years ago when we first announced this. Advisors, we shut down the idea of having new advisors join the Ameritrade platform. They can put new accounts on the Ameritrade platform, but every new advisor at that point in time, joined the Schwab platform. And so we've -- we're well underway in the process of transitioning those over. So let's talk about the change in the industry. It's getting dramatic. And you could see the success we've had, as I said, that's the one thing that's been there consistently at 13% CAGR. I think I used to talk to you 3 years ago and through our virtual update, we used to talk a lot more about a 10% CAGR. Certainly, this has been a successful industry. It's drawing assets away. Jonathan mentioned some statistics about the retail market. We at Schwab all feel the same way. the assets, our growth is out there. It's not even necessarily with competitors. We have a small fraction of what is a very, very successful marketplace, and we are going to continue to exploit that in every way that we can. And as I think about what's going on in the marketplace and the growth that we've seen and the CAGR that we're enjoying, I think about everything that's happening from within that marketplace, M&A. There's -- you could argue, and I do often with our industry colleagues, there's a lot of M&A. Well, there's not really very much at all M&A at all. The truth is we did about 300 deals last year, but up about 5% from the year before, which is dramatically up from the year before that. But deals are happening constantly. -- firms are coming together, and they're coming together to grow. I think that's the important aspect of it. The M&A is being done because firms are seeing opportunities to merge together to create more centralized services to build scale, which is also important to advisors and maybe not -- had this debate with a client in my office the other day, maybe not as important to an advisory firm, but important. Certainly, fees are not going up for anybody, including advisors. And hence, we have to make sure that we can cover more assets with similar cost structures, and they're starting to get that idea as well. And as we continue to move forward in creating those opportunities for advisors, they will continue to bring more assets in. And the M&A that's happening within advisory firms is going to create more success within those firms. The concept you'll hear us talk about this a lot going on the -- going forward. The concept as rep as portfolio manager is starting to change. centralized services used to be done around operational functions. It's going to be a lot more, I think, about sort of the strategic and the more important relationship functions that are within a firm as we go forward. So we'll keep an eye on that, and we'll keep updating you on where we think that's going and the opportunities that we have. There's also a lot of capital coming into the space. It's been recognized as a successful place. Why wouldn't capital want to be here. You're seeing some of the likes of CI Financial coming in and acquiring firms in mass and with an intent to build those centralized services and scale. They've taken a lot of like firms and trying to create a capability there and doing it with advisors at the helm. Sometimes this is a retirement strategy. Quite often, what it is, is trying to create that multigenerational firm I talked about before. So you have 2 types of M&A there. You have money coming in, third parties acquiring in a successful way, I may say, and then you have advisors acquiring advisors. The thing that still alludes me, I've said this to you before, is I thought the M&A would focus itself more at the lower end of the market because of the complexities of regulation, the cost of operations, the ability to scale or the inability to scale a smaller firms, and it hasn't. M&A has really resided in the $1 billion space mostly, large successful firms coming together with other large successful firms. So we have to keep an eye on that and continue to monitor how that's going to change the landscape of what's going on. The target always being taking more assets away from the traditional models. That's the most important thing that can happen here. So as we continue to talk about the change that's happening, no one in this industry is staying in their lane. Everybody is looking to get involved in some other aspects of the business. Much of that, I think, has to do with chasing different revenue streams and opportunities. Some of it has to do with reaction to legislation and regulation or proposed legislation and regulation and trying to grab a spot there. We're seeing a lot of consolidation of providers. It's never been easier to go independent. And much of that is because fintech arrived on the scene in a big, big way. providers arrived on the scene in a product type way. And the open architecture nature of the independent space is really what's been driving its success. I may add that we are part of that open architecture in every particular case. Our capabilities sit right on the shelf, along with others, but the independence is what is so critically important to advisors, and we have to make sure that we're maintaining that. I think about what's going on with some of the providers like Envestnet announcing they're going to be in the custody business, I found that quite interesting. It's really hard to be in the custody business. I can attest to that. I remember when a competitor many years ago announced in November, they were going to be in the custody business with advisors by February and didn't laugh because we are paranoid, and we take everything quite seriously. But I knew that was impossible to build a platform of that magnitude. And I think to myself, why wouldn't Envestnet think they want to be in the custody business. And then I start to think a proposed regulation and legislation around outsourcing and what that could potentially mean. Interesting possibility Goldman talked about wanting to be in the custody business. I'm not so sure they're there any longer. This is a business you need to love in order to stay with it. I say that's a walk all the time. Can we love a business that's a 9 bp business, 9 bp net. And we are -- and we do, but it is a hard business, and it's a business that's taken us 2 decades to build in making sure that we can get all the capabilities that advisors want. I wouldn't quite say it's bespoke, but our job is making sure when an advisor has a need that we can fulfill unmet need. You've probably seen us go out, make a couple of passive investments. One pass one actually more of an ownership investment or investment in Dynasty. I think some of you may be curious about that. Dynasty is one of those solutions that exist in the marketplace that help to bring assets away from the more traditional models, not to demonize those models, but that's our job, trying to get more people interested in the independent space. And Dynasty has done a fantastic job in doing that. They have 25 of their firms on our platform as a custodian, and we've created a fabulous partnership along with them. And there's others in the industry, but they asked us if we like to be part of it Absolutely, we want it to be part of it. And so we made a nominal capital commitment to them in a passive kind of way because they're helping the industry grow. And who knows? Will we do more of those perhaps but it will have to be under the same kind of criteria as we think about it. Another deal we did recently was Family Wealth Alliance. In fact, just a couple of weeks ago, some of you asked me about that, we've become much, much bigger in the family office space. We now have 80 family offices that we cover through our model, 60 people dedicated to that. It's a really important space. Clients have more than doubled their size of accounts affluency, certainly driving up the change. And it's our job to make sure that we're creating capabilities that make sense for our family offices, many of which are multifamily offices, which were our clients already. And we had capabilities, but branding it has made a real difference in getting something like a family wealth advisor that's been around since 2003, with credibility covering 25,000 families, $450 billion in assets, not all on our platform either, which is kind of neat. And a guy like Tom Libergood, who created it that long ago, and we've been working with for the last decade as well, I think, is going to be very, very positive for us in continuing to penetrate that market from multifamily and into the single-family offices, getting exposure to those people. I opened by talking about the community and how important the community of people can be. Well, when you deal with family offices and many of you might not know this, the value of them is coming together more than anything. Often, their needs are economic, financial, but often not. -- security, travel, capabilities, services around the world. That's what they want to talk to other family offices about , and we then have the ability to bring them to bear in those conversations. And that's certainly going to make a big difference for us in penetrating those markets. So we're quite excited about being able to do more of that. And we'll look for those opportunities. These are not big M&A deals. They're additive to what we're doing. And if you look at FWA, family wealth Aliante, they look an awful lot like our consulting offer. So why not go out and get something that's in place and running and get into this place right away. And so to decide the consultative services that we've built over the past decade for premium firms and other firms throughout our network to make sure we continue to help them grow. So lots going on in that space. As we talk about the growth of the industry, one thing I would highlight to you, 15 straight quarters of 2:1 TOA ratios of assets coming away from others. That's a critically important dynamic that we have to continue to watch, bringing assets in, bringing in share of market, winning against our competitors. I would say our #1 advantage right now in the marketplace is capability. But most importantly, it's focus and consistency. We're in this business. Lots of other people say they want to be in the business. Lots of other people were in the business. Some other people are saying they're still in the business. I don't see the evidence of all of it. I see us with the assets that you can see on the right-hand side, half the firm's assets in this business, 1/3 of the revenue, this is really important business to Charles Schwab, and we're never going to forget that. I see lots of people smartly saying 13 CAGR, very successful place, lots of P&E capital coming into it. I want to be in that business. but can they get there? Do they really want to be there? Can they stay there, get there, stay there and be there through a lot of different economic climates, we can. We've got that scale, that earlier question from Christian. We clearly have that scale in this space. In fact, you can believe these numbers and not believe these numbers are all kind of bantered about, but Suruli talks about there being like 16,000 or 18,000 advisors. Conservatively, I will tell you that we are doing business with 85% of those advisors. Not always is the primary, but we have some form of business with 85% of advisors in the industry, and that's significant. And our aspiration is always to be the primary in every one of those relationships. So we'll keep stressing forward on all of those. Deal size, I talked about -- I did talk about the deal size coming to us. It's growing. Firms are larger when they come into the independents, but they're smaller as well. It's easier to be an independent. So we often see them come. Another sort of fun fact to side that, that we're seeing is there are twice as many transactions happening today that happened 2 years ago of $10 million or more generational wealth transfer is moving forward, and is moving forward at a very rapid pace. So if you think about our advisors being the same age as our clients, our clients are starting to pass their wealth on to that next generation, which is further stressing, I think, the industry to update itself and to make sure they're current for those next generation of assets. Sometimes they're going to a single individual, often they're being fragmented. Advisors are going to have to evolve. And because of that, we're also seeing the emergence of strategic firms in the industry. Firms that come together, I can mention a few, but you could think about high tower and focused financial. Firms that are very aggressive and trying to make sure their capabilities are staying current with the markets so they can continue to grow. And when I say their capabilities, usually it's an agglomeration of advisors and their capabilities. Let's be honest. As the market moves quickly and evolves quickly, it's not serving anybody well to be standing alone, and not taking advantage of a great custodian and the evolution of the business or perhaps taking advantage of an enterprise firm that's in the consolidation business, a mariner, the list is long as you go through. In fact, when we talk about deal flow, there's often 10 or 12 firms bidding for business that's in the marketplace. There's no shortage of demand and capability. And then you think about the other side of the marketplace, the independents or the IBDs -- they're here to stay. They've had some success. LPL talks about taking yet another run at this space. I think they've had great success in building models that help to retain the assets they've had, but can they attract assets. I think that's probably a question that remains. The regionals, Raymond James, they're out there. We still don't see a lot of success against the independent model, but they're trying. And so add them to the list of others who say they want to be in this space, they want to be in the independent space. And remember, you can always move to fee. That's probably the step 1 of moving to independents as a custodian, gets really, really hard when you start talking about open architecture product and you start giving up that revenue flow that comes with your captive product, your IPOs and your capital markets. And so I think you're going to see this only go so far that competition can come. We did $30 billion in net new assets in our new-to-industry assets, $18 billion of those came from wirehouses. So we're still continuing to see the success that comes along with that. And wirehouses again waffling just a tiny bit on, am I going to buy revenue flow? Am I going to rent revenue flow? Shouldn't I? Am I going to trade teams with other teams? And while they're doing that, good firms, large firms, in some cases, firms with tens of billions of dollars are just coming out into independent saying, I'm not playing that game anymore. I'm going to go out and I'm going to create a legacy here. I'm going to create a firm where I have terminal value in it that I can trade. I'm going to build a firm that can work for the people and the clients that I have. So we'll continue to see some of that growth. But with that, there's another challenge. When I talk to advisors, they always talk to me about technology and talent being their 2 #1 concerns, and they should. So we're heavily, heavily invested. I think we put $18 million since 2007 into university CFP programs, and university grants, not grants that necessary get our name on the door anywhere, but programs that are starting to bring help and capability into the marketplace, programs that are designed to make sure that their diversity of talent is getting better, whether it's ethnicity, sex, it is so important that we continue to move this industry to a place that represents the clients. And we've kind of been stuck, again, in most of the industry being post 55, a lot of [white male], not necessarily the demographic of the client base any longer. And so we're working hard at making sure that we're driving success into the universities at an early age and trying to create more opportunities in the historically black universities, certainly, other opportunities. The goal, if you look at this right now, the goal here, as I said to the team, is to try and get every state to have a blue that we can bring in. I remember when it was odd for us many years ago to have students that are impact events. So if you notice them there, there would be 10 or so wandering around, they'd be wearing school shirts. We now have 100 every year who come. And not only that, more importantly, everybody else at their conference started bringing students as well. If they hire 70,000 more people in the next 5 years, 70,000, where are they going to come from? How are we possibly going to do that unless we promote this at a very, very early part of people's career development. We're building a firm of the future while delivering on promises to clients, enhancing our control is critically important in this conversation. We had a little bit earlier, Michael and I were having this -- we're a $3.4 billion, $3.5 trillion franchise for advisors. We can't take risks with that, not because we can't as the firm Charles Schwab, which of course, we want to be very careful with. But our clients tell us, don't be a Page 1 headline. We can't afford to take that. We tell our clients their assets are safe with you. And so we have to have the right control as we bring these two teams together. And I will tell you, we did it with the people. We had lots of replacements, lots of people where we took our TD partners and replaced some of our Schwab partners, and then we have to do it on technologies as well. APIs are something that frequently comes to mind. We have 190 now. They're not all with TD APIs. They're not all with Schwab APIs, they are combination of we deem to be the absolute best in the industry. And we have a sandbox for those who want to come along and maybe try some stuff out with us. But we're not going to put that sandbox into production and jeopardize our clients, I promise you that. New launches, T. Rowe Price, institutional transaction fund, very important that's been waiting for some time. DocuSign 2.0, something that TD had that was really, really good and then the clients like we had to meet them with that one. We think we have a better solution coming through eSignature, but at the same time, we had to meet them now to make sure that they can continue to do their business. And of course, digital onboarding, as I keep talking about that, so important. As we complete the -- really the whole integration, sits top of mind for all of our strategies going forward, digital adoption, our culture, our people, efficiency, wealth management solutions and lending capabilities. Two things I'll highlight there. The digital -- it is a digital onboarding process for advisors. As I said to you at the beginning, it's going to revolutionize and I think it's going to bring a lot more business directly to Schwab because it's going to be ease of doing business is going to make such a big difference in transitioning assets is such a very critical to and lending. I know [Rich], Jonathan, everybody covered this pledged asset lending, so important to advisors right now. We're starting to get our legs under us there. We'll continue down that path. I think originations are going to be right there. And then business lending has to be on the horizon, right, a premier bank that can really serve these institutional firms. And as always, I will highlight to you, and this is just a fun story. I show the slide all the time. We do this all through our client size. We do this all with our clients. These are all clients in our advertising. You should see the glee on TD Ameritrade advisors when they pop up in a commercial. It's like 7 years ago when we first started doing it with the Schwab advisors, they love seeing their face up there on banners in commercials, and they've been coveting this opportunity for quite some time. So quite proud to see the firm coming together. As always, let's go to some questions.

Walter Bettinger :

Win and we lose through our advisors. Advisors are adept at getting involved with families way downstream. And so they're keeping the assets. But what they need to do is they need to be building models within their slightly different way than they might have served the parents assets, right? I think virtual, I think this is one of the silver lines of COVID, I think we've learned a lot through all of that. I think they have an opportunity to create different portfolios for this group. Asset accumulation versus de-accumulation, if you will, is something that they're all starting to focus an awful lot more on. And I think M&A is going to play a little bit of a role in here too, in creating some more of those centralized services. Some firms are using junior partners and assigning them to the books of these smaller clients as well.

Walter Bettinger :

Well, advisors are continuing to load and something we should be talking about is their movement into alternatives, which has been quite prolific recently, using things like iCapital so important case management, just 2 examples of third-party platforms we have in that open architecture environment I mentioned. Clients don't want to pay transactions, and yet there's pressure on economics across the board. And so I think no loads are coming into the SEC has entered into it. They're class, best-in-class share is something that they're looking deeply into. And so I think you're seeing advisors now really revisit that, along with the fact that they're coming to realize that the idea is rep as the portfolio manager is something they need to move away from. That's going to be gradual, and it's going to take some time. But I think we're going to see more of that migration. And I think there's space there for us and other third parties and overlay-type management. I didn't mention iRebal and thinkpipes when I was going through some of those best of both worlds. But I think our model marketplace is going to play a very big role in the future as well. Our combined TD and Schwab...

Unidentified Company Representative:

Ben, will get there eventually, I promise.

Bernard Clark :

Rich has highlighted, I've been around a while. Yes. No, I am shocked by the interest that continues at very, very high multiples. I'm not sure that advisors they're a bit of an all twisted punch. I'm not sure the multiples are what they're moving them, and there are multiple bidders. So that continues. And I do think that firms are going to have to, in some way, change to that or find opportunity. And we're helping some of those consolidators to find opportunities and how they can build those businesses after to create some better economic if that's what they're after. But I do think the centralization of capabilities is what's going to be important in the future. But I don't see the flow going away.

Bernard Clark :

I almost hate answering that question because it always sounds like I'm a homer. But at the end of the day, Pershing X, it feels to me -- so I'll give you Bernie's opinions, right? It feels to me which is dangerous and I'm about to get run off the stage with and Fidelity, it feels like they're trying to go back to their DNA of being a fun company, everything is distribution. So that's how I look at our 2 competitors. Still fierce, still with great capability. I could probably tell you more about Pershing than I can about Fidelity because they hide behind that cloak of secrecy of not being public. But I will tell you that when it comes to we will not be outdone, when it comes down to longevity in the marketplace, we will not be outdone. And I think we may find ourselves doing business with Pershing X, and that's just fine. We can do that until we have a capability that's superior.

Bernard Clark :

Well, the growth is still coming from outside of the space. So it's not an internal competitive space, right? We have about 1/3 of our clients that we call hybrids. I think the hybrid assets are excluded from that number, but it's reasonably de minimis. When someone comes to us, typically, what they're trying to do is grow themselves out of that revenue stream, and they're quite successful at doing. I just sat with a very large consolidator, I had this conversation the other day from the Midwest. And they're looking at the opportunities of how fast they can remove themselves because they can't be a truly fiduciary as long as they're hanging on to that commission space, right? And they have to keep the licensing and there's all sorts of stuff that comes along with that. So I think that's a de minimis amount. I think the amount of assets that make the most sense are probably the $8 billion to $10 trillion that sits in the wires. And we see a lot of advisors who are in the independent broker-dealer space who are finding themselves to what looks more like an 80:20. Indirectly, I would tell you some of these models that they're trying to hold assets on to in the IBDs are actually helping us because they're forcing advisors to the fee space. And then it's just a small across the street to us or independents in general -- I shouldn't say us, but the independents in general, it's once they get the fee. And if they have a little residual commission business, it can always be handled through -- there's a preponderance of independent broker dealers that can do that.

Bernard Clark :

So now I get the pleasure of introducing my friend and colleague who I sit before too. If I forget to introduce you, please just come up, Neesha Hathi. Neesha Hathi, many of you remember, had a cup of coffee with advisory services for a decade. So she's been a key part of ours. She runs wealth and advice solutions now, and she looks after everything in the firm having to do with that and certainly it's going to be a big aid to advisors as well on a going-forward basis.

Michael Cyprys :

Mike Cyprys from Morgan Stanley. I was hoping you could elaborate a bit on the new discretionary management product that you're going to be rolling out for retail customers this year that you alluded to. Just maybe you could expand upon that? What are the economics for Schwab? Can you talk about the value proposition and how that's differentiated from other offerings in the marketplace?

Unidentified Analyst:

You talked about the gap between those who pay for advice, and those who are willing to pay for advice. Can you elaborate more on why that gap exist, and what is it specifically that you'll do, and kind of timeframe you expect to kind of close that gap over time.

Jeff Edwards :

Sorry, [Stephen]. So we do have a short kind of working lunch break. The food will be right out the door that you guys came in this morning. You can grab your lunch, stretch your legs. If anybody wants to stick around for Peter, he will be here presenting some materials and trying to take a few questions. So -- but no pressure. So yes, just follow this way, pick up, your name should be on the lunch, but feel free to reach out to any questions. And we'll see you guys back in about 10, 15 minutes. [Break]

Peter Crawford :

Right. Excellent. Well, thank you very much the home stretch indeed. And thank you. It looks like most of you came back to hear my session. I feel honored and delighted and hopefully, I won't disappoint. Great to see so many familiar faces here and see the familiar backs of the laptops here in the room and here in Dallas. And I also want to thank all of you up there out in the web for joining us for this multi-hour webcast. I know we're all at this point, tired of doing a long webcast, but hopefully, we've made it worth your while and giving you a lot of good information about the company. So by now, you've had a chance to hear from my colleagues about the strong momentum we have in the market despite investor sentiment that has been decidedly negative about the progress we're making on the Ameritrade integration and our excitement about the considerable opportunities that the combination enables about our ambitious but achievable agenda to create and to continue building the premier wealth management platform for retail clients and for RIAs. And finally, about our confidence in sustaining this enviable level of organic growth we've been able to deliver. So in my time today, I'll recap yet another year of record financial performance in the face of a mixed environment that featured both headwinds and tailwinds. I'll also provide some more empirical data and some more information analysis around our clients' behavior with regarding to their cash and explain why we're confident that this behavior will abate during 2023. And we'll see at some point this year a resumption of deposit growth. And finally, I'll talk about our outlook for 2023, a year that Walt described in his comments as a transitional year. A transition for our economy as the Fed seems poised to pause this tightening cycle, a transition for our organization as we shift our focus beyond the integration to the considerable opportunities that this union creates and a transition for us as well from our financial performance. As we're poised to produce revenue growth that may be a little bit lower than what we've seen in the last couple of years, there's a [head] even, and this is really important, even if rates fall in the outer years as many expect. So let's talk about some of the factors that contributed to that record financial. So it's a year ago at this meeting, it was virtual, but we laid out our scenario for the year. And the scenario used -- assumed a number of pretty conventional assumptions. And most important of which was the expectation at the time by the market that we'd see 75 basis points of Fed increases over the course of 2022. Now of course, the year unfolded very, very differently than we, or pretty much anyone else expected, with the Fed actually hiking rates 75 basis points almost every meeting, but every other key measure falling over the course of the year. [Natural] performance reflected the resilience of our business model amidst these combination of headwinds and tailwinds. Revenue increased by 12% year-over-year, a function of our expanding net interest margin, which more than offset the decline in client cash balances and margin balances and trading and, of course, the impact of the declining equity markets. We contained our expense growth despite that revenue outperformance and continued high inflation and increases in some third-party pass-through fees, we contained our expense growth within the range that we communicated. And that combination produced a 50% adjusted pre-tax margin, our highest best year ever and 20% growth in adjusted earnings per share to $3.90. Turning our attention to the balance sheet. Our balance sheet reflected the reaction by our clients to the dramatic increase in rates. As they move some of their uninvested cash off our balance sheet into higher-yielding alternatives oftentimes with our active help and encouragement. Total balance sheet assets declined 17% for the year, driven by declines in both bank deposits as well as payables to brokerage clients. While we finished the year with roughly $17 billion of FHLB advances and other short-term borrowings. Now within interest-earning assets, we saw a 28% reduction in margin balances, a function of the more negative investor sentiment as well as higher rates. But we did see a 17% increase in bank loans owing to a lot of what my colleagues talked about. Despite the higher rates, we continue to have a remarkably strong pipeline of loans certainly relative to those pre-pandemic levels. Now our stockholders' equity declined function of declines in our available for sale mark-to-market unrealized declines in our available-for-sale portfolio. Of course, those don't impact our regulatory capital. So with that, despite that, our consolidated Tier 1 leverage ratio climbed 100 basis points to finish well above our operating objective of [6.50]% to [6.75]%. Now we've talked for years to do 2 things

Peter Crawford :

Sure. So tried to lay out a increase from '22 to '23. I mean the biggest single one was the integration-related spending. Now that's not a -- just to be clear, that's the surge staffing to handle those call volumes, a large portion of that will reverse and will go down in 2024. So that will be a helpful offset to our other expense growth. And then the software and hardware depreciation and amortization, that's -- a lot of that's on hardware that we put into place in '22. And so we're already having the full year impact of that. So I wouldn’t expect another step up in that expense as we go into 2024. 2024 and '25 are also the years where we harness the expense synergies. And so that's going to be very, very helpful. Remember, we said that the vast majority of remaining expense synergies would not necessarily be harnessed until we get through the client conversions. With that last client conversion in 2024, that's the year we really unlock that remaining roughly 1/3 of the expense synergies. So that's also a driver of that 45% expense growth. Rich, it's always -- we always a balance when we think about our expenses. And we want to drive down that EOCA, I believe, the most important thing is to make sure we're there for our clients. We will always make that trade-off to make sure where they're there for our clients because we know as important as it is to manage expenses, staying true to our clients, doing right by our clients, that is even more important. And so we want to be thoughtful around how we manage expenses, drive that expense on client assets down over time. And we think this is a plan to get -- to continue to do that.

Peter Crawford :

Well, it's really a function of, as I mentioned, I mean, there's not any unusual assumptions in there around sort of outsized margin balance growth it assumes continued growth and margin balances consistent with the growth in the market and continued growth in our lending solutions that we talked about -- but it really is the -- a more significant driver of that is the repricing, resetting the yields on the fixed investment portfolio at those prevailing higher prices. And where the market is at 3.75% or 4%, that pickup is still very significant as we continue to reinvest those maturing proceeds. That’s the real advantage of -- that we have of having that sort of unlocked earnings power stored up that we'll be able to unleash as we reinvest that fixed investment portfolio.

Peter Crawford :

So the interest earning asset assumption down 8% to 12% over the course of the year assumes that we've reduced those interest-earning assets significantly by the end of 2023. In terms of your second question around the mid-single digits, I guess it depends on how you define mid-single digit, I mean it might be mid, might be up or mid, somewhere in that range, whether it's -- but the most important point is it's a temporary funding source that we expect will be paid off as we see a resumption in sort of core deposit growth.

Peter Crawford :

Yes. Great question. Yes. I mean I'm very grateful that we launched the bank when we did to continue to grow revenue as we've grown assets -- continue to be successful as we've grown assets. It's a more efficient way to monetize our clients' uninvested cash balances. And that's what's allowed us thrive I missed an environment where equity commissions were going to where we saw a movement of client assets out of Mutual Fund 1 source into ETFs and index funds. And I think what's interesting about the bank, though, is while it started out a little bit more as a way to monetize our clients on invested cash. Its role has evolved. It's now a really important strategic capability for us. Because as Jonathan and Bernie and Neesha, Rick, Walt all talked about, we are competing against big banks and warehouses. And this lending, our ability to offer lending solutions -- very compelling lending solutions at a very low cost is really, really important, both defensively and offensively for us. So it absolutely allows us to compete against those firms, compete for clients, retain the clients that we have. Very, very important capability for us that is out.

Peter Crawford :

So we think that we're at a rate now of the Fed funds rate, short-term rates, where incremental rate moves increases don't have a material impact in terms of level of sorting or the client is going to move into a purchase money fund when personal funds are yielding 5.25%. They're probably going to move in personally [consuming] 4.75%. We're at a point now where, again, that determination, that decision is not a huge factor. So I wouldn't expect that to be a big impact. While at the same time, of course, higher rates will be good for us in terms of the floating rate assets that we have margin loans, the segregated cap. Should we take one just maybe from the web before we -- from the web now. We're okay.

Peter Crawford :

Yes, I would say a couple of things. Our client behavior regarding their cash is much more determined by the -- in terms of the cash per account is much more influenced by a level of interest rates and is by what's happening with the equity markets. When clients -- what we tend to see the impact from the equity markets is typically equity markets -- if the equity markets drop dramatically, cash comes on to the balance sheet, but a big lag. And of course, an environment where I think that you're getting at is equity markets, we suddenly see a big rally in the equity markets. That clearly is a net positive for Schwab, right? If we see a dramatic rise in equity markets, all the asset-based fees, those go up, the measures of the client engagement tend to follow. So we tend to see more margin utilization, more trading more securities lending revenue, all of those, that is absolutely a net positive for Schwab on that. And I would -- any impact on client cash allocations tends to be very delayed and much more muted relative to the impact of interest rates.

Peter Crawford :

Yes. So we've set our buybacks into the opportunistic, not programmatic. But I would say -- and I think you're absolutely right. The payout ratio could be significantly above that 125% level. We wanted to make sure we gave ourselves a lot of a lot of leeway there. I'd expect that we will continue to buy back our stock, again, opportunistically and bring that leverage ratio down over the course of the year. In terms of maintaining, I don't see the need to necessarily maintain some buffer. We already that 6 50 to 6 75 is a buffer on top of the buffer. Now if we saw a dramatic change in the market that we anticipate a dramatic incline sheet, that might be a situation where we say, okay, let's slow this down. But if we're in a situation we're in right now, I think we'd be bringing that Tier 1 leverage ratio down from where it is today over time.

Peter Crawford :

Yes. So you can see all the -- I should have mentioned this, you can see all those assumptions in the appendix. And certainly, you're welcome to follow up with the IR team in terms of the specifics, given the answer of time, I won't go through kind of all those different assumptions. But they're there's so a pretty relatively conventional assumptions, not dissimilar from what we assume every year when we provide our scenarios.

Peter Crawford :

Terminology that Jonathan referenced there, is the green clients, as we would expect, the green clients do tend to sort less than the blue clients. And that's smaller accounts, more trading-oriented. What's also different though is the green clients tend to be a little bit more responsive to the market. And so what we've actually been seeing is as the market has been declining a lot of Ameritrade clients are looking at as an opportunity to buy into the market. And so we've actually seen earlier not actually inflows even as the market has been declining, and that's been one of the drivers -- big drivers of those -- the decline in the BDA balances.

Peter Crawford :

Yes. So the way to think about that breakage fee is essentially is like the market -- those are what we're essentially breaking as our fixed rate investments for lack of a better term. And so that breakage fee is roughly equivalent to the mark-to-market on those fixed rate investments. So from an NPV standpoint, it's neutral to positive for us from a net present value standpoint because we can take those proceeds and reinvest at higher yields. In terms of the BDA assumptions going forward, I think it's fair to assume that the BDA balances declined by roughly $10 billion a year until we get to the $50 billion floor, so we're 6 or 7 years away from that. There's a lot of sort of moving pieces within it and a lot of acronyms we can throw at you. But that, I think, if you're trying to model the business over the next 5, 6, 7 years, 10 years, I would assume that the BDA balances decline by roughly $10 billion a year until we get that $50 billion floor. I think we have time maybe for one more question.

Peter Crawford :

So the 8% to 12% decline seems airy for all the actions that we're planning on taking in 2023. Yes. That's sort of everything. There's nothing we're holding out through us separately from that. But again, I want to emphasize that assumes a reduction in some of those temporary funding sources, the CDs, FHLB, et cetera, that we had of 2022, our expectation is majority of that is gone by the end of 2023.

Walt Bettinger:

Thank you, Jeff, and hello, everyone. Thanks for joining us for our April business update. This is an important opportunity for our team at Schwab to speak directly with all of you to speak with accuracy and facts and to speak with clarity and transparency. We know that the past few weeks have been very challenging for long-term stockholders, which, of course, all of our executives at Schwab are also, me included. Let me start by making a few crystal clear statements. First, our clients, although curious and somewhat surprised about the downward movement in our stock price, remain fully engaged with us and are bringing substantial assets to Schwab on both the retail side and the RIA advisor side. We are winning in the marketplace among clients. Anyone suggesting otherwise, is mistaken. Simply put, our franchise strength and financial model remain very much intact. Second, we did not and have not changed our multi-decade approach to conservatively managing our bank balance sheet. Any suggestions to the contrary of that are false. And although our near-term cost of funding are higher than recent historical levels, and as a result, will impact our near-term earnings. This cost is temporary and should diminish over the coming quarters and could wind down between now and the end of 2024. And third, we are well into the execution of the conversion of the former Ameritrade clients to Schwab. And as we progress through this conversion and beyond, we will ultimately realize substantial expense savings, well beyond the remaining $500 million to $600 million we originally committed to as part of the Ameritrade integration synergies. Now looking at the first quarter, it was a complex environment for investors. Although the equity markets overall performed quite well, investor sentiment was actually quite negative throughout the quarter. The Fed raised interest rates another 50 basis points, while the 5- and 10-year yield on treasuries fell by 39 and 40 basis points, respectively. And yet despite negative investor sentiment, this wasn't reflected in our clients' engagement with us. Clients entrusted us with over $130 billion in core net new assets, with the monthly level increasing each of the 3 months of the quarter, peaking with over $50 billion in March and achieving an organic growth rate in excess of 7%, once again validating our long-term track record of growing client assets in every economic environment. In addition to growth in client assets, clients remained engaged with us in other areas with another quarter of over 1 million new client accounts, over 5 million daily average trades, a Client Promoter Score or Net Promoter Score of 66 and almost $9 billion moved into our investment advisory solutions. Let's go ahead and transition from our client results to discuss some of the corporate financial areas that have been in the press on the minds of investors. And in too many cases, falsely described by some competitors who have tried without much success, is evidenced by our near record March level of net new asset flows to scare clients into leaving Schwab. Again, our franchise and financial model are strong. We have substantial liquidity. We have capital well in excess of regulatory requirements, and our strong profit margins deliver ongoing organic capital formation, which can be used to meet future capital needs. We have industry-leading levels of FDIC insured balances at our bank, our investors' bank. Our balance sheet and investments were and are conservatively managed and managed in a manner consistent with how we have managed our bank balance sheet for the last 2 decades. And for our long-term stockholders, we have great confidence, and our ability to deliver a combination of growth and capital return, just as we have for almost 50 years. So I'd like to go into a bit more detail now on each one of these statements. I've publicly stated multiple times and in multiple formats that we cannot foresee any plausible scenario where we would have to sell securities to meet the liquidity needs of our clients, and that's not an accident. Because we have always planned for the potential of time periods where high liquidity needs exceed our available cash. Of course, these time periods tend to occur when the Fed is raising interest rates rapidly. And while this cycle of interest rate increases has been historically rapid, leading clients to realign their investment cash more quickly than we had predicted. Our advanced planning ensured that we would have the necessary liquidity to meet their demands. We prepare in part by minimizing the issuance of CDs and/or borrowing from the FHLB during more normal times, effectively keeping that dry powder for periods of higher liquidity needs. Of course, accessing this higher cost funding is not something we expect to be anything other than temporary, currently projected to wind down over the next 7 quarters and be largely gone by year-end 2024. I would certainly hope that by this point in time, the short driven speculation that we would find ourselves in a position where we would be forced to sell securities that have temporary paper losses has been put to bed. From a capital standpoint, we have solid levels today, well in excess of regulatory requirements. And we understand the possibility that the AOCI opt-out might well be eliminated and the questions that, that raises about the potential need for capital. At this point, if this scenario does play out and a reasonable time frame is afforded to build the capital to support this change, we feel confident today in our ability to build the necessary capital organically, given our strong profit margins. Even in the stressed market environment this past quarter, we achieved an adjusted pretax margin of almost 46%. And even under some of the most pessimistic scenarios for the future, we are at least 40% pretax. And of course, our unrealized marks on certain securities decline over time, and they've also declined as interest rates have modestly moderated, declines that you'll see happening when you review our first quarter 10-Q. The conservative nature of our bank management is also reflected in the very high percentage of deposits insured under the FDIC limit. At quarter end, approximately 86% of our bank deposits were under the FDIC insured limits. In addition, these deposits are spread among tens of millions of investor accounts. And lastly, there are no groups of investors or advisers who directly influence or encourage collective behavior. The 10 RIA firms whose clients hold the greatest amount of cash on our bank balance sheet, account for barely 2% of total bank deposits and the average transactional cash per account for those RIA firms is less than $13,000. I hope these facts remove any concerns about some sort of ordinated action potentially happening that would meaningfully impact our bank deposits. This is a very important slide. I'd like to dive deeper into our clients' cash behaviors. I know this is a critical area of interest, particularly as it could apply to future levels of bank balance sheet cash and client cash realignments. As I've discussed in the past, when interest rates are near 0, clients tend to co-mingle their transactional cash and their longer-term investment cash together. Of course, there's very little incentive during times like that to move their investment cash into solutions that offer higher yields than bank sweep. But when interest rates rise, we reach out to clients and suggest they consider realigning their investment cash into other solutions, whatever the client sees fit, whether that would be a purchase money fund -- a purchase money market fund, a CD, a treasury security or another appropriate cash solution that the client is interested in. And of course, this has been taking place, predominantly inside Schwab, as rates have been rising over the past year or so. The rate, pace and ultimate level of this realigning has a large impact on our near-term financial results. So not surprising, we study it closely, and we have models that estimate how it will unfold. By several measures we study, we believe that this cash realigning process is now slowing and getting closer to its endpoint, which should then likely reverse to a stage where bank balance sheet cash begins to grow as a result of our organic net new asset growth as well as new accounts that we attract. Now in terms of the slide, we've included a chart that goes back to 2004, and it illustrates multiple time frames where interest rates were relatively high as well as several time frames where interest rates were near 0, often referred to as ZIRP periods. When we study this information, RIA per account basis, what we see as the most accurate way to model this. Transactional cash per account is down to an average of approximately $10,400, a level as low as we have seen in the past 20 years and down about 50% from the peak period during the COVID pandemic. From a percent standpoint, transactional cash per account is at a 20-year low of approximately 5%. Now could it go lower? Yes, of course, but we believe it is closer than ever to finding its ending point. Here's why. If you look at daily Schwab Bank cash movements, a key metric for identifying trends far more important than a quarterly summary. February of this year was lower than January. And if we adjust for the single day after the Silicon Valley Bank failure, where cash movement was modestly elevated, March was lower on a per day basis than February. And through the first half of April, even allowing for tax payments, April is also lower than March, measurably lower. Lastly, it's important to recognize that while some clients did readjust their cash allocations in response to the Silicon Valley Bank failure by buying treasuries or CDs or moving from prime money funds to treasury or government money funds, we also saw a sharp increase in new cash coming into Schwab, consistent with being a safe port in the storm. Now this slide is also a particularly important one as it provides factual information around a topic that has been fraught with inaccuracies in the press and blogs alike that incredibly to me often relied on speculative information from short sellers and competitors. Schwab Bank is a bank for investors. We manage client cash at our bank conservatively and consistently. We manage this cash in the same way we've managed it for the 20 years that we've had our bank. We make what we consider to be conservative loans, almost exclusively to our existing investment clients. Now these loans are either backed by our client securities portfolio or loans against their personal real estate. This makes up about 12% of our assets. We do not make commercial loans as speculated by one of our competitors on national television. The balance is invested primarily in securities. And with this balance, we look to manage credit risk by investing between 85% and 90% in securities backed by the U.S. government or its agencies. That's our approach to credit risk. Now let's talk about duration risk. Again, an area that has been fraught with misinformation. First, let me begin by saying it's important not to confuse as unfortunately some less than savvy alleged researchers and analysts have that maturity or weighted average life is not the same as duration. We have many floating rate securities that have a long life, but essentially zero duration and therefore, do not contribute to negative marks with higher interest rates. And of course, offer increased yields as rates rise. Second, we do not now and never have tried to guess future interest rate movements. Doing so is a fool's game. It's like trying to guess stock market movements. We don't guess and we don't try to time interest rate movements. Our approach is very straight forward. We have historically managed our bank investment portfolio to a duration range between 2.75 and 4 years. And we were approximately 3.5 years as rates began to rise in mid-2022, admittedly, nearer the higher end of our historic range than the lower end of fair criticism. Importantly, our overall duration across the firm's aggregate balance sheets, which includes the banks and the broker-dealers, was about 2.5 years. That is it, not 5, not 10, but 2.5 years. And we all know that even at 2.5 years, this is not low enough to avoid temporary paper losses when rates rise close to 500 basis points in a year. We just felt it was important to be transparent on where we were as this rising rate cycle began. So again, we did not change our historic approach during the COVID pandemic. Contrary to some items I've read and heard, we did not buy securities that would take us out of our historic duration range. But even more bluntly, we did not go out and load up our securities portfolio with long-dated bonds during the pandemic period. Now it can be a fair criticism that we should have changed our 2-decade approach to consistently maintaining a relatively short-term duration bank portfolio during the COVID pandemic in favor of holding primarily cash. That's fair to say. And if we would have known that the Federal Reserve was going to raise rates faster than they ever have in history, in retrospect, that would have been a brilliant move to make. What we did do was to begin to build up higher levels of liquid cash in late 2021 as transitory comments about inflation from the Federal Reserve waned and in early 2022 as the Federal Reserve began discussing increases in interest rates. We increased our normal cash allocation about $60 billion. But given the pace that the Federal Reserve raised rates and therefore, the pace of the resolving client cash realigning, again, in retrospect, $60 billion was not nearly enough, and that led to our need to execute on our other liquidity measures. I started my comments by making clear that our financial model and franchise strength are intact. So the obvious question is, how this manifests itself in terms of earnings growth and our ability to deliver for our stockholders? It's well understood that the temporary cost of higher funding from CDs and FHLB loans will impact our near-term revenue growth and earnings. Hopefully, it is also well understood that, as these borrowings are paid off, that will be an accelerant to our medium-term earnings. But as client cash realigning moderates and eventually reverses and the headwinds from higher cost, temporary funding sources diminishes over the next 7 quarters, what remains? What remains is an extraordinary company. We have a diverse client base spread across approximately 35 million accounts. We have a track record of delivering exceptionally strong organic asset growth in every environment. We are completing the integration of the former Ameritrade client base and adding world-class trading capabilities, along with approximately 10 million new clients, who will be exposed to all the additional products and services that Schwab offers that were not available at Ameritrade, and millions of existing Schwab clients will be exposed to the world-class retail trading platforms that were previously only available to Ameritrade clients. And as a result of the integration process winding down, along with investments that we have made in enhancing efficiency during this integration process, we will be in a position to substantially reduce operating expenses. Again, as I stated, well beyond the remaining $500 million to $600 million we originally committed to as part of the Ameritrade integration synergies. It's a powerful formula. It's a winning formula, and I'm confident that it will be a formula that delivers for our long-term stockholders, as it has since we went public in 1987. So Peter, let me turn it over to you to talk some more about our financial results and projections.

Rick Wurster:

Thank you, Peter, and hello, everyone. In the winter business update, I described how well Schwab is positioned to sustain our organic growth rate of 5% to 7% over the long term through a combination of growth from existing clients, attracting new clients and growth from our strategic initiatives. First quarter was a great example of this as we grew net new assets by over 7%. As I shared with you our business results, I'd like to leave you with 3 takeaways. First, our business is thriving, and we again delivered strong organic client growth. Second, through the volatility in March, we saw an increase in net new assets and client engagement and asset flows that the bank remains steady. We emerged from a crisis not weaker, but stronger. Third, our strategic initiatives are paying off and lots of opportunity remains. Let's dive into the results in more detail. To put it simply, we are winning across all fronts. We're winning with existing clients, with new clients and on both the retail and RIA sides of our business. Within Investor Services, we attracted $60 billion in core net new assets. In addition, we saw an 18% year-over-year increase in high net worth, net new assets in the quarter. Our note trade-offs approach continues to attract clients and engender trust from our existing clients, and that was particularly true in a period of uncertainty. As I mentioned in our winter business update, our client base continues to get younger with 56% of new-to-firm households under 40 this quarter. This is notable because with an average age under 50, our clients are still accumulating assets. Within Advisor Services, we had an outstanding quarter of growth with $71 billion in core net new assets. When the going got tough in March, our growth accelerated with $32 billion in NNA in March alone in Advisor Services. In periods of uncertainty and heightened volatility, advisors win. They win because they are trusted fiduciaries with clients' best interest in mind. And we win because we are the trusted partner of RIAs and partner with them to deliver for clients in all environments. Our TOA ratio remained high and was in excess of 2% for the quarter. We are committed to helping RIAs of all sizes grow by delivering the leading custody platform with no fees, alongside practice management support, industry advocacy and relationship support RIAs can count on. There are no trade-offs. In summary, our business is thriving. Our note trade-off approach was recognized by the industry. The third-party accolades you see on the screen speak to the way we serve our clients each and every day. We were recognized by Investor's Business Daily as the #1 online retail broker overall, by J.D. Power as the #1 full-service broker and for the sixth consecutive year Schwab was named one of Fortune Magazine's top 50 World's Most Admired Companies. I'd like to turn now to our strategic initiatives of scale and efficiency, win-win monetization and client segmentation. We are continuing to advance these initiatives within our strategic focus areas. And as I mentioned, these are paying off with tangible wins in the first quarter of this year. Let me start with scale and efficiency. Integration remains our top priority. We successfully completed our first client transition group in February, bringing over around 500,000 client accounts, including a small number of advisors. Service teams achieved an average speed to answer of just 6 seconds during the conversion, a good indication of how seamlessly the transition went after years of preparation. We remain on track to bring over 13 million clients this year, representing 97% of Ameritrade clients, with the remaining 3% our most active traders coming over in 2024. And as Walt mentioned earlier, we are on track to achieve $1.8 billion to $2 billion in run rate expense synergies by the end of 2024. Most important is the client benefit we see. In retail, clients will benefit from the combination of our modern wealth management platform, alongside the leading trading and education platform in the industry. For advisors, we will add iRebal and thinkpipes, 2 capabilities advisors love to an offer that as it stands as no trade-offs. Turning now to win-win monetization. One of our priorities is growing our wealth business. Wealth is an area in which we delight clients, as the Client Promoter Scores of wealth clients are typically the highest at Schwab. Our clients are increasingly asking for help and advice, providing us with a growth opportunity, and wealth offers a diversifying source of economics to us as a business. We've been investing heavily to deliver for clients and accelerate our growth, and we saw meaningful progress in the first quarter. Net flows into the Wasmer Schroeder strategies were $1.5 billion and assets under management surpassed $17 billion. This is a clear example of a win-win opportunity for clients in Schwab. The offer brought down the cost of access to fixed income managed accounts on Schwab's platform and interest from clients has been strong as Wasmer represented the majority of net flows in the fixed income managed accounts. We launched several key enhancements to Schwab Personalized Indexing, including more customization and digital capabilities. Retail clients who work with Schwab FC can now exclude more individual stocks as well as entire industries and sub-industries from their portfolios. We also launched a digital dashboard for retail clients that shows a real-time view of their account value and highlights clearly the value of tax loss harvesting. And clients continue to turn to Schwab for advice during market volatility. Schwab Wealth Advisory had $3.2 billion in net flows in the first quarter, the highest quarter of net flows in the history of the offer, as both Schwab and Ameritrade clients increasingly find the offer attractive. Finally, we continue to meet the specific needs of our client segments. We are launching this year Schwab Private Client Services and Schwab Private Wealth Services for our high net worth and ultra-high net worth clients. We are winning with this client segment today and the differentiated service, support and offering will further add to our no trade-offs experience for this client segment. Our world-class trader offering remains unparalleled in the industry. We released new features on thinkorswim while preparing to convert thinkorswim clients and preparing to make the offer available to Schwab clients this year. Another key priority in this focus area is to provide tailored solutions and experiences for RIAs of all sizes. In the first quarter, we acquired Family Wealth Alliance, a membership organization that provides resources to the family wealth community serving ultra-high net worth clients. The acquisition continues a relationship that has existed between the 2 companies for years. And together, we'll be able to expand the services we offer for multifamily offices and single-family offices. We are thriving and our growth initiatives are paying off. I shared in the winter business update some of the statistics you see on the left side of this page. They show we have lots of opportunity in front of us. We remain confident we can close the share of wallet opportunity I described by introducing clients to the collective capabilities of our integrated firm. We also believe we can accelerate the growth of our wealth business, both at Schwab and by introducing it to Ameritrade clients. We saw very positive signs this quarter as it was our strongest quarter of flows ever into full-service wealth solutions. And 95% of eligible Ameritrade FCs enrolled a client into a wealth solution, a very promising sign for the future. We continue to invest in our lending platform to increasingly be there for clients in the future. And finally, the combination with Ameritrade allows us to enhance our trading capabilities for a highly engaged and important client segment. Investing in a thinkorswim platform and bringing the powerful platform tools and education to our trader clients will be an important differentiator for Schwab as we look to the future. I'd like to wrap up where I started. We are in a position of strength. Our business thrived in the first quarter and our growth accelerated through the recent market volatility. The virtuous cycle will continue to help us sustain attractive organic NNA growth from both new and existing clients. We are continuing to execute on our key strategic focus areas of scale and efficiency, win-win monetization and client segmentation. We saw meaningful impact from some of those initiatives in the first quarter, while other initiatives will help accelerate the growth of our business into the future. We are delivering wins for clients and the firm each quarter. The future is bright. With that, I will turn it over to Jeff for Q&A.

Operator:

[Operator Instructions] And our first question is from Dan Fannon with Jefferies.

Walt Bettinger:

Thanks, Dan. I'm going to go ahead and comment on this. So I think when you look at client cash realigning, we feel fairly confident that the metrics we've shown have good basis in history. I guess I would encourage you to think of a client cash aligning. It's an event, it's not a process. And I'm going to illustrate that by an example. If you have a retail client that has, say, build up $50,000 in cash during the pandemic period. And they look at that and say, well, I want to keep 20,000 of that liquid available for immediate trading or other uses, paying bills, they don't take that $30,000 and say, "Well, I'm going to move $10,000 this quarter and $10,000 next quarter and then $10,000 several quarters in the future." It's an event. They reinvest the $30,000. And so what you generally will see is you'll see a rapid acceleration of client cash realigning early in the process of rate rise, let's call it in the first year. And then you begin to see it go the other way. And we think, as it goes the other way, it goes the other way in a relatively accelerating manner because, again, the event has occurred. The client, in my example, has moved their entire $30,000. So we understand the question. We think that the cash, as we indicated, the cash realigning process is slowing. We are very encouraged by what we see in April with measurable slowing. Again, we're looking at 3 consecutive months of declines, and we feel very good about the chart and the results we're able to share with you.

Dan Fannon:

Yes.

Rich Repetto:

Walt and Peter, and first, thank you for doing the timely call. And at least I hope you consider this format going forward. But I guess my question is sort of related to the first question. There was -- we calculate $44 billion, I guess, in declining balance sheet, cut cash or uninvested sweep cash. So -- and helped by organic close in March that you talked about. But my question is, your terminology has changed a little bit, I think. But anyway, do we still expect 8% to 12% decline in the average interest-earning assets, Peter? And that's factoring in sort of this protection of AOCI. Does that factor in it if you're even at all trying to keep aware of that or manage that risk. So the 8% to 12% average interest-earning asset declined by December 1 -- December?

Operator:

The next question is from Alex Blostein with Goldman Sachs.

Peter Crawford:

Thanks for the question. So I guess I'd say a couple of things. Certainly, you are right that if we were to sell the securities -- a meaningful portion of our securities portfolio, it would actually be accretive to our capital levels, if you included that -- or certainly agree to our tangible capital levels. We said multiple times that we see no reason, no need to be forced to sell securities, given the strong -- the ample access to liquidity and the nature of our deposit base and so forth. Beyond that, just don't really want to speculate or sort of talk in hypotheticals about the conditions under which we would sell that securities portfolio. I just would say that we see no need to do so. But of course, we're always going to be thinking about what's the right thing for stockholders, but we see no reason to do so and certainly wouldn't do it right now, given sort of some of the volatility, if you will, in the market around firms that have made that decision.

Ken Worthington:

You broke the BDA investments, I think, in the third-party BDAs this quarter. With BDA balances down $20 billion in 1Q '23 and floating rate securities down to $2.2 billion in the quarter, do you foresee having to break the TD managed BDA investments? If so, is this a charge that you would be responsible for? And what do you foresee as the charges needed to maintain this program, given your outlook for sorting this year?

Operator:

The next question is from Brian Bedell with Deutsche Bank.

Peter Crawford:

Sure. So some of the -- certainly, the CDs that we issue are termed out. So it's not like we can recall those necessarily. And the FHLB advances have different terms. But as I mentioned, we -- the decision to build up cash in March meant that we front-loaded some of that activity. So of course, if we -- as we see the pace of this client realignment slow, very reasonable to expect that, of course, we will initiate less advances and let those advances that we have roll off. And so absolutely, we could see this roll off very, very quickly, even as we start to see a resumption of deposit growth over the course of latter part of '23 and then into 2024. And so I mean, the key point on these advances is these are limited and they're temporary. This is not something that is going to be part of our long-term financial picture, and we will certainly pay them off as quickly as we can.

Mike Cyprys:

I want to circle back multiyear commentary around the ability to deliver substantial expense savings beyond the $500 million to $600 million or so. I was just hoping you might be able to help quantify how meaningful that could be? Is that $1 billion? Is that $2 billion? And maybe you can expand on where that's coming from? What are some of the actions that you guys might be able to take to hit that? And how do you ensure this doesn't hit the overall growth in customer and overall assets?

Operator:

The next question is from Bill Katz with Credit Suisse.

Peter Crawford:

Yes. So thanks for the question, Bill. So in terms of the deposit pricing, if you will, I mean, our philosophy on that hasn't changed, right? Our clients keep -- as we know from history that our clients have sort of 2 buckets of cash, their transactional cash and their investment cash. And our philosophy on the transactional cash is to offer a rate that is very competitive. Certainly, today is at 45 basis points. It's a lot better than what clients can earn in their checking accounts at most of the traditional banks and then to offer our clients a range of options for their investment cash that are, in many cases, industry leading, whether that's access to treasuries or brokered CDs or purchase money funds or whatever it might be. And what we've seen is -- and that's served us well for multiple decades. And whether we pay 45 basis points or 65 basis points or 100 basis points for that transactional cash, it doesn't make -- it makes very, very little influence on client behavior. So I don't necessarily see that aspect of our philosophy changing. Of course, we'll -- as we always do, we'll learn from the experience from what we learned about client behavior, we'll have to take into consideration potential regulatory changes and we'll adapt. And -- but I have every confidence that we'll thrive as we have every time we've faced changes around us previously, whether it was when the dot-com bubble burst in 2000 or whether it was when we launched the bank and came under Fed supervision or went to 0 commissions in every single situation, we adapted and we came out the other end even stronger than we were going into it. And that's because we stay -- as Walt and Rick talked about, we stay focused on our clients and doing right by our clients. And if we do that, everything else will take care of itself.

Operator:

Our last question is from Ben Budish with Barclays.

Peter Crawford:

Yes. Thanks, Ben. I think what we would like to see a little bit more clarity on the regulatory front and what's going to happen with how capital is treated and a time line there. As I said, we feel very confident in our ability to build into the potential inclusion of AOCI into our regulatory capital ratios, but we'd like to see a little bit more clarity there before we would, I think, strongly consider or look to resume the buybacks. Of course, our buybacks are always opportunistic, not programmatic, as we've said multiple times, but I think that's probably one of the key points we want to wait for.

Walt Bettinger:

Thanks, Jeff, and thanks, everyone, for joining in and participating, and thanks for the feedback on the timing of this update relative to our earnings report, and please continue to provide that feedback. And we'll be -- look to be responsive to what we hear from all of you around the best time to do these updates. I think, as all of you know, I've been doing this a long time. This is my 15th year as CEO of Schwab. And during that time, I've seen a lot of different environments. Good is as well as much more difficult ones. But when I look at that history, what's consistent to me is that long-term success comes from maintaining a focus on clients. There are always going to be circumstances that come up on a periodic basis that have more of a short-term impact. And we're well aware. We're not oblivious to what's going on. We also know that we have driven much of what has gone on that has affected our near-term earnings because we've been proactively reaching out to our clients of all sizes for the last year and explaining to them the options that they should consider with their investment in cash. But again, I'd like to put this in the context of what I led with around clients. It's the right thing to do. And it's what we would do during this environment if we're faced with this environment again. We're well aware that long-term success comes from a focus on clients. And we're well aware that our bank is unique as it serves as a bank for investors. We're also well aware that as storms come, storms also go. Eventually, they come to an end. And what we know from history is that when those storms and the firms who stand tall or those who have a focus on clients. And that's something that I believe you can count on for Schwab as you have for many years in the past and can count on again in the future. Thanks again for all of your time today. We very much appreciate it, and we appreciate the thoughtful questions.

Walt Bettinger:

[Technical Difficulty] ...that began in 2020 and many others. And in each of these time periods, there was a list of doubters. In fact, I recently went back and read some of the reports and articles that were written about Schwab during those periods. And although I generally respect those who doubted us, I have enormous confidence in our firm and in our people. I have enormous confidence in our ability to serve our 30-million-plus clients, and enormous confidence in our ability to deliver for our long-term stockholders. As we all know, the third quarter was very difficult for investors. The Federal Reserve continued with an aggressive policy designed to battle deep-seated inflation -- they did so with steep increases in rates, and at the same time, equity markets fell for the third consecutive quarter. The S&P 500 and NASDAQ now showing year-to-date losses between 25% and 32%. And yet despite these challenging days for investing, our all-weather business model continued to prove successful. Whether we’re looking at our strong organic asset growth rate of 7% reflected in $115 billion of net new assets, or the fact that our retail net new assets in the third quarter were 20% higher than the same period last year. It’s clear that our Through clients’ eyes strategy is working and a major contributor to our organic growth. And just as our client strategy was successful, our commitment to encouraging a long-term approach to investing was also reflected in our clients’ actions. Even with investing sentiment near record lows, our clients remained resilient with net equity buys exceeding net sales. And our clients remained trusting in our advisory services with flows into these solutions in excess of $8 billion during the quarter. Now as expected in a difficult investing environment, cash is an important part of our clients’ investing approach. Now this is something that we’ve always known, always believed in. And as I often say, there’s no investor who has ever lived through a bear market who then doubts that cash is a critical part of an asset allocation strategy. Now recently, we know there’s been a lot of commentary about so-called client cash sorting. And there’s been a lot of commentary as if it’s some kind of bad thing or something that we didn’t expect or, frankly, didn’t welcome. And, to the contrary, we view it as both expected and as a positive. In fact, we put a lot of effort into helping our clients make the most of their cash. Our approach to assisting clients with our cash needs is robust and it’s very focused on their needs. For example, for transactional cash, we offer competitive yields and features relative to other transaction accounts, including taking steps like pioneering fee-free ATM withdrawals worldwide. And for investment cash, we offer money market funds with low fees, CDs from banks across the country in a variety of quality fixed income investment options. Our clients’ decisions with their cash are, of course, influenced by the interest rate environment. During a ZIRP or 0 interest rate environment, clients have little yield motivation to move money from a transactional category, like a bank sweep or checking, to an investment category, like a purchase money fund or a fixed income offering. And then, of course, when rates rise, it’s a prudent decision for clients to make that move with their investment cash, and we encourage that. We encourage those moves. We make outbound phone calls from our financial consultants and others. We do seminars. We offer marketing that encourages clients to position their investment cash into higher-yielding alternatives. Now some might question, well, why would [we] do that? We know that we take a revenue hit with every dollar that moves, for example, from a bank sweep to a money market fund. But to those individuals who question it, I would suggest that maybe they don’t really understand what we mean when we say through clients’ eyes or they don’t really understand our long-term horizon for growth because we proactively contact clients because it’s the right thing to do. The right thing to move their investment cash into higher-yielding options. And our clients, not surprisingly, respond very favorably to our proactive efforts to show them how to increase their yields on investment cash. I guess if I were to summarize this slide, I’d say that if you understand our firm, if you understand Schwab, you know we are doing exactly what you should expect us to do in the middle of a rapidly rising rate environment. And our clients are doing exactly what we expect that they would and, frankly, should do. And none of what is happening should interfere with our ability to grow our revenue and our net interest margin, and none of it should impact our ability to deliver earnings growth consistent with our financial formula over the coming quarters and years. Before I pass it over to Rick to cover some of our strategic efforts in more detail, I want to spend a couple of moments on the status of our Ameritrade integration and conversion because we’re closing our second full year of preparing for conversion, and we feel very good about where we are. We have built tremendous scale and capacity, far greater than we anticipated when we announced this acquisition. We’ve committed to retaining our high-end clients with capabilities that take great features from both firms, for example, from Ameritrade, things like iRebal, thinkorswim and thinkpipes. We’ve worked diligently to make the actual conversion process streamlined and simple for our combined clients, along with retaining key high-quality employees, and of course, we’ve done all this, as you know, in the middle of a global pandemic. When we complete this integration, we think we will be offering the industry’s top overall investing experience. Of course, nothing as large and complex as this integration and conversion goes perfectly. In addition to the pandemic-related issues, which we’re all familiar with, 2 additional issues are likely to push our total integration spend about 10% higher than we anticipated 18 months ago. Now the first one is probably obvious to everyone, it’s inflation. Technology equipment, cloud contracts, market-driven staff compensation, all these costs more, frankly, they cost a lot more than we anticipated back in 2019 and 2020. In addition, in light of the war in the Ukraine, we made a decision, we believe a correct decision, and this is actually creating the largest reason for these higher costs and also likely to push the last conversion of somewhere around 1% or 2% of our clients back into the first part of 2024. But I want to emphasize, it will not impact the amount or timing of the expense synergies we’ve committed to, and here’s why. The thinkorswim system at Ameritrade relied very heavily on software developers and engineers based in Russia. Now these individuals managed the majority of the TOS system, from design to enhancement and even to ongoing daily maintenance. When the war in Ukraine began, we stopped using those Russian-based resources. This meant not only moving all of those efforts, but also training dozens and dozens of new engineers and developers on the TOS system, and this was very costly, but it was the right thing to do. And I know that anyone listening to this call would have made the exact same decision that we made. So just to sum all this up, despite the pandemic, despite record client engagement, despite the highest inflation in 40 years, despite geopolitical and market volatility, we remain on track to convert 98% to 99% of our clients in 2023, deliver on the expense synergies we committed to at the very outset, and do so with a total integration budget only modestly above our early 2021 estimates. So Rick, let me go ahead and turn it over to you to talk in more detail about some of our strategic efforts.

Peter Crawford:

All right. Well, thank you very much, Rick. So you all had a chance to hear Walt and Rick talk about our through clients’ eyes strategy continues to resonate with investors despite the challenging environment and very low investor sentiment, how our cash strategy is consistent with that strategy, the progress we’re making with the Ameritrade acquisition in spite of a number of unforeseen challenges and how we’re continuing to advance our appropriately ambitious strategic agenda. In my time today, I’ll talk about how the combination of strong business momentum and rising interest rates overcame a tough equity market and more bearish investor sentiment to produce yet another quarter of record financial performance. I’ll also provide an updated outlook for the rest of the year. And finally, I’ll talk about how we’re confident we will navigate through this environment and continue producing strong financial performance in the quarters and years ahead. What should hopefully become clear is that we’re certainly benefiting from higher rates and are poised to benefit even more in the quarters and years ahead, even as we take steps to manage through some of the speed bumps that those higher rates present. But those speed bumps are quite manageable, which means that the most important factor in our long-term success is the strength of our business and our through clients’ eyes strategy, something that’s producing strong momentum and positioning us to continue thriving even after rates eventually normalize. Let’s talk about some of the factors that contributed to our record financial performance in the third quarter. Compared to the second quarter, we faced more headwinds than tailwinds with equity markets down and the resulting bearish investor sentiment weighing on trading activity and margin utilization. We did, of course, benefit from rates that continue to increase across the curve. Now in spite of the volatile market, we’ve been able to continue driving strong organic growth. Roughly $300 billion in core net new assets in the first 9 months of the year despite record high tax payments by clients, and an average of over 1 million new accounts per quarter. Despite these headwinds, our financial performance in the third quarter broke multiple records. Revenue increased 20% year-over-year and 8% sequentially, driven by a 44% increase in net interest revenue, reflecting higher interest-earning assets, and a 52-basis-point increase in our net interest margin year-over-year to 197 basis points, which was also up 35 basis points sequentially. That more than offset a decline in asset management and admin fees due to falling equity markets. Adjusted expenses were up 12% year-over-year, consistent with our expectations given higher head count and the 5% across-the-board salary increase we implemented late last year. And we increased our adjusted pretax margin to 53% and produced a record at $1.10 in adjusted EPS. Bank deposits were down 10% sequentially due to client cash allocation decisions that were broadly consistent with our expectations given the dramatic increase in rates. The decline in stockholders’ equity was the product of unrealized mark-to-market losses in our available-for-sale portfolio as well as $1.5 billion of common share buybacks and the redemption of our $400 million Series A preferred. And despite that nearly $2 billion of capital return, our consolidated Tier 1 leverage ratio finished above our operating objective. Despite the challenging equity markets, we feel very confident about our ability to continue driving strong revenue growth even as we maintain a high level of capital return. Assuming the Fed funds rate exits 2022 at 4.5%, we’d expect to produce an 11% to 13% year-over-year increase in revenue, consistent with the scenario we shared earlier. That reflects continued expansion of our net interest margin to the mid-210s in Q4, a roughly 10% to 12% decline in average interest-earning assets from December 2021 to December 2022, and net interest revenue higher than Q3 despite continued client cash allocations decisions and some limited and temporary borrowing from the FHLB to fund some of those outflows. We have taken steps to limit expense growth, and we now expect full year expense growth to be on the lower end of the 7% to 8% range we communicated a few months ago. Looking ahead to 2023, we continue to see no reason that the magnitude of client cash sorting will be dramatically different than the last rising rate cycle, suggesting balances trough at some point next year. We have ample sources of liquidity to support our clients and anticipate growth in both net interest margin and net interest revenue from Q4 of this year to Q4 of next year and beyond. And of course, you can expect that the higher pace of capital return we started in Q3 will continue. There’s obviously been a lot of commentary, perhaps too much on the topic of client cash sorting. And we continue to receive a lot of questions. I want to emphasize that this is a dynamic, which we view as very much temporary, quite manageable and not a factor in our long-term performance. I want to reiterate a few high-level observations regarding our current beliefs around sorting, with additional detail in the appendix, which you’re welcome to discuss with the IR team after the call. Now we have broken these into 2 categories regarding the pace of sorting and the ultimate magnitude of sorting. First, we have extensive data that suggests that the rate we pay on transactional cash has little or no impact on the pace or magnitude of sorting. So you’re not going to see us change our sweep deposit pricing philosophy to catch up or to influence client behavior. Second, we’ve also seen from experience, and it’s consistent with intuition, that the pace of client cash reallocations decreases once the Fed stops hiking rates. Third, we have seen over time that clients seek to maintain a minimum level of transactional or sweep cash in their account. And as we reach that point, any remaining client cash sorting is offset by organic cash inflows to both new and existing accounts. Fourth, higher cash balance accounts tend to move earliest, and we’ve already seen them decrease their activity. And fifth, and finally, our client base today has a higher mix of clients who tend to maintain higher -- relative levels of transactional cash. Put all that together, and we are confident that the activity we’re seeing will abate. And as we said in our recent CFO commentary, we believe we’re now in the middle innings of this process. There’s also been a lot of speculation about actions we may need to take to support these client cash allocation decisions. So we thought it would be helpful to share a few facts. First, we have access to roughly $100 billion to $150 billion of readily available cash over the next 15 months. Roughly half of that from excess cash on hand or that the investment portfolio will generate, and the other half from cash that comes in through our net new assets. Second, we also have access to a very large amount of funding from the FHLB, from retail CDs we’re looking to offer, and various forms of supplemental funding. In the last 2 weeks, we initiated borrowings from the FHLB of roughly $10 billion. We expect the usage of these to be quite limited, perhaps no more than a mid-single-digit percent of our liabilities and quite temporary. But the capacity to do more and for a longer period of time is certainly there. So any potential asset sales we do are likely to be very limited and opportunistic. It’s really important to recognize that even after we reach peak rates this cycle, we have the ability to continue expanding our net interest margin over the following years as our fixed investment portfolio rolls over. And this NIM expansion would be additive to the through-the-cycle financial formula we have delivered over the years and expect to continue moving forward. I don’t think I need to spend much time on capital return. We’ve been certainly discussing for a while our expectation for a higher level of capital return, and you saw that begin in the third quarter. Before I close, I want to pull out from some of our near-term dynamics and remind everyone about that through-the-cycle financial formula, which has worked over multiple decades, and we’d expect to continue working in the decades ahead. It’s built on our through clients’ eyes strategy and no trade-offs positioning leading to consistent organic growth. And then even as we worked our way through multiple rate cycles, made disruptive moves like cutting equity commissions to 0 and acquiring Ameritrade, we’ve been able to convert that strong organic growth into asset growth, revenue growth and through ongoing expense discipline, expanding margins and EPS growth over 20%. That has been the investment thesis for Schwab for much of our history, and it continues to be the same today. We were speaking with a member of the investment community last week who said this last quarter demonstrated our ability to "walk and chew gum at the same time." He was referring to our ability to grow top line revenue and deliver capital return at the same time. And while we’d argue that this feed is a bit more difficult for most firms to achieve and that well-worn analogy would suggest he is right, that is exactly what we expect of ourselves. But equally notable is our ability this quarter -- this year to both help our clients and our business navigate this extraordinary environment, while, at the same time, taking the steps necessary to drive long-term operating and financial performance. And as I noted previously, in the last 20 years, we have been through 2 full rate cycles, down, up, down, up. On the way down, we get asked about capital and premium amortization. On the way up, we’re asked about liquidity and sorting. But meanwhile, amidst all these questions, the Schwab engine keeps chugging along, adding clients, finding new revenue opportunities, driving greater efficiency, returning capital to stockholders, growing earnings power, rewarding those stockholders who have a long-term orientation, and I am confident that all of those components will be part of our story this cycle. Jeff, let me turn it over to you for Q&A.

Operator:

[Operator Instructions] Our first question will come from Ken Worthington with JPMorgan.

Walt Bettinger:

Ken, thanks for the question. So in terms of win-win monetization opportunities, we believe we have a lot of upside. I mean both wealth management and lending, 2 examples of programs that we’re focused on today. We think there’s enormous upside there. And I shared some of the levers we’re trying to pull on wealth. And in lending, of course, we think we’ll see more of the upside when we get back into a more normalized interest rate environment. But essentially, what we’ve done is we’ve set the table. We’ve created the digital experiences, the product capabilities, and we’ve educated our field to be ready to engage clients in those discussions. And so when the interest rate environment becomes more favorable, we expect there to be benefits there. When we think about personalized indexing, which is another one of the programs we’ve talked about for a while, we expect that to be a 10-year ride of money moving from active strategies and some taxable assets that are in taxable ETFs to move in there. So we think there’s a long runway to all 3 of these programs that we think will provide meaningful upside in the coming years. As it relates to the INTF platform, it is very new. We are seeing assets flow there. And our expectation there, of course, is also strong. I think part of what we’re seeing, or part of the challenge broadly, whether it’s INTF or our relationship with T. Rowe Price is it’s just it’s been a difficult time for active management. And so that’s one that we believe over the long run, again, we’ll pay dividends, but it will, in part, depend on it being an environment where active management is in favor.

Rich Repetto:

First, thanks, Walt, for emphasizing the long-term franchise value related to cash allocation. That’s a helpful reminder for us. I guess my question would be, Peter, as you offered some reasons why you thought that cash sorting had reached the middle innings, and why you won’t -- it won’t exceed the last cycle? Can you put any numbers behind that? And maybe a little bit more detail on why you expect that? And is it do -- well, that would be the question, I guess.

Operator:

Our next question comes from Dan Fannon with Jefferies.

Peter Crawford:

So it comes back to our view on when the we’ve seen over time that these client cash allocation decisions at level of transactional cash reaches a certain floor, and as it starts to approach that floor, it starts to taper up -- the allocation start to taper off and then it’s offset by cash that comes in through new accounts. And so we view -- our view is that, that’s going to trough at some point in 2023. And then as new cash comes in, we’ll be able to reduce the use of the FHLB and any retail CD offers that we have or any other forms of funding that we access.

Steven Chubak:

So, Peter, I wanted to ask a question on capital. You’ve announced a large buyback authorization. As you’ve noted, under your binding regulatory constraint of Tier 1 leverage, you’re already in an excess position, but your TCE ratio is running at low levels, largely a function of negative AOCI marks, but it’s prompted questions as to whether you’re a lower TCE might preclude buyback. If it turns negative, it could even preclude tapping of the FHLB facility. So to what extent does the TCE ratio impact your ability to execute buybacks or tapping the FHLB? And how should we think about your philosophy around optimizing capital ratios to ensure you’re not running with too much excess?

Steven Chubak:

And optimizing the buybacks, sorry?

Jeff Edwards:

Let’s take a question from the web console. This is from Ben Budish at Barclays. Walt, maybe you can take this. Can you speak a little bit to the pipeline for new RIAs coming in? And if we should think about any -- how the integration and conversion might factor into that [train] going forward?

Operator:

Our next question comes from Devin Ryan with JMP Securities.

Peter Crawford:

Yes. So this may be one where we want to take this offline and have a conversation with the IR team around going through those costs, Devin. But the FHLB borrowing was a bit to cover some of what we’ve seen thus far in October and also a bit to get ahead of it. We always want to be ahead of the game around from a liquidity standpoint. And then in terms of the cost and all that, we can get into that in more detail offline with the IR team.

Kyle Voigt:

Maybe just a follow-up on the disclosure of the $100 billion to $150 billion of cash flows that are available from cash on hand, cash from NNA and the portfolio cash flows. I guess, given the current pace of sorting, I was wondering if you could provide a little bit more granularity on some of those buckets. So what was the -- the current excess cash on hand on the balance sheet as of the third quarter? And then maybe over the next 12-month period, what percentage of the securities portfolio would you expect to mature, or even given that in dollar terms would also be very helpful?

Operator:

Our next question comes from Brian Bedell with Deutsche Bank.

Peter Crawford:

It’s an interesting question. So I’d say a couple of things. We -- the way we think about managing the duration on the asset side of the equation is really very much an outcome of what we view as the liability duration. And in different rate environments, of course, that liability duration changes. So in a higher rate environment, liability duration shrinks. And so on the margin, you tend to shrink your asset duration and reverse is obviously true. We do -- we have recently resumed the capability to have derivatives. We’re not thinking about that in the context necessarily of hedging sort of downside risk, but we see that as -- sometimes, in some cases, a more efficient way to manage our overall asset duration. I would say that -- so I don’t think -- I wouldn’t anticipate a dramatic change in our philosophy of than what we have done previously. And there’s certainly no assumption in that chart that you saw there that we shared any assumption there that we manage our investing philosophy differently than what in the past.

Bill Katz:

I think I’ll switch up the topic here a little bit, and maybe we can talk a little bit out expense outlook. So Walt, you mentioned a little bit of inflation on some of the integration charges. And then Peter, you sort of took down the guidance to the low end of the range for the fourth quarter, which is great to see. Looking into 2023 and thinking about incremental margin on the revenue growth coming off of NII and some of these inflationary type of factors. How should we think about maybe core expense growth for ‘23, maybe even to ‘24%, particularly as you get a greater line of sight to residual savings with the Ameritrade integration?

Operator:

Our next question comes from Michael Cyprys with Morgan Stanley.

Peter Crawford:

So from a reinvestment rate standpoint, we are focused on cash right now and maintaining cash. There’s not much reinvestment going on. On duration, you’re absolutely right. Actually, despite the significant increase in rates across the curve in the last quarter, our duration on our investment portfolio actually shrank by a 10th, so we went from roughly [4.1] to a little under [4]. And that reflects the types of securities that we have purchased that we really very much target securities that don’t have that degree of extension risks. So we feel really good about that. If you look at actually, there’s a chart in the appendix, I encourage you to take a look at, that looks at the duration profile of our portfolio over time versus what you see in the some of the benchmarks. So we feel very, very good about the lack of duration extension risk in the portfolio.

Brennan Hawken:

I just would like to maybe dig in a little bit on your current understanding that the situation is fluid. But -- and thanks for the incremental $10 billion so far borrowing on FHLB and the color around that. Where do you think that, that would peak out? I’d assume, given the pace we’re running at and the fact that you don’t think we’re going to see any worse experience than what we saw last cycle, we’re not very far from that period. And so is embedded within your guidance that the FHLB will ramp up into the beginning of next year and then be paid down as you hit that plateau, and you see cash begin to grow normally and then it’s off the balance sheet by the end of the year. Is that what’s reflected, or could you give a little color around what your expectations are for that funding?

Brennan Hawken:

Great. Just one quick follow-up. The CDs, is there any term or yes...

Walt Bettinger:

Thanks again, Jeff. And I want to thank everyone for joining us today. Today is actually a special day, an important milestone. As many of you know, our own Rich Fowler, he of the top-down days, this is his last quarter as Head of Investor Relations. My understanding is he’s going to sprint off into retirement. Those of you who know Rich, know that he was a college level sprinter, which is no surprise to any of us who know Rich, but he’s going to sprint off into retirement. Rich is the only CIRO that we have ever had at Schwab. That’s pretty remarkable. He’s been here through 3 CFOs, over 100 quarterly earnings cycles. But when I think of Rich, the things that stand out are his integrity, clarity, transparency, whether it’s disclosures, interactions with all of you, incredibly special. And as great of a CIRO as he is, he is an even better person. We’re going to miss you, Rich. You’ve done a wonderful job of preparing Jeff and team to step into your shoes. And I just -- and speaking directly to Rich, want him to rest assured that the priorities and values that he’s embodied at Schwab will continue long after he has crossed the next finish line in his sprint. So thanks again, Rich, and thanks to all of you for joining us, and we look forward to speaking with you again in a future business update. Bye-bye.

Walt Bettinger:

Thanks a lot, Jeff, and good morning, everyone. Thanks for investing some time to listen-in on our July business update. So 3 months ago, I emphasized the word consistency during our time together. And I stressed the way consistency plays a critical role at Schwab. A consistent business strategy, a consistent commitment to feeding the virtuous cycle and innovating on behalf of investors, a consistent financial reporting cadence, a consistent commitment to our employees and the communities that we live and work in. And in a consistent long-term approach that is focused not just on the current year, but on years to come. And today, as we discuss our second quarter results and our viewpoint for the future, the benefits of our consistent strategy and commitment to clients, I think, is highly evident. Because it's times like these when investor's sentiment is negative when the equity markets are falling, these are the times that separate companies who chase headlines and/or focus on short-term success from a company like Schwab, a company built to last, a company built to succeed in all environments. By serving investors and advisers in good times and difficult times, while also delivering the superior financial results that you see. Now before we discuss the second quarter in a bit more specifics, I want to touch on the announcement this morning from our Board of Directors that I would be joining our founder, Chuck Schwab, as Co-Chair of our Board. Although it's personally a tremendous honor that Chuck and the Board have seen fit to entrust me with this additional responsibility, the reality is this announcement is not about me. Announcement is aligned with the consistency theme that I just spoke of. Consistency and continuity are hallmarks of Schwab. They add to a sense of confidence that our clients, our employees, stockholders and the communities where we live and work can rely on. Our consistent strategy that we refer to as to clients' eyes is not a catchy slogan. It's a timeless strategy. It's timeless because, in our view, it is the only business strategy that can stand the test of time. A strategy that places our clients at the forefront of the decisions we make. And a key part of my new responsibilities as Co-Chair of the Board will be to ensure that our focus on clients, our consistent focus on clients remains the hallmark of Schwab for years to come. As all of you know well, in the second quarter, the equity markets officially entered bear market territory. Volatility remained quite high and the Federal Reserve advanced their efforts to bring inflation under control by raising interest rates. And of course, this continued with another 75 basis point increase yesterday, moving the target rate to between 2.25% and 2.5%. Now not surprisingly, investors felt this pain. They felt the pain from the equity market declines with investor sentiment falling sharply and reaching levels that we haven't seen in many, many years. Interestingly, however, Schwab clients continued to invest for the long haul. I guess you could say consistency is a hallmark of our clients also. The net buy/sell ratio of our clients during the quarter as punishing as the second quarter was, was only modestly lower than it was during the meme stock quarter back in Q1 of last year. I guess the takeaway is that our clients are investors. And with well over 30 million investor accounts, yes, there are different approaches for certain. Some are buy and hold, some trade actively, some rely on an independent adviser. Of course, many are a combination of all these. But what's important is that collectively, they take a long-term view of the markets. Collectively, they understand the power of being in the market. Collectively, they know that consistency, again, is the path to success when it comes to long-term investing. This long-term focus by our clients is not an accident. It's an outcome of our purpose and our strategy at Schwab because we focus on attracting long-term investors and cultivating them on educating them on the power of long-term diversified investing and being in the market and staying in the market and being consistent with their investing strategies. And of course, there it is, again, that word, consistency. We believe that a major part of why our clients can feel confident with taking a long-term approach to their investing is the confidence that they have in us at Schwab. Despite, again, what anyone would describe as a relatively brutal equity and bond market of late. Our clients still give us Net Promoter Scores in the mid- to high 60s. And with our fastest-growing client base, high net worth investors offering us our highest scores overall. Our client easy score is now more than 90, reflecting our commitment to making it easy for our clients to do business with us. And meanwhile, 83% of our clients rate their phone-based service experience with us as perfect, a score of 7 out of 7. In addition to our efforts, of course, around ease of business and quality of service being recognized by our clients, we're gratified that many third parties do as well. The importance of service quality, timely and responsive service, it's especially critical during difficult times for investors because it's service quality that helps keep these investors informed, aware and as confident as possible. It contributes to client engagement and optimism for the future. I just encourage you not to make the mistake and think that given where the markets are that our clients are not highly engaged, optimistic and investing for the long term. And I think as evidence reflecting this optimism, our clients continue to add money to their investing strategies at a relatively high rate despite the bear market with annualized organic growth about 5% and really rather astonishing for a bear market, 6% when we exclude April. And of course, it's record-breaking levels of tax payments. So this is a picture of a strong, healthy company excelling during a quarter as difficult as any quarter in many years. But I think what's also incredibly important is it's a picture of a healthy client base. A client base taking a long-term approach to investing a consistent long-term philosophy. Now with over $180 billion in core net new assets in the first half of this year and our seventh consecutive quarter with over 1 million new brokerage accounts, our organic growth is indisputable. We still maintain a net TOA ratio of approximately 1.6:1. That means we're winning $1.60 from competitors for every dollar they win from us. Again, reflecting our competitive strength from a relative market is also there. Importantly, our efforts to ensure long-term organic growth continues as we diversify our client base. You can see that over half of our new to retail clients are under the age of 40 and they drove over half of our new client net new assets. So this is particularly important because it illustrates that not only are we winning in the under 40 segment. But we are winning under 40 investors with substantial investable assets, not simply winning younger investors who have little money with which to invest. And as we've repeatedly emphasized, our business-serving independent investment advisers continues its success serving the needs of all sizes of advisers. So we aim to provide the best platform for every RIA regardless of size or business model or specialty. And our success in winning clients of all shapes and sizes clearly indicates we're succeeding. Now while we continue to be the leader in serving the largest advisers, again, what's fascinating about this chart, is that our largest share of net new assets year-to-date have actually come from smaller advisers, those who manage less than $500 million. As we've repeatedly stated, and I don't know how many more times we can continue, but we will keep saying it, our RIA custody business is committed to serving advisers of all sizes, in a world-class manner and without charging custodial fees. So Rick, let me turn it over to you, and you can cover some more details of some of our efforts.

Peter Crawford:

Well, thank you very much, Rick. So Walt and Rick talked about our ability to build and maintain the loyalty of our clients despite the challenging environment and very low investor sentiment. How that loyalty has translated into continued robust organic growth? The strong positioning we have built around modern wealth management and our progress and plans for making that position even more formidable. In my time today, I'll talk about how the combination of strong business momentum, a more subdued, but still quite active client base and rising interest rates produced record financial performance in the second quarter. I'll also provide an updated outlook for the rest of the year, which demonstrates the power of our all-weather business model and the benefits we derive from higher rates. And finally, I'll provide an update on our capital planning with our capital ratios having reached their highest level since the pandemic began, enabling us to potentially accelerate our capital return activities. What you'll hopefully hear is that this company continues to drive exceptional operating and financial performance, that we're clearly benefiting from higher rates and are poised to benefit even more in the quarters ahead. But that's only part of the story. In short, we're demonstrating once again the enduring power of Schwab's strategy and business model, one that combines growth, profitability and capital return with a lot more opportunity ahead of us. Let's talk about some of the factors that contributed to our strong financial performance in the second quarter. Our performance was obviously helped by higher interest rates across the curve, which boosted our net interest margin and BDA yield and eliminated money fund fee waivers by the end of the quarter. While falling equity markets weighed on asset management fees, and the ensuing decline in investor sentiment that Walt talked about resulted in trading activity and margin utilization that were lower than the first quarter but still at historically high levels. What endures amidst this choppy environment is our unmatched ability to drive robust organic growth. Roughly $185 billion in core net new assets in the first half of the year despite record high tax payments by clients, and 5% growth in active accounts on the heels of the unprecedented new account formation we saw in the first half of 2021. Despite some cross currents, our financial performance in the second quarter broke multiple records. Revenue increased 13% year-over-year and 9% sequentially, driven by a 31% increase in net interest revenue reflecting a 16 basis point year-over-year increase on our net interest margin, are up 24 basis points from the first quarter and interest-earning assets that largely were in line with expectations. Flat asset management and administrative fees, as the elimination of money fund fee waivers and organic inflows offset the impact of the market decline. And trading revenue that was lower than last year despite a slight increase in daily average trades. We limited adjusted expense growth of 2% year-over-year, all of which helped produce an adjusted pretax margin of 49.5%, a record $2 billion in adjusted net income and a record $0.97 in adjusted EPS. That was the income statement. Let's turn our attention briefly to the balance sheet. Our balance sheet assets declined 4% year-to-date due mostly to those record tax payments in April as well as some sorting activity in the second quarter that was consistent with our expectations given the rate environment. Our strong earnings, combined with that slight decrease in assets, boosted our capital ratios to the highest level we've seen in roughly 2.5 years. Despite the challenging equity markets, we feel very confident about our ability to drive strong revenue growth and resume a higher pace of capital return. Assuming the Fed follows through as the market predicts with a Fed funds rate exiting 2022 at 3.5%, we'd expect to produce an 11% to 13% year-over-year increase in revenue despite the market downturn. That reflects continued expansion of our net interest margin to just over 2% by Q4. Deposit betas that we expect to continue to run a bit lower than the last rising rate cycle and a continuation of clients moving some of their investment cash off our balance sheet in search of higher yields. But remember, when they do that, it frees up capital that we can return to our stockholders. We continue to thoughtfully and responsibly manage our expenses, navigating this inflationary environment, driving efficiency throughout our business and prioritizing our investments to advance the strategic agenda that Rick discussed. Controlling for an increase in the pass-through fee that boosts both revenue and expense and which we do not control, our full year expense outlook remains the same as what we shared back in February. And with our inaugural CCAR submission now behind us, which demonstrated the strength of our balance sheet as reflected the fact that we're the only firm to see an increase in capital ratios during the stress event. And our capital levels in the mid-6s, we are nearing the point at which we can accelerate capital return. You saw that the Board approved a 10% increase in our quarterly dividend to $0.22 as well as a new $15 billion buyback authorization that we'd expect to utilize as soon as later this year and beyond. And at the same time, we also have the option of redeeming one or more of our outstanding preferreds. I want to close by picking up on a theme that Walt discussed in his opening comments, how this is as a company built and managed for the long term. So we're certainly pleased by our current financial performance despite the difficult macro environment. We are much more gratified by our ability to consistently drive a set of behaviors and outcomes that have enabled us to deliver for clients and stockholders for over 4 decades. Continuing to be the premier asset gatherer as indicated by our net new assets, new accounts and TOA ratio, a reflection of our Through Clients' Eyes strategy and formidable competitive position. Building a diversified and resilient business model that converts business growth into revenue growth, producing record revenue in the second quarter maintaining discipline in how we manage expenses, producing operating leverage through the cycle and increasing margins, which have now reached nearly 50% and have an opportunity to continue to climb and being very efficient in how we deploy the capital that has been entrusted to us or as we're now poised to do return excess capital back to our stockholders. Make no mistake, Challenging conditions in all this is a good environment for both our actual financial results and our future financial prospects, and we intend to pursue those prospects as we remain focused on serving clients and being good stewards of our stockholders' capital. With that, Jeff, let me turn it over to you to facilitate our Q&A.

Operator:

[Operator Instructions] Our first question today will come from Ken Worthington with JPMC.

Peter Crawford:

Thanks, Ken, for the question. So I would say, in aggregate, the dynamics around cash sorting in the second quarter were very consistent with our overall expectations. And I think this is -- I know there's going to be a lot of questions about sorting. So an attempt maybe to anticipate or perhaps preempt them. It might be helpful just to share a few high-level thoughts around sorting. I want to reiterate that our expectation is that the level of sorting won't be higher than the last rising rate cycle, and it actually could be somewhat lower given the fact that we're not going through the bulk transfer process that we're doing in the last rising rate cycle, that we have an influx of smaller accounts who tend to do less sorting. And we also have a client base that is much more actively trading than they were previously, and we know that when clients are trading, they tend to keep more transactional cash. Second, we know from history that eventually cash, both total cash and on balance sheet cash will find its level, after which point it will grow with the growth in accounts and the growth of total client assets. Third, and this is really important, the cash is staying at Schwab. We've done a lot to create a great array of cash solutions and we've done a lot and continue to do a lot to make our clients aware of those solutions, make sure they're making smart decisions with regard -- regarding their cash. We want our clients to be happy, and we want that cash to stay at Schwab, and that we're seeing -- certainly seeing that happen. Fourth, I think when you look at sorting in isolation, you're only really looking at one part of the equation. And what I mean by that is that the rate increases that give rise to the sorting also help us earn more on the interest assets that remain here, the cash that remains here. Driving NIR higher despite lower interest-earning assets. So in the scenario that we shared, if you do the math, as an example, you'll see that we'd expect to generate roughly $500 million more in net interest revenue in the fourth quarter than we did in the second quarter despite allowing for some continuation of the client cash sorting. And the last point I would make, fifth point I would make is to the extent that cash balances decrease, it frees up capital, enabling us to buy back stock and drive EPS growth one way or the other. Hopefully, that answers your question, Ken.

Rick Wurster:

Thank you for the question. First thing I would say as it relates to your specific question, Ken, on T. Rowe, I would say that it's very early days. We're just getting that program going. We are seeing some enthusiasm for it among our clients. And we are seeing a simpler process that we've built around our clients finding the product that they want to be well received by our clients. So we're making it easier for clients to find the right product for them. In terms of specifics, I would say that we've launched the T. Rowe program into a challenging market, where we're seeing both active management and interest and equities declined to some extent because of the volatility in the market. And so we've seen some headwinds, but with those headwinds, of course, I'd bring it back to our all-weather model when active management is out of favor, passive is in favor, and we've seen strong growth in our ETF business. We're third this year in flows with relatively strong inflows. So again, we think about it as an all-weather model. And importantly, we also think about delivering the choice clients want. So the program is doing exactly what we'd want it to so far. We've got plans in the future to leverage the program to a greater extent. And we're also investing in our experience for advisers through an institutional no transaction fee platform, I think shows again our commitment to delivering for advisers. In terms of your final part of your question, Ken, I think the philosophy of making sure that we create a win-win deal for clients for ourselves and for managers is important and one that we will continue to strike across our third-party platform. So that's certainly a part of our future plans.

Rich Repetto:

Walt and Rick and Peter, I guess, first, congrats, Walt, on being named co-Chairman of Schwab. It's a great honor for you, for sure. So my first question would be just a follow-up on the sorting. And Peter, you didn't -- or one of the questions was the balance sheet or the average interest-earning assets exiting the year? And can you sort of more quantitatively sort of compare 2Q sorting to what your expectations were and the expectations, I guess, for the rest of the year as well.

Rich Repetto:

Okay. I'll look at the appendix closer. I guess a follow-up question would be for Walt. And it's on regulation and I think everybody is aware, Chair Gensler, SEC Chair Gensler made some remarks in early June about things that he was looking at, not formal proposals, but things that he was going to emphasize in regards to retail equity market structure. And I just wanted to get Walt, what sort of Schwab's view on some of the changes that at least he has spoken out in favor, including the minimum price increments, the smaller NBBO protected sizes in this order by order competition?

Operator:

Our next question comes from Dan Fannon with Jefferies.

Peter Crawford:

Sure. So thanks for the question. So in terms of the expense outlook, I shared in this scenario what the expense outlook would be for the full year. So looking at our typical seasonal pattern, you tend to see a little bit lighter expenses in the third quarter and a little bit heavier in the fourth quarter. So as you think about the math on that. I think the important point on expenses is, is we want to continue to drive down our expense on client assets through the cycle. And we want to continue to deliver operating leverage, which is a key part of our financial formula. At the same time, we want to make sure that we're investing in our clients and certainly the long-term growth of our business. That is certainly a delicate balance, but I think you've seen us manage that to achieve that overtime with EOCA declining and our margins increasing. So that continues to be our focus. Sorry, the second question -- part of your question was on -- try again.

Peter Crawford:

Sorry, the expense synergies yes. So we have roughly -- perhaps a little bit less than half of the overall expense synergies to deliver. We've said previously that the pace of delivery will be a little bit lighter now relative to the first year or 2 post acquisition. The next big unlock on those expense synergies will be as we complete the client conversions and can eliminate the duplicate systems and so forth that you should see a more meaningful portion of the expenses -- expense synergies materialize at that point in time. We continue to feel very confident in our ability to hit the expense synergy numbers that we have shared previously.

Walt Bettinger:

Yes. That's -- it's a good question. So right now, I think the pipeline is as robust as we've ever experienced. But I believe your assumption is not an inaccurate one that when you have a more difficult equity market, that it is probably a little bit more difficult for advisers to move to independents, but it's probably a lag factor, which is why we're not seeing it reflected in our current book of business. I think more what you see in real time is that some investors who invest with advisers may be a bit more hesitant to move money under the management of that adviser during a very difficult market environment. So you probably get more near-term implication from that. And maybe a little bit more of a lag implication from a weaker equity market in terms of advisers moving to independents. But as of right now, our pipeline is as strong and robust as we've experienced. And we feel very optimistic about our ability to assist those advisers moving independents and moving their assets to us.

Unidentified Analyst:

I'm glad she said UBS because I did not catch the name she said. So Peter, wanted to follow up with you on the appendix and the reference cash? And just clarify some of your prior comments about sorting. I think previously on the spring update, you had indicated that a roughly 20% decline in sweep cash would be the expectation based upon the experience last cycle. And when we look at the pie chart that shows the cash breakdown, I would assume that, that 20% would apply to really just the universe that doesn't include, obviously, sweep money fund. BDA has a different profile, as you said, more active-oriented and checking and savings. Is that the base that we should be thinking about when we're applying that 20%?

Unidentified Analyst:

Great. And when we think about the 2Q experience, it's a little tricky because we had some sorting get started. You had said it was roughly in line with your expectations, which is encouraging. But there was some tax noise in there, too. When we think about the reductions in the quarter, it might have been actually partially offset by some increase in cash due to volatility. Can you maybe help us think through sorting experience to date so we can know how to calibrate for that less than 20% threshold, just so for those who are keeping score at home.

Unidentified Analyst:

Okay. Fair enough. Maybe since that's a bit of a mulligan, maybe I'll try for my second question with something a little different. You give in the appendix some greater profile of the securities portfolio, which is really great and really helpful. When we're thinking about the potential for cash needs in the coming year as potentially sorting might happen a little faster, who knows. What does the profile of maturities in the securities book look like over the next roughly 12 months, let's say? Do you have an idea or a projection about how much cash will be generated from that portfolio?

Jeff Edwards:

I'm stepping here with a couple of questions from the web console. I'm going to try to aggregate them. I think the first one here is for you, Rick. Given the recent backdrop and kind of shifting environment where have we seen clients kind of gravitate from an advice and asset management solution perspective? Where are they most interested?

Jeff Edwards:

Great. And here, maybe one for Walt. Just around, let's say, Schwab's persistent and steady business momentum through shifting environments and a changing competitive landscape over the years. What are some of the main forces you'd attribute to this steady growth, secular growth? And anything that you note that's changing or evolving on that front?

Jeff Edwards:

Operator, go ahead with the next caller.

Craig Siegenthaler:

So organic growth has deteriorated at the new retail trading platforms, and we want to get an update on the competitive dynamics in your retail business -- and really, if you could highlight what trends you're seeing from younger first-time investors.

Craig Siegenthaler:

Thank you. And my follow-up, similar topic, retail trading platforms. So now that you're finishing up digesting your last set of deals. And I know one of them is going to take a couple more years for the revenue synergies really to kick in. But how would you think about inorganic opportunities relating to retail trading platforms, especially given that you're freeing up some excess capital, where these platforms could allow you to acquire a larger number of younger clients.

Jeff Edwards:

Coming in with one other kind of set of questions from the webcast. We've got some stuff, Peter, for you around AOCI and something that's been top of mind for folks. Maybe you could quickly hit on that just to address those questions.

Jeff Edwards:

Great. Thank you, Peter. Operator, maybe we have time for one more question from the queue.

Brian Bedell:

Congrats to you, Walt as well. The -- just on to cash sorting, maybe just some clarifications on the appendix, the 6% to 10% drop in the balance sheet. First of all was that on an end of period total asset basis or average or interest -- or on interest-earning assets? And then, Peter, just your view of cash sorting past the Fed tightening cycle. So if the Fed were to stop at the -- let's say, by the end of the year, would you still expect to see a significant amount of cash sorting into 2023? Or do you think that really abates? And if I could squeeze one more in there on the BDA, I don't know if I missed this, but did you move any BDA assets over in July? And if you didn't, do you have the capacity to move $10 billion over this year?

Brian Bedell:

And if I could just follow up on the roll-off on the securities portfolio. Again, a great color on the appendix on the reinvestment rates. What are the current roll-off rates on that securities portfolio? And then do you have any update on the premium amortization from your last guidance in the first quarter?

Peter Crawford:

Yes. So thank you. And certainly, thanks, everyone, for the questions and certainly thank you all for the time today. And we clearly spent a lot of time over the last several months discussing interest rates and cash balances, sorting, trading levels. I think what you've probably heard is, I certainly -- none of us can sit here and tell you exactly how those will go over the next few months or quarters. But one thing we remain very confident about is our outlook through the cycle. Confident in our long-term financial formula, which, those of you who followed the company for a while, recall as high single-digit to low double-digit client asset growth, including 5% to 7% organic growth, leading to a similar level of revenue growth. Expanding pretax margins through scale and expense discipline, which creates low double-digit earnings growth, which plus some amount of capital return creates mid-teens EPS growth. That formula remains as relevant today as ever. So you want to put all together what you see as a company poised to combine strong revenue growth over time with significant capital return. But also, I think this goes back to what Walt said, a company that isn't now and has never been satisfied, pressing ahead from a position of strength. Thank you all, and we'll look forward to talking with you again in October.

Rick Wurster:

Thank you, Walt, and hello, everyone. I'm thrilled to be here today to share an update on the progress we have made this year to advance our key strategic initiatives. Walt talked about consistency. Our actions continue to be guided by our Through Clients' Eyes strategy. With that as our North Star, we're focused on the 3 actions that you see on this page

Now despite some of those challenging dynamics, we were able to deliver financial performance that was a bit below last year's record level but still quite solid. As we said previously, with the acquisition of Ameritrade, we are more exposed to dynamics that can fluctuate in less predictable ways:

trading behavior, margin utilization and securities lending to name a few. In Q1, the risk off sentiment among clients impacted all these drivers and weighed on our results, resulting in revenue that was down 1% from the unprecedented Q1 of 2021. Now we limited growth in adjusted expenses to 4% year-over-year, which produced an adjusted pretax margin close to 45%, a 26% return on tangible common equity and $0.77 of adjusted EPS.

Let me close with a few thoughts. It's obviously been a turbulent week for the stock, as Walt referenced and frankly, a turbulent start to the year. And we're cognizant of the impact that has on all of you, our owners. At the same time, we continue to focus on the things that we can control. And the measures that we look at as indicators of the value of the business have stayed remarkably consistent:

organic growth, whether measured by net new assets or new accounts; our Net Promoter Score or what we call Client Promoter Scores, which have reached new highs despite the market turbulence; our TOA ratio and the wins we see from competitors; and the progress we're making on our strategic agenda. Those are the most important barometers regarding the health of the business and are all giving us confidence that we're on the right track.

Jeff Edwards:

Great. Thank you very much, Peter. Let's go ahead and turn to the phone lines. Operator, first question, please?

Kenneth Worthington:

So you mentioned that you're building cash on the balance sheet in part as a function to prepare, I think for cash sorting is how I interpreted it. And there is a benefit of being able to invest for higher rates in the future. How much cash do you want to or feel you need to have on hand in coming quarters to meet these needs? And is this 15% level that we saw in the first quarter the right level that you would expect to be at in future quarters? Or should it go higher before it starts to go lower?

Peter Crawford:

Yes. Well, as you said, we don't -- we definitely don't try to time the market. So it really is a function of what we see with that client -- what we see with the rate environment, what we see with that client activity. I do expect that we'll deploy some of that cash over the next couple of quarters, but we'll likely be deploying that in -- or continue to deploy that in securities that have a relatively short maturity so that we have a lot of paydowns and maturities in the next 2 or 3 years.

Operator:

And our next question is from Craig Siegenthaler from Bank of America.

Peter Crawford:

Sure. So I guess the short answer, Craig, is it depends. I think that it's certainly conceivable that we could cross within the next couple of quarters. It's also conceivable that if the client cash sorting evolves in a manner consistent with what we saw in 2015 through 2019, that could slow the balance sheet growth or potentially even reverse some of that balance sheet growth and push that date further back.

Peter Crawford:

Well, I mean, again, our capital levels, we have buffers on top of buffers on top of buffers. So we've got -- we feel like we're sitting on a lot of capital even sitting where we are today at 6.1% Tier 1 leverage. We certainly wouldn't want to do anything that sacrifices the long-term growth of the business. So the idea of saying, "Let's somehow cap our growth below $700 billion," I wouldn't necessarily see that as a path that we want to pursue.

Devin Ryan:

So I guess another question here just on the balance sheet. So on the NIM commentary for 4Q by kind of mid-1.80s, what is the expectation at that point for prepay amortization? What's the assumption there? How much drag, I guess, is left? I think you have about 50 basis points today. So what's embedded? And then in terms of just the mix and thinking about kind of the loan book, you obviously have some good traction on mortgage lending and refinance activity as you guys talked about. It seems like that might slow here just in the rising rate environment. So maybe talk a little bit about kind of the outlook for growing the loan book. And are there other products that could offset that? And even would you do an acquisition to kind of accelerate other areas of loan growth?

Devin Ryan:

Yes. Great. Okay. A quick follow-up. Obviously, I think enthusiasm around the personalized indexing and the direct indexing opportunity. Is there any way to frame out kind of the trajectory and opportunity there, kind of how you think about the impact of Schwab or the size of the market over time as that continues to scale?

But I also believe that this is a product that if you walk down the street and ask someone, "Hey, do you want a direct indexing or when people come into our offices?" they've never heard of the product before by and large. And so one of the real powers I think that Schwab brings to the table as it relates to personalized indexing is I think success is going to take 3 things:

one, it's going to take strong indexing skills; two, it's going to take digital capabilities; and importantly, number three, it's going to take distribution. Because in the near term, this product is going to have to be sold. It's going to have to be explained. The benefits are going to have to be shared with clients as to why that's helpful. And so I really think we're in a unique position, and we're excited for the growth.

Operator:

Our next question is from Rich Repetto from Piper Sandler.

Peter Crawford:

Well, thank you, Rich, for the question. I do think that's something we're likely to include when we have our July update as we get further into this cycle. As you point out, the next couple of Fed funds increases, we'll get the benefit, of course, from the increase itself plus the impact on the money fund fee waivers. Those money fund fee waivers should all be gone after the next, certainly, one or potentially 2 Fed increase. I think probably the next one, they're pretty much all gone at that point.

Peter Crawford:

Well, we use that -- we mentioned that, Rich, as a reference point, not as a prediction -- there are a number of different dynamics this time, this go around, right? We're not going through the bulk transfer. We're not executing the bulk transfers as we did last time when those bulk transfers were a catalyst for some clients to take action with regard to their cash.

Brennan Hawken:

Actually sort of a follow-up on the -- Richard's questions. When we think about the BDA and you think about sweep as a percentage of client cash as you laid out, would you include the BDA when you think about a comparable set? I'd think that you wouldn't, but just want to clarify. And then the BDA that you pulled into the balance sheet here this quarter, is that all we should expect for 2022? Or is there more optionality? I know there are some wrinkles in that agreement, which could allow for some additional transfers.

Peter Crawford:

Yes. That's a really interesting question. So our securities lending operation tends to focus more on the hard-to-borrow stocks. And so we're lending out stocks that oftentimes have a 99% rate -- annualized rate. So certainly very -- these are very high-spread securities, very much in demand that can generate a lot of -- certainly a lot of revenue.

Peter Crawford:

Sure. So I mean there's a number of different -- certainly a number of different dynamics at play there. So then again, the next couple of rate hikes, the $54 million of money fund fee waivers, we'd expect those to be completely eliminated by -- assuming the Fed follows through, be completely eliminated by the end of the second quarter. So going into the third quarter, we've got the full fees that we're capturing there.

Operator:

Our final question today is from Brian Bedell from Deutsche Bank.

Peter Crawford:

Sure. So let's see. Let me again take the second part of the question first. Executing on the transfers on the IDAs, as I mentioned, I wouldn't expect that we're going to do -- we already took the $12 billion, $13 billion thus far this year. And I wouldn't expect us to do a lot more on the IDA migrations this year. We'll have to see you kind of where we are next year as we get into our planning and how we think about that.

Brian Bedell:

Great. And my last question is for Rick, actually. Given the high net worth expansion strategy, I guess, thinking also about advisory services in the RIA business, can you talk about making alternatives available on your platform, obviously, with the theme of democratization of alternative investments and still some 1% to 2% types of allocations and clamoring for that? Are you seeing demand from your clients, your advisers as well? And are there plans to add a lot more capabilities for alternatives on to your platform?

Walt Bettinger :

Thank you, Rich and good morning, everyone. Thanks for joining us. During certainly what continues to be extraordinary times we all recognize that we're living in a unique and challenging time for everyone. And my best wishes for good health and safety go out to all of you who are joining us on the call. It's really times to like these that have focused and consistent strategy means more than ever, the noise around us from a struggling economy a record low interest rates, a degree of political turmoil can shake those less committed to a sound long term approach. At Schwab, we remain as committed as ever to our two client side strategy and our key strategic initiatives, scale monetization and segmentation. Our approach is winning in the market. And we believe that our combination with TD Ameritrade will deliver outstanding financial results along with furthering our competitive position in key client segments. As I've said before, we are on offense. And the response from our clients with record and near record metrics supports the efforts that we're making to offer world class value service advice and transparency. Now as of October 6, we have successfully completed the four acquisitions that were announced in the past 15 months. Each of these transactions are strategically important for us, but of course in different ways and each slots in perfectly with those key strategic initiatives I mentioned previously of scale monetization and segmentation. USAA adds to our scale of existing clients. And our exclusive Wealth Management referral arrangement that we have with USAA continues, adding scale for us and should be effective for years to come. Motive delivers highly talented technologists along with a platform that is helping accelerate our efforts to deliver thematic investing, as well as direct indexing to investors and advisors. And of course, that will in time contribute to our efforts around monetization. That is good for clients. Wasmer, Schroeder accomplishes a similar goal, monetization that's good for our clients, but with maybe a more traditional approach to investment solutions in the fixed income area, and of course their expertise in tax smart fixed income investing is likely to prove especially valuable, as tax rates potentially become an increasingly important consideration for investors after the election. Of course, the TD Ameritrade acquisition not only builds tremendous scale, but it also delivers outstanding capabilities that serve our segmentation objective. We know that they had a best in class platform for traders, several capabilities that are highly valued within the investment advisor community also. This slide graphically illustrates the scale impact of the TD Ameritrade acquisition. Also it shows the powerful combination of our firm's with net new assets in excess of $75 billion, and almost 1.5 million new brokerage accounts in the third quarter alone, keeping in mind that that third quarter included tax payments, unlike in most years. Now, Peters going to speak a little bit later regarding the near term and longer term financial benefits of our transaction. But for now, I will simply say that they are significant. Now as strong as our asset gathering and overall financial performance has been we see many untapped opportunities to drive significant asset and revenue growth by leveraging our scale, better monetizing assets in ways that are good for clients, and developing leading offers for key segments of our client base. The M&A has played an important role in pursuing these initiatives. But M&A activity is only one way that will drive these efforts forward with all three key initiatives contributing to our strong growth. Through the first three quarters of 2020, and of course, this is looking exclusively at Schwab results, clients and trusted us with core net new assets in excess of $160 billion, a 5% organic growth rate, which is consistent with our long term results. Included in there is an all-time monthly record for the month of September with $20 billion in core net new assets. I remember when we reached $2 trillion in firm wide assets, the number one question I received was always could Schwab continue to capture an organic net new asset growth rate in that 5% to 7% range even on such a large base. Of course, we were confident that we could back down and we remain equally confident today. That'd be sure we talk about a range because as we all recognize that there will be some variability driven by market conditions, as well as employment conditions and those contribute to either accelerating or decelerating money in motion, and therefore, new assets in our category. I think what's clear, though, is what won't change is our ability to keep winning assets, and continue gaining market share, regardless of whatever the environment is around us. Our organic efforts around scale are also paying dividends in terms of operating efficiency, with almost two thirds of our client households now digitally active, over half of the arrays we serve are leveraging our digital service capabilities. And over three fourths of our client base is now enrolled in paperless reporting. Here is an example of where the pandemic that we're dealing with has actually contributed to more rapid adoption of digital capabilities. And of course, digital adoption and digital initiatives are what I like to refer to as triple wins. And by that I mean that they result in a better experience for our clients through both faster processing as well as a richer overall experience. They contribute to lowering error rates, and also lowering costs for Schwab. And, of course, that in turn benefits both our stockholders as well as our employees as our employees are able to engage in more value added interactions with our clients. Let me emphasize though, that adoption of digital does not mean that people and specifically our branches in our service centers don't matter. In fact, arguably, they matter as much or more than ever. What digital adoption does mean is that employees can focus on relationships, more than simply processing transactions. And of course, that's exactly what we want, what our clients want, and what we mean when we talk about bringing together really the best of people and technology to our no tradeoffs value proposition. We've demonstrated that when we offer clients and this is both on the retail side and on the RA side, when we offer them high quality solutions at very competitive prices, they vote with their fee [ph]. Use above Schwab managed ETFs is growing again, after a slow down earlier in 2020, largely due to tax last harvesting. Clients continue to enroll in our retail advisory programs, we now have assets they're exceeding $360 billion and clients are increasingly turning to Schwab bank for their lending needs, with loans up over 30% from one year ago. Our success with our asset management and lending products also fuels our confidence in continuing to extend our capabilities. And part of that is ensuring that third party managers provide appropriate compensation for the many services that we provide them and the investors who invest in their products through our platform. These types of efforts will further diversify our model and decrease our reliance on spread based revenue. Whether it's from ongoing negotiations with fund complexes that rely on Schwab to provide shareholder servicing, without helping us cover those costs, to substantial opportunities in thematic investing and direct indexing, to the growth opportunity in the area of retail advisory services and last but not least to the opportunity to deliver premier fixed income advisory to clients at a great value through in house Wasmer Schroeder. At the same time, we're working hard to build and deliver increasingly segmented capabilities to delight clients of all sizes and types. Whether they are targeted at newer younger investors, which certainly gets a lot of press today, new and creative ways to invest in a more customized or personalized manner through themes and direct indexing, better serving the fastest growing segment of our retail business, which is high net worth and ultra high net worth investors. And creating new and more streamlined experiences for independent investment advisors that we serve and of course, we serve all sides, investment advisors large, small, and in between. As I've said for a number of years, the future in our industry, in our view belongs to the organizations that deliver a no tradeoffs approach to investing, great value, transparency and trust, omni channel service, a single place to meet all of it investors needs all of this from a company that is both a challenger to the rest of the industry, as well as a beacon of confidence due to our size and scale. In our words, it's no tradeoffs, no limits and all done through client size. At Schwab, we call that modern wealth management. And we think that uniquely define Schwab and is only achievable by a firm with our size, scale, and importantly our focus. In our view, our capabilities, our rather simple strategy, our enormous scale, our culture of service, and our commitment as a challenger company, to continue disrupting to benefit investors and advisors is a combination that no one else in the market can match. In our transfer of account or asset figures tell the story better than I ever could, attracting $2 from core competitors for every dollar they take from us. Strong results versus the global banks and warehouses at 2.2 to one. Strong results versus the independent broker dealers at 1.8 to one an exceptionally strong results versus the mono line fin-tech companies that were asked about so frequently at a ratio of over 200 to one. All contributing to a firm wide TOA [ph] ratio of two to one and as successful as both TD Ameritrade and Schwab have been in taking share for the past four decades the reality is we still collectively have a very small share of an enormous wealth management market in the US. So just in closing, we know that we are dealing with record low interest rates, and those create short term headwinds. Eventually we'll have relief from this pandemic. Eventually, the economy will get fully back on its feet. Eventually, our belief is that interest rates won't remain at all-time record lows. But in the meantime, we won't be here off course. We won't deviate from our through client side strategy. We won't stop being on offense with our key strategic initiatives of scale monetization and segmentation. And we surely won't stop pursuing disruptive actions that benefit clients, the very soul of a challenger. For those of you who know Schwab, well, you know that we don't measure our progress in quarters, and generally not even in years, but rather in decades. And I've never been more optimistic about what the future decades hold for Schwab. So I want to transition over to Joe Martinetto, I'm pleased that we're now in a position to begin the process that actually unleashes the potential from combining Schwab and TD Ameritrade as all of you know, Joe is leading that effort. And I know he's looking forward to sharing an initial update on our integration efforts. So Joe, let me turn it over to you.

Peter Crawford:

All right. Well, thank you very much, Joe. It's certainly great to have you back here at the business update. Well, even if it is in your words, a cameo appearance. So Walt and Joe talked about the excitement we feel about the TD Ameritrade acquisition and our confidence in how it will benefit clients, stockholders and our combined team of employees. They talked about the strong momentum we continue to enjoy in the marketplace in spite of the challenging conditions in which we operate, and the progress we're making in executing on our strategy around leveraging our scale, capturing monetization opportunities to benefit clients and creating leading experiences for key segments of our client base. In my time today, I'll talk about how that momentum helped to partially offset the current challenging market environment and especially the pressure from low interest rates. I'll also share with you the operating and financial results for TD Ameritrade for the quarter ended September 30, which demonstrate that we are joining forces with a very, very healthy business, whose continued momentum in this environment leads both to stronger financial performance and an even more resilient business model. And finally, I'll provide an update on our Q4 outlook, incorporating TD Ameritrade for the first time and I'll also provide some initial thoughts on 2021. I think the overall message you'll hear is that we're clearly well-aware of the environmental challenges we face, some of which are clearly impacting our financial results. And we recognize there may be some difficult weeks and months ahead. But at the same time, we couldn't be more optimistic and more confident about the future for this company. And feel like we have crossed a bit of an inflection point, given our strong momentum in the market, our early experience and successes with TD Ameritrade acquisition and integration and finally the progress we're making both organically and via M&A around our strategic priorities. We'll talk a lot around here about focusing on what we can control. We can't control the equity markets whose recent performances has become a tailwind for us and we cannot control the interest rate environment -- clearly a very formidable headwind. But what we can control is that no trade-offs positioning that Walt talked about, which when coupled with high investor engagement have led to enormous year over year increases in new to firm retail households. And in a business built on trust, we also work really hard to maintain that trust giving our clients confidence in entrusting their assets with us, including their uninvested cash, which is up over 50% year-over-year. Given that mix of some tailwinds and some strong interest rate headwinds, it's not surprising that our revenue was down 10% year-over-year in the third quarter. This was entirely due to an 18% decline in net interest revenue. Average interest earning assets rose at remarkable 45% year-over-year, but that wasn't enough to overcome a 105 basis point reduction in our net interest margin due to Fed cuts, an increase in premium amortization and the impact of investing nearly $100 billion of new cash at rates lower than our average portfolio yield. Asset management and admin fees were up 4% year-over-year, despite the return this year of money fund waivers, which totaled $44 million in the quarter. And trading was down 12% despite a more than doubling of trading activity due of course, to last year's commission reductions. Now expenses were up roughly 6%, but that would have been only about 2% without the acquisition and integration expenses for TD Ameritrade and the incremental acquired intangible amortization related to the USA transaction, Motif and Wasmer acquisitions. And even that modest adjusted expense growth includes the ongoing expenses of those three new businesses, which together contributed a little more than two percentage points of growth. Put it all together, and we delivered a 36% pretax margin and a 39% adjusted pretax margin. A 10% return on equity and a 12% return on tangible common equity, which continues to be adversely impacted by a now $5.7 billion net unrealized gain within our available for sale portfolio. Our balance sheet continues to grow due both to our substantial organic growth and client allocation decisions. As we said previously, we typically see client cash on the balance sheet increase more quickly when interest rates are low. As clients see less benefit and utilizing purchase money funds, CDs and other fixed income instruments leaving more cash in their account and a greater portion of that cash in our bank and broker dealers sweep options. Following a huge surge in client cash at the end of the first quarter, we've seen somewhat slower but still quite robust growth and sweep cash balances during the last two quarters, including a 6% sequential increase in Q3. That balance sheet growth reduced our Tier 1 leverage ratio to 5.7% for the third quarter. While that's below our operating objective of 6.75% to 7%, it's still well above the regulatory minimum. And as I'll discuss in a moment, the TD Ameritrade acquisition is quite helpful in enabling us to rebuild our capital ratios more quickly than we would be able to do otherwise. Now the concern whenever you buy a business and have an extended timeframe between signing and close, is what is the state of that business when you finally take over? Judging by the operating and financial results for TD Ameritrade and the quarter ended September 30, it's clear we're bringing onboard a very, very healthy business and one that is performing exceptionally well in the current environment. And for that, we certainly should thank the thousands of TD Ameritrade employees who've been working so hard over the last 10 to 12 months. Now before I run through the few highlights from the TD Ameritrade seller quarter, a public service announcement or promotional announcement. As Rich noted at the outset, there are additional standalone operating and financial information for TD Ameritrade has been posted to the financial report section of Schwab's Investor Relations site. Now you can see the strong operating metrics here highlighted by a significant momentum in the market, 20% increase in net new assets, and a greater than 300% increase in net new funded accounts and positive indicators of course of investor engagement with a 355% increase in trading activity and a 23% increase in average margin balances. That's substantial business growth and higher investor engagement translated into robust financial performance. Revenue up 5% as a surgeon trading and margin balances more than offset the impact of lower interest rates. Operating expenses down 2% and operating margin above 50% and a 16% increase in earnings per share to $1.16. While both firms have been performing quite well independently, the combination creates an even more resilient and potent company. Merging our financial results for the third quarter would suggest a company with over $4 billion in revenue, a pretax margin of 45% plus and approximately $53 billion in stockholders equity. And the mix of revenue of course is different than what Schwab has experienced in the recent past. With just over 50% coming from spread-based revenue, net interest revenue and what you see on the pie chart as the BDA fees, 24% coming from asset management and admin fees, and now 21% coming from trading. Now those of you who followed the company for a long time have heard many of us, myself included, talk about our lack of reliance of trading as being a good thing. But that was when trading was facing secular headwinds in the form of ever-decreasing equity commissions. But that pricing erosion now largely off the table, the greater exposure to trading is clearly a benefit as it increases our diversification, add less capital intensive revenue streams, and create an even more all-weather business model as is being demonstrated in the current environment. Now this year has clearly unfolded differently than the way any of us anticipated several quarters ago and even relative to the scenario we share back in April. The equity markets have continued to rise much more quickly, interest rates both short and long term remain at historically low levels. Trading activity on the other hand is provided nice lift and our balance sheet growth has already surpassed the upper end of the range we've communicated. Our performance to date reflects that mix of tailwinds and one very stiff headwind. Revenue has been tracking a little bit on the lower end of the range. Despite key drivers of our workload, all increasing sharply, new accounts, trade calls, et cetera, we've managed to limit adjusted expense growth to the lower end of the range. And in doing so have produced an adjusted pretax margin just above 40% year-to-date. Of course the scenarios we share previously excluded the impact of TD Ameritrade. But with the closing now behind us we're in a position to communicate a scenario for the fourth quarter, which reflects the combination. So for the full year, we now expect year-over-year revenue growth to be positive 7.5% to 8%. Now that assumes modest market appreciation from levels of late last week earlier this week, continue to elevated trading and stabilizing prepayment speeds [ph]. It has also based off an expectation that net interest margin for the fourth quarter should be in the 150 basis point range plus or minus, but perhaps 10 basis points or more above where our average for Q3. A function of absorbing TD Ameritrade non-BDA related to interest earning assets, [indiscernible] margin book onto our balance sheet. And for those of you familiar with the way that TD Ameritrade historically report NIM, I know that our measure of NIM excludes those BDA balances. We'd anticipate full year adjusted total expense growth to be 15.5% to 16.5%. That includes roughly 4% year-over-year growth for the Schwab standalone business consistent with a scenario we discussed back in July. It also reflects the initial synergy realization that Joe described earlier in his update, but of course exclude the acquisition integration costs and as a reminder, we currently anticipate roughly 30% to 35% of the total integration spend to occur in the first 12 months post-closing. Those numbers also exclude any amortization of acquired intangibles which we expect will be roughly $445 million in the fourth quarter. So putting it all together, the scenario would result in a 25% to 35% accretion in adjusted EPS, relative to our Q3 results. Turning our attention to the balance sheet. We'd expect our balance sheet to grow by a bit over 70% driven by the addition of TD Ameritrade's $70 billion balance sheet and continued growth and client cash balances which typically see even higher flows in the fourth quarter. Now the acquisition not only is immediately and significantly additive to EPS, it's also immediately accretive to our capital ratios as well. I mentioned earlier that our Q3 Tier 1 leverage ratio is 5.7% based off of average assets and the spot ratio given the fact that the balance has grown over the quarter, based off the end of period assets was probably 10 to 15 basis points lower. But the acquisition of TD Ameritrade immediately boost that spot Tier 1 leverage ratio to nearly 6%. And the capital benefit from the acquisition extends beyond the closing date. Given our desire to keep the ratio preferred to Tier 1 capital below 25% and the absence of preferred equity and TD Ameritrade's capital stack, the acquisition creates additional preferred capacity, which we'd expect to access in the coming quarters. And by adding incremental earnings, the acquisition increases our organic capital formation as well. Despite the interest rate environment, we're feeling very excited and very confident as we look ahead to 2021. We expect the momentum that both firms have enjoyed to lay the foundation for continued success next year. And the financial benefits that we that we expect to reveal themselves in our Q4 results should continue to build as we capture more of the expense and revenue synergies. And while we'll share our scenarios for 2021 at the February business update as we always do, we hope you can appreciate the potent firm we've created here. $6 trillion in client assets, 29 million brokerage accounts, and $6.5 billion to $7 billion of adjusted pretax income, just analyzing our combined third quarter and potential fourth quarter results. And importantly with interest rates and prepayment speeds appearing to stabilize, we can see after several quarterly declines in net interest revenue the potential for sequential increases in NIR, assuming we continue to see organic growth and clients we've cashed balances consistent with recent months, as well as similar levels of margin balances. And even as we work hard to integrate TD Ameritrade as quickly and as effectively as possible, we'll also further advanced our strategies around scale, monetization and segmentation. And finally, we're ever mindful of our capital position, ensuring that we have adequate capital to support the organic growth of our balance sheet, as well as the transfers from the IDA, which can begin as early as July 1 of next year. Now let me close with a few thoughts. We have spent a lot of time discussing the acquisition of TD Ameritrade and clearly with good reason. We couldn't be more excited about what it means for this company, for our clients and for our stockholders. But while it's true that the acquisition marks the new chapter in Schwab's history, it's also only a piece of the story. We're still pushing forward aggressively on multiple other fronts that Walt described, capturing opportunities to better serve our clients, confronting our competition head on, and doubling down on our efforts to drive greater efficiency and productivity throughout our business. And while it's also true that the acquisition is transformative, increasing our scale, broadening our capabilities, it won't fundamentally change who we are or how we operate, our focus on clients, the discipline with which we manage the business, our fundamental financial formula, and our long term orientation. This is what has made us successful for over four decades and we're confident [indiscernible] successful in the next decades to come. With that, let me turn it to Rich for some questions.

Operator:

Thank you. We will now begin the question and answer session. [Operator Instructions] Our first question comes from Dan Fannon with Jefferies. Your line is open. You may ask your question.

Peter Crawford:

Dan, so let me take that. This is Peter. Let me take that in a couple ways. First, the near term accretion math has gotten better, frankly in the last year given the relative earnings trajectory of both TD Ameritrade and Schwab. In terms of the synergy realization, I would say that if anything, the synergy opportunity has increased. On the cost synergy side, despite the environmental changes, if you will, I don't think our thinking around the cost synergy opportunity has fundamentally shifted. We still think that those numbers are very achievable and largely are to be derived in the similar places that we had expected a year ago. On the revenue side, Joe mentioned that a large portion of the revenue synergies are coming from rebanking the balances in the IDA. Those balances at the time of the acquisition were I think roughly $115 billion. And today they're over $150 billion. So that benefits us in a couple of ways

Operator:

Thank you. Our next question comes from Will Nance with Goldman Sachs, you may ask your question.

Rich Fowler:

It sounds like repeated question,

Will Nance:

Got it. That's very helpful. And then, secondly, kind of on the same topic, I'll keep asking few other questions. As we think about the continued growth in the securities portfolio, you've had a big opportunity over the past year or so to continue to shift the mix towards fixed rate securities and away from the floating rate allocations, just maybe looking for an update on how long that can kind of continue, when you would kind of need to start keeping that balance in line and what the rates on those sorts of securities look like in today's environments, I guess, from a credit perspective.

Will Nance:

That's helpful. Thanks for taking my questions.

Mike Carrier:

Good morning, thanks for taking the questions. What -- it seems like you guys offer great value in many areas, and you've been innovative in the different offerings. But one of the things you mentioned is kind of on the higher wall side, the RIAs, and when you think about the more holistic and full service types of offerings, how do you think about Schwab offering you say lending, insurance, or other offerings that can be increasingly in demand meaning, you think about that on a proprietary basis, third parties, but wanted to get your thoughts there?

Mike Carrier :

Yeah, both, but I would say probably you're going to see more demand through the RIAs.

Mike Carrier:

Great. Okay. And then, Peter, just one clarification. I think that you mentioned that the NIM for the fourth quarter around the 150, and I don't know if you had to break out between Schwab and Ameritrade and not looking for that going forward, but just given the moving pieces this quarter. I don't know if you can provide some context, you know, on the moving pieces. Thanks.

Mike Carrier:

That makes sense. Thanks.

Steven Chubak:

Hi, good morning. So I wanted to start with a question just on the election impact. There's some speculation that blue wave could drive steeper yield curve, which will certainly be beneficial, but also could come with the cost of either increase in tax rates and tougher regulation, whether it's DOL, transaction tax, higher capital requirements for banks, which will clearly present some headwinds. And I was hoping you can just provide some perspective on how you're thinking about the different election scenarios and what the potential implications could be?

Walt Bettinger:

Sure. I think -- I think most of our emphasis right now is on making sure that we're here for our clients during -- during what could prove to be a volatile election period. It's -- I would say that our capability to speculate on the outcome of this election is no better than anyone else's, and, so I don't think we are planning on strategic changes at this point in time. I think all the things that you mentioned, are accurate if in fact, you get the outcome for the election that you referenced. And we would at that point in time have to figure out how the interplay between a steeper yield curve as well as some of the less favorable things for our business that you mentioned, if they end up occurring. But right now all the emphasis is really around making sure that we have system availability, capacity, service for our clients, as we go into a period that could be very volatile. And it may be an extended period before we know the outcome of the election, at least, for some offices. Peter, I don't know if you have anything you want to add to that?

Steven Chubak:

Thank you both for that perspective. And just for my follow up, I wanted to ask on capital. Following the deal use or at least with the completion of the deal you spoke to the capital accretion, Peter, and the additional preferred capacity getting you back well above 6%, but just given your target of 6.75% to 7% coupled with the fact that you continue to see really strong organic cash growth, it looks like by the time you can onboard the BDA in July of next year, that you're still going to be below that target level and was hoping you could speak to how you're managing to those capital constraints, how it might impact the decision making to onboard the BDA as quickly and how you're just balancing that pace with a commensurate capital drags?

Steven Chubak:

Thanks for clarifying that Peter, much appreciated.

Brian Bedell:

Great. Thanks. Good morning, folks. Let me just start with the interest rate, headwind dynamic. Peter, you mentioned the 90 to 105 basis points, fixed reinvestment rates, maybe you could share the floating reinvestment rates if you continue to keep that at 15%. And then any commentary on money market fee waivers into 4Q, given the exit run rate was higher than the entry run rate and tricky.

Brian Bedell:

Okay, got it. And then a question for Walt. Longer term on the interest rate dynamic, if we are in a lower rate environment for much longer than anyone thinks, what are your thoughts on globally migrating the revenue mix away from interest rate sensitive types of areas? And how would you -- how are you thinking it's possible to build those more sustainable fee revenue areas and maybe that weaves into some of the revenue synergies that I'm sure we'll talk about more in February? But how are you thinking about trying to change that mix, if at all?

Brian Bedell:

Okay, thanks for your color. Thank you.

Devin Ryan:

Great. Good morning. First question here just on expenses. And I know we're going to find our point on this. But if we think beyond the immediate $250 million to $300 million synergies here, if you can just help us maybe bridge a bit to the to $1.8 billion to $2 billion, and just remind us of some of the key milestones that are going to be required to hit those types of levels. And just also, if you can, whether you're feeling the same around the timing here because obviously, the range is the same, but a lot has changed. It was previously stated to just try to think about the timing of expense synergies relative to what you guys were thinking when the deal was announced.

Devin Ryan:

[Technical Difficulty] through some of the account growth metrics and just terrific momentum here in the business. I'm curious, just with the deal closing, whether there's been any change in trajectory within either business in the retail side or institutional side. Also just with the RA custody, whether or I guess more what you're telling advisors, especially your advisors that have assets and accounts custody on both platforms, and just some curious kind of whether it's just business as usual, or if there's anything else that's going to change just with the deal formally closing here.

Devin Ryan:

Okay, terrific. Thank you very much.

Chris Sadler:

Good morning. Any early update on the revenue synergies which you would outline particularly payment for overflow? I'm sure you've had a chance to kind of at least get an early look at the extent to which Ameritrade's greater order routing revenues due to product mix technology or just different philosophies.

Chris Sadler:

Okay, thanks, Joe. Then just one other one on the pricing landscape or marketing landscape. Well, you noted a few quarters ago that you had seen some increased competition around some of the offers that some larger banks were offering to try to drive client acquisition. Just any update on that front will be great.

Chris Sadler:

Okay, thank you.

Brennan Hawken:

Hey, good afternoon now, I guess. Thanks for taking my question. At least good afternoon on the east coast. So it seems as though near term accretion from the deal is better but it didn't sound like you were changing the long term. In fact, it sounded like from an expense perspective, you specifically didn't change the long term. But is it right for us to assume that the experience that you're having here in the early days is clickable and that the better than expected accretion off the bat, therefore, would also translate into better accretion in total? Or is it just that things are happening maybe a little sooner than expected and it's just timing? Sorry, if you touched on it, that just wasn't completely clear to me.

Operator:

Thank you. Next question comes from Craig Siegenthaler with Credit Suisse, you may ask your question.

Walt Bettinger:

Craig, I'll take that. Unfortunately, this is going to be one of those questions. So I'll just say upfront, I'm not going to answer to your satisfaction. We're not going to discuss timing on the introduction for competitive reasons nor are we going to discuss which organizations might go first, but we certainly have every intention of making it available to both. That'll be used slightly differently by retail and by the RAA and so the determinant will be not trying to benefit one segment of our business over another, it'll just be which one we can get it to quicker because of the way they'll utilize the product.

Operator:

Thank you. Next question comes from Chris Harris with Wells Fargo. You may ask your question.

Peter Crawford:

Is it $250 million to $300 million we talked about today or already accomplished? They will show up in the run rate beginning in Q4. A little bit of timing there and that some of the staff reductions here have happened through October, but they will start to show in Q4 before embedded in Q1, those are done and executed on. And we're not, at this point, providing target dates for account conversion, but you start thinking to some of the other comments here around the 18 to 36 months and you got to get the accounts conversion in that window, with the time to be able to do some of the clean-up at the back end, to be able to get to the full synergy number. Then you can start to back into what some of our thinking is probably around the conversion date.

Operator:

Thank you. Next question comes from Kyle Voigt with KBW. You may ask your question.

Joe Martinetto:

So my guess is, we will be in a position at that winter business update to write more details on all of these components. From a revenue perspective, I would echo some of Peter's earlier comments to say that we were pretty enthusiastic about what we're finding. And today thinking through some of the pricing and recognition, implications of decisions that we're going to have to face around how we bring these organizations together. But I would say, we're feeling optimistic about what we're seeing and what some of the recognition opportunities might look like. As you look forward to post conversion, I'd say that a couple of big buckets that we're going to have to dimensionalize here are around being able to provide some of the better trading opportunity in the systems, the TD Ameritrade has built to the Schwab client base, as well as being able to provide some of the more extensive wealth management capabilities the Schwab has built, as the TD Ameritrade existing client base. And if I had to guess a little bit today, I would say, we might see those trading benefits happen a little bit faster than wealth management. Wealth management has to be more of a relationship-type activity that we expect to build over time. We do think that those opportunities are significant, that may take a little longer recognize post conversion.

Operator:

Thank you. And this question comes from Michael Cypryss with Morgan Stanley, you may ask your question.

Joe Martinetto:

Walt, do you want to start us off on new customers?

Michael Cypryss:

And just maybe a follow up on the lending side, just hoping you could just give a little bit more color around some of the initiatives there, and how meaningful could this be as you look out over the next couple of years? On the lending side, more pledged asset lines among other lending products that you have, that you're prioritizing or even thinking about bringing to the marketplace?

Peter Crawford:

Yes, I can take that. We're quite pleased with the momentum we have on the lending side, if you look at -- I think our overall bank loans are up 30% year over year. Of course, that's during obviously a refinancing wave. But with our investor advantage pricing, that has been a huge win with our clients and our client-facing employees and just exceptional, exceptional pricing, while still offering an attractive economic benefit to us and helping us to cement those relationships with our key clients. Some of them was other firms that would like to do business with them at bay. I think there's certainly more opportunity there. And there's also more opportunity with the pledged asset line and having greater penetration there. If you look at where we are with pals [ph], we're certainly underpenetrated relative to what you see at the wirehouse firms. And I would say that's true both of our legacy Schwab clients and even more true with the TD Ameritrade clients, and the opportunity there is very, very fertile. So we're very, very excited, very enthusiastic about our ability to continue to grow that in a way that is very consistent with our strategy. I think we're out a time and I just thought I should just close with that. And just thank all of you for your questions today. I just want to close with a couple of thoughts and really reinforce something Walt said earlier, clearly we know that interest rates move in cycles, and this low rate environment will end at some point in the future. And we'll see the return to more normalized rates. But we're certainly not just waiting around for that to happen. And I'll say, while we're quite pleased by the near-term EPS benefit, and the acquisition supports that 25% to 35% number I referenced earlier. It's really the long term prospects that make us even more excited. And that's why we're really pressing ahead very, very aggressively, but in a way that's entirely consistent with our strategy, our purpose and our DNA. As those actions begin to bear fruit, in some cases quickly and other cases more gradually over time, it just reinforces our confidence and our enthusiasm. We'll look forward to seeing all of you virtually most likely, possibly some in person at the February business update. Stay safe everyone and thank you for your time today.

Walt Bettinger:

Thank you, Brittany. Is this a remote? Good morning everyone. Thank you for joining us, being here in San Francisco. For everyone on the webcast, thanks a lot for being with us this morning. I'm going to take a little bit of a different approach today in my segment than I have in the past. Let's see if I can work clicker. I'm going to start with a little bit of a backward look as we try to evaluate the picture of where the company is today. So starting with a backward look and then looking realistically at the competitive environment, the intense competitive environment that we operate in today. And then examining how we look to navigate that competitive environment, so that we're in a position to reward our clients as well as our stockholders. And then at the end, I'll go through some results of the way that we have navigated that environment. So a little bit of a reverse approach than we've taken in prior years in evaluating and sharing with you about where Schwab stands today. So this first slide just shows a bit of history both growth in assets, I think. I think that chart on the far left would work out to somewhere around in 11% CAGR. Clients over the course of the last decade are now paying us about 14% less per dollar of their assets overall than they did a decade ago. At the same time, our EPS has grown. And I think that that chart at the middle bottom would work out to about a 15% CAGR in terms of growth in earnings per share. And at the same time, we strive to take bold actions that are consistent with our Through Clients’ Eyes strategies. A couple – last year, of course, the move to zero online trading commissions for equities and ETFs, the introduction of a subscription based pricing as well as our intelligent income and then two acquisitions. I'm sure we'll spend a fair amount of time on today. At the same time, what we recognize is this is not the financial services environment of a decade ago. This is a hyper competitive strong organizations, no one is sort of on their heels. No one is trying to recover at this point in time from a particularly difficult tenure in their company's history. We compete with a broad array of different organizations from large integrated banks, again who are very strong today and aggressively looking to push into our traditional space serving mass affluent, private companies that may operate at a different levels of profitability or scrutiny or even regulatory oversight than we may, firms that are backed by venture capital that that may not be operating with a profitability motive or a profit motive in mind at least in the near-term. As well as some entities that we compete with, of course, who don't pay corporate income taxes, giving them a structural advantage. So it's a hyper competitive set of organizations that make up the world in which we operate. And of course, as a result, some of which has happened to us, some of which we have created. Pricing dynamics in our industry continue to lean more and more to the consumer with aggressive movements down in a variety of different pricing, both explicit pricing like commissions as well as implicit pricing, for example, fees for underlying asset management. And then lastly, we live in a unique world in which the willingness to write very, very large checks to clients in an effort to attract their assets is growing and I'll show a little bit more detail around that. Just to take one look at this in sort of an unveil, we decided to look at digitally enabled platforms starting back in 2009 and you can see some of the organizations that were involved in introducing these types of digitally enabled platforms and then how it has grown to a point that many of you may recall when I first talked about these platforms a half dozen years or so ago from this stage. I said that every financial services firm will eventually have some form of digitally enabled platform. And of course I think we can see that unfolding. What's come in recent years though is that these large integrated banking organizations have become much more aggressive in the mass affluent space with organizations like Goldman Sachs and JPMorgan Chase and BofA Merrill getting into our space, offering competitive pricing and competitive array of services. When you put that into the backdrop of what does it mean for the consumer, this is one of the most impactful slides that I've seen in a long, long time. And it begins looking back about 45 years ago at three different types of experiences that a typical consumer might have from a financial standpoint. So it starts by showing at the top the cost of investing, the overall cost of a $250,000 portfolio. And we have all the details behind this in an appendix. Of course, you'll get all the slides available to, was around $8,000 in 1976. Compare that to the annual cost of a four year private college education, which was just below $4,000 and the cost, the annual cost for healthcare for an individual about $700. It's occurred in the last 45 years. Now, certainly Schwab has played a role in this, but I think the breadth of competitiveness in our industry has contributed to the outcome that you can see today with the education up at about $50,000 a year, healthcare over 11, and the cost on that $250,000 portfolio. And that includes we baked in the subscription pricing costs for planning to be part of it. So it's not just asset management down to $660 for a $250,000 portfolio. An extraordinary illustration of just how our industry and the competitiveness of our industry has contributed to benefits to consumers. What's interesting is that in the face of all of this decline in terms of what the consumer is paying, you have rapidly rising expectations. And of course that is consistent with why you see us constantly talk about a no trade-offs approach in our Through Clients’ Eyes strategies. Both embedded costs such as underlying fees that may be embedded in an ETF or a mutual fund as well as explicit costs like equity commissions or advisory fees often in a wrap type program have all gone down while at the same time clients' expectations continue to rise appropriately so. A fascinating area in our industry is the willingness of firms to write checks to provide cash to clients to move their dollars. I suppose it's the ultimate form of direct marketing. But what's interesting is that although this has been a fairly widespread approach in recent years, the intensity of it in the last three or four quarters has been quite dramatic. And you can see that illustrated here in a couple of well known competitors that have increased the amount that they will pay. I just recently saw an example of actually a local client here in San Francisco that was offered, I believe, $36,000 to move a very low revenue generating sitting on individual stocks account. So I'm not sure whether this is a reflection of the thought that metrics generate an impact to a stock price, even if there aren't economics behind it, or whether it's just a thought, if I can win these assets, I can figure out some way to monetize them. Unfortunately, this approach works. And so, therefore, organizations like ours, despite finding it a somewhat distasteful approach recognize that we have to be willing to match these types of things or there is a certain percentage of clients, who will move on. It doesn't necessarily build a deep relationship with a client if you're buying the assets with a check, but again it is effective and the intensity of it is higher than ever before. So what do we try to do inside this overall environment? I think when you're in the environment that we operate today, you must be on offense. And I don't know whether I'm drawing off from a football environment that we just went – just completed here two days ago, but definitely we believe the best defense is a good offense. And so, we are on offense and we are focused on three primary areas that we think serve our clients well, operating Through Clients’ Eyes and at the same time put us in a position to reward our stockholders, scale and efficiency, monetization that is in the client's best interest in client segmentation. So diving in a little bit deeper in each one of these three, we'll start a little bit with scale and efficiency. This is a slide that just illustrates some of the implications of work that we're doing in the scale area. Growth in our digital advisory program approaches $50 billion. Investments in our mobile capabilities now at J.D Power and number one rated for US Wealth Management mobile app satisfaction, significant increase in mobile users now up to 1.2 million a month. Joe will go into more detail, but a variety of early rewards and I would say very early rewards in terms of the impact of our digital transformation in driving down costs and at the same time enhancing the client experience. So again, no trade-off, better experience for the client, but also lower cost for us. And then, of course, the two acquisitions can have a measurable impact in terms of scale and efficiency for us over time. From a monetization standpoint, we are looking aggressively at opportunities here, but again, aggressively while doing so recognizing our Through Clients’ Eyes strategy. So I've identified just four of them here. The first one at the top left involves us looking at all of the revenue that is generated from the $4 trillion of client assets that we serve today and who captures that revenue and are we comfortable with who is capturing that revenue and is the client being best served or is the allocation of that revenue inconsistent with how we think it should be allocated, in other words, should our share be higher than it is today? So that is one opportunity. We think direct indexing is a critical part of the long-term future of investing and you'll see us making strides in this area to better serve clients. I would argue at the biggest picture level that everywhere technology has gone, it has attacked the concept of bundling and a lack of transparency. And so I questioned whether over time like direct indexing will have an impact on mutual funds and even potentially ETFs as technology and efficiency brings the opportunity to create better portfolios, more customized portfolios for individual investors as well as organizations. Schwab intelligent income is designed as a very effective means by which principally investors who have their money in tax qualified accounts can convert that into a paycheck, which of course is the vast majority of individuals in our country who accumulate their liquid assets and say a 401k or an IRA or a combination of the two Schwab intelligent income offers them a high quality way to turn that into income. At the same time, we also would expect that you will see us introduce versions of this that are even more tax efficient for people who have significant wealth outside of a tax qualified accounts. And then of course, I guess the topic does your environmental, social governance type of investing is certainly something attracting more attention and we think an opportunity that melds perfectly with Schwab, our brand as well as our history and our reputation as an organization committed to inclusion. So as you would expect we think that the revenue sources will continue to evolve over the coming years and that you will see a growth in the revenue that we generate from non-spread income while at the same time always doing so in a manner that is consistent with serving our clients well. It is natural that immediately after we would have finished the majority of the large transfers of sweep money fund balances to the balance sheet that you would be at a high point of the percentage of your revenue generated from spread all other things in the environment being equal. And then we would expect over time the growth that we'll experience in non-spread revenue to make up a higher percentage than it made today. From a segmentation standpoint, the opportunities are great. I would say we have simply scratched the surface of opportunities here to better serve clients, particularly at the higher end. When you examine our client base, there is a lot of affluent clients in the retail world, in fact, by some measures, more affluent clients in our retail population than in our RIA population, but often with different behaviors, largely self directed investors and relatively price conscious. At the same time, we have, as I mentioned, a lot of affluent investors in the RIA world. And so, there is a series of things that we're working on today to enhance the capabilities for both sets of clients, relationship broadening more opportunities in the lending space, planning opportunities on the retail side. We know that the RIA is that we serve compete directly with advisors of many of these large integrated banks and many of them will lead with lending. And therefore, it's essential that the RIAs have access to lending products through us that are on par with the lending capabilities that the firms – the organizations that are competing with might be able to offer these affluent investors. So if you put it all together, it sort of brings us right back to the beginning often where I open the comments that I make in meetings like this, the virtuous cycle and how did the virtuous cycle work during 2019. And you can see with the math here we – again, we're in excess of $200 billion in core net new assets leading to $4 trillion overall, revenue just shy of $11 billion, 6% growth. And of course, that includes the fourth quarter with the commission impact. ROE approaching 20% with solid EPS growth and of course in sharing back with our clients the significant move we announced in October to eliminate the online and mobile equity and ETF commissions. Third consecutive year in which we were able to generate around 7% organic growth on our asset base. Certainly, our assets continue to grow at $4 trillion now and could be larger pending the acquisitions that we have discussed. We continue to feel very confident in our ability to deliver in the range of net new assets that we've historically talked about as a percentage of our base. We don't feel that at a certain size that we were not able to deliver that percentage of assets. I remember being asked that question back in say 2009 when we had reached $1.1 trillion in assets. Are you going to be able to continue to grow at this rate while at 6%, 7%. We felt confident, then we've done so and we feel confident going forward. At the same time our client utilization remains relatively elevated. So the second year in a row of about 1.5 million new brokerage accounts and three quarters of a million new to firm and that was entirely new to firm households at Schwab and our clients continue to take advantage of capabilities that we offer across a variety of product solutions. Putting it together into more of a financial picture, you see the revenue growth from 2015, the ROE progression, earnings per share and then the pre-tax profit margin expansion. And I think as everyone knows, we had a couple of small items in a relatively small impact from an expense standpoint in 2019 that we're actually showing of course with those numbers included in the 2.67 and the 45.2. So how do you succeed in a world of hyper competitiveness and an incredibly strong and diverse competitors? Again, I think it all comes back to the client with our strategy Through Clients’ Eyes, a focus on no trade-offs, delivering great value, service, transparency and trust. I suppose that a headline that's a way of saying no trade offs. We think that's the key to competing in the environment that we're in, deliver for the clients without any tradeoffs. So let me go ahead and stop there. And I left about a half an hour ideally for Q&A that we have. I think we have mics correct. So we want to have folks stand and identify themselves, raise your hand. When you get the mic stand, Identify yourself and go ahead with your question.

Walt Bettinger:

Sure. Well, thanks, Brian. A lot in that question. I think, I guess, I would start with a couple of points in competing with these large integrated banks. One is that we're going to have to leverage our uniqueness, our capabilities, our scale and our efficiency. So we operate the firm today at a total cost of about 16 basis points. We think that some of the transactions that we've announced upon full integration will help lower that 16 basis points a bit, but we will continue to invest in digital capabilities that will further lower that. And by keeping our costs low and sharing back with the client some part of that efficiency, we're going to keep price pressure on the industry to the benefit of the consumer. And that's going to continue to apply pressure to those who may operate at a higher cost. At the same time it's not just about costs. There's also value and relationship involved in that. So we'll continue to expand our capabilities with digital that will deliver great value for clients and a great experience, but for the clients where relationship is important as you saw in the segmentation slide, we are delivering today and we'll deliver an even broader array of relationship capabilities for select clients. Put that all together again, I think you're looking at, as we often say, no trade offs type of environment, great value, great service and for those that it's important, a personal relationship that they can rely on, sometimes that'll be delivered in the retail world, sometimes it will be delivered in the RIA world.

Walt Bettinger:

Yes.

Walt Bettinger:

Well, I think the announcements and the public statements that have been made by our competitors are logical on their part. And whenever you have a big combination, it is an opportunity for them to pursue the conversion or the winning over of clients who are in one of the two organizations today. It makes a lot of sense for them to do so. And I think it is reflective, again, of the intense competitive world in which we operate. That’s simply the combination of Schwab and Ameritrade does not change the industry. The combined organizations would be somewhere around 11% of investable wealth in the United States. So it's still fairly modest in terms of the overall size and therefore these competitors' comments and actions make a lot of sense for them to pursue. At the same time, we think that the combination of the two puts us in a better position than ever to offer this no trade-offs proposition. So whether you are a trading oriented investor and benefiting from what we would consider in many cases best-in-class trading platforms from Ameritrade, whether you're more of a long-term investor benefiting from many of the capabilities that Schwab has you need banking capabilities. Putting all this together, we believe offers the best complete total experience at Schwab as anyone in the marketplace can deliver in at a value that we think is the best for the consumer. But it's going to be a road to get there. We're working carefully with the Department of Justice today. We have great respect for them. They're thoughtful. They're inquisitive. We're working with them on the industry and how the industry functions and operates from an educational standpoint, but they're very bright, very thoughtful and careful in considering to ensure that they fulfill their duties from a consumer standpoint, but we feel very confident that the combination creates that true ideal model again with no tradeoffs.

Walt Bettinger:

Yes. So let me do the second part first. I think clearly the greatest opportunity today when we look at the revenue that our clients are generating for third parties is in the asset management space. And so that is a focus of ours in evaluating whether the consumer is getting the absolute best service, best value, best outcomes for what they're paying or are there alternatives that might be better for them overall. And at the same time potentially shift some of the revenue from third parties to us, but again, only in the context if it's in the best interest of the client. But I think asset management is the one that immediately is at the top of the list in ensuring that the client is getting the best possible results there and at the lowest possible cost, leaving as much as we can in their pocket. In terms of brand extension, interesting, our brand is already viewed quite broadly. And it's not just our brand; it's also the work that we do behind the scenes for the RIA. So, the RIAs are having a good success competing in the higher end of the market for people who are looking for the broad, robust capabilities that that many of affluent or high net worth investors are looking for. And at the same time, our brand fares very well with affluent or high net worth investors who are more self-directed oriented and might be looking more for platform service and lower overall cost. So the brand extends quite well. And down into the millennial, I think, Jonathan will share details on this, but over 50% of our new to firm households are under the age of 40. So, we're fairing very, very well in the millennial – the younger investor space with our initiative. So I think our brand has already extended quite well. What's critical for us is to ensure that the experiences that these various client groups have when they come to Schwab are consistent with their expectations for a world-class experience.

Walt Bettinger:

Hey, Mike.

Walt Bettinger:

Yes. So I think that when you have – there's a couple things you have to do with the cash. One is your field has to be aware of the fact that we're not going to lose clients to another organization because of a cash offer. So you have to educate your field, make sure they're aware of that, and then you have to be willing to match what goes on out there even at times when arguably it is uneconomic in the short-run to do so. But there are as we all know organizations over the years who will make uneconomic decisions or what appears to be uneconomic decisions in the short run for a variety of different reasons. And what we don't want to do is allow those organizations and those decisions to undermine our long-term trajectory. So we have to be willing to match. At the same time, as I referenced earlier, Mike, we think it's a strategy that is incredibly shortsighted creates a level of expectations on the part of the consumer that probably are going to forever be difficult to match. And you could definitely find yourself in a place where the consumer expectation is to get a check every time from someone when they're planning to make any type of investment. So it's not a strategy that that we consider an effective long-term one. You asked around…

Walt Bettinger:

Yes. So, the insurance business is a very difficult business with very challenging returns. I think it is likely that you will see us leveraging a bit of our partnership that we have with USAA to deliver quality solutions in that space where they're in the best interest of the client, but I think it's very low probability that you'd see us actually designing or creating or starting an insurance company to offer those types of products. But again, what we'll want to look for is only when it's in the best interest of the client. And if so, USAA has great solutions as do some of the other partners who worked with today.

Craig Siegenthaler:

Craig Siegenthaler, Credit Suisse.

Craig Siegenthaler:

Craig Siegenthaler, Credit Suisse. After the earlier slide on direct index investing, can you just walk us through what is the timeline when you think about when Schwab will be ready to launch these capabilities in the retail channel? And do you think Schwab will be one of the first firms to do this? Or do you think other firms out there will be to do it?

Jeff Edwards:

Sure, I had a question from the web. Can you elaborate a bit more on the incremental lending opportunities you may want to pursue out of the bank? And what is your comfort level on expanding the ratio of loans to securities?

Dan Fannon:

Dan Fannon, Jefferies. Just to follow up on asset management. If you look at Ameritrade's revenue mix today versus yours, asset management is even a smaller component. So as part of what you're talking about in terms of incremental growth just normalizing their – kind of penetration of their customer base with what you’re already doing? Or is it – I assume there's a combination of both of that?

Jeff Edwards:

We had one more from the web. Following the commission actions in October, as you look ahead, where do you and the executive team see the most potential price risk in the business and across the broader industry?

Rich Repetto:

Well, Rich again. So when you looked at the potential acquisition targets, you picked Ameritrade with a significant RIA network.

Rich Repetto:

So, I guess could you give us the thoughts on, was this a surprise? Like it has garnered reasonable amount of press and discussion, I see when you get your second requests, the other day stocks traded-up actually off of that that day. But what – just what are your thoughts on, this, the whole RIA issue and regulation.

Rich Repetto:

And just the broader view about the antitrust sort of review in the advisory space. You can call it RIA.

Brennan Hawken:

Well Brennan Hawken from UBS.

Brennan Hawken:

Just a couple questions on some of the things you mentioned. First on the competition in the cash offers, a lot of it made sense right up until I think the end and I might not have heard it correctly, cause you said the people they are being aggressive doing things that are uneconomic, it's confusing to you, that all made sense. And then I thought you said you told the field we'll match it, but why?

Brennan Hawken:

Like if competitors are going to do something dumb, it's uneconomic and so you lose a customer, isn't that sort of c'est la vie and then you can just pick up customers elsewhere. Wouldn't doing something that you know is uneconomic to support a net new money or whatever the print or the number is that, doesn't that – isn't that not – doesn't that make sense. I don't get it.

Brennan Hawken:

Okay. and then on the – growing the loan book, particularly in the retail side, I might not be remembering correctly, but I think you guys made an effort similar to this about a decade ago to try to grow a prime mortgage book a, which didn't translate into a ton of loan growth. How are you approaching things differently than you've approached in the past on the retail side? What is it that you're going to do to compel some of those loan balances to come to you? And what is it going to end up costing you?

Christian Bolu:

Christian Bolu, Autonomous Research. Hi. Your market share in the RIA business post the Ameritrade deal will be between 40% and 50%. Just maybe what's your argument as to why that is not anti-competitive?

Christian Bolu:

I think it is basically your data that you guys used to present.

Brian Bedell:

This is Brian Bedell from Deutsche Bank again. Just coming back to what you commented on before on the revenue synergy opportunity for the Ameritrade customer base. Obviously more trading focus, but why wouldn't you be more optimistic about the wallet share penetration there? Presumably, they're doing banking somewhere else or wealth management somewhere else and now that you've got a – or you will have an enhanced range of services, should we be thinking or should we be thinking there's a better opportunity to penetrate that customer wallet share?

Brian Bedell:

Thanks, and then just a follow-up back on the – one of the first questions on the long-term competitive response. You're positioning your firm more and more to compete with a broader range of financial service companies, Vanguard, Fidelity, potentially BlackRock with self indexing, if you're successful there of course the wirehouses, why don't you see those other firms trying to – obviously they'll have competitive responses, but why don't you – what barriers to entry or what barriers to them raising their ability to compete with you? Do you see going forward that you will be putting together with the combined firm?

Will Nance:

Will Nance, Goldman Sachs. I wanted to follow-up on the idea of you getting your fair share of the revenues currently going to other parties. There's always been this narrative around your retail business competing for the advisory business of the advisors on your RIA platform. I guess you've always done a good job managing that conflict with the advisors on your own platform. For some of the advisors on the Ameritrade platform who maybe are less familiar with how you go about that, what sorts of efforts for outreach are you guys contemplating to kind of manage that, that perception as you execute also on kind of getting your fair share of the revenues on your platform?

Kyle Voigt:

Thanks Kyle Voigt with KBW. Just with respect to the DOJ, some prior deals where the DOJ issued that second request have resulted in a remedy being offered or agreed upon. Assuming the DOJ is focused on the RIA custody business. Do you believe that operationally it's even feasible to offer a remedy for a fraction of the RIA custody business? And you previously mentioned the RIA business as part of the strategic rationale for the Ameritrade transaction. Do you believe that rationale for the transaction would remain in place even excluding a custody business?

Jeff Edwards:

Yes, one more quick one from the web. A number of firms are looking at some, maybe some newer acquisition channels such as a stock plan service businesses or other corporate relationships. Can you talk a little bit about how Schwab is participating in those newer channels?

Joe Martinetto:

Thanks Walt. So with the introduction I got, I feel like I should issue a disclaimer at the beginning. No one's going to make you an offer you can't refuse except for maybe superior wealth management services with great price points and value. So, all right that kind of fell on his face. I didn't know he was going to do that. That was the best he could come up with in the moment. I better should move over to the business side and give you what you're looking for the update on the TD Ameritrade transaction as well as spend some time on digital. I think there's some key integration points to steal a word here around what we've been doing with digital and how we plan to approach the integration efforts more broadly. So like to be able to bring that all together. So, starting with the transaction these first couple of slides, it is not going to be a lot new, but this is a transaction that's predominantly driven by building scale. Scale can produce some relatively significant shareholder value, scale becomes a strategic valuation driver when you use it the way we have. So when you drive scale and share some of the benefits of that scale back with your clients, either through product innovation or pricing to create new opportunities to drive growth for the firm for the long run. So this more than just the unlock from reduction of expenses, this is about building a long-term scale model that allows us to continue to create and leverage that, that strategic advantage that comes with building scale. When I talk about scale, what are we talking about? Obviously the consolidated firm is going to be quite large. So, you got some metrics on the side of the page here that will allow you to get a sense of what a post-integration company might look like. Clearly this gives us opportunities that are beyond the scale in terms of size of firm that we operate today. There's some other advantages that come through the transaction. We've heard Walt talk a little bit about some of the capabilities that we would expect to be able to offer either to the Schwab client set from what comes from the TD Ameritrade capability set or to the TD Ameritrade clients from the capabilities that Schwab has that they don't currently offer. And there is an opportunity for a pretty significant shareholder unlock here in value in terms of reducing some of the expenses of the consolidated entity. So, what are we talking about in terms of dollars? First I would say you don't have to scribble madly to write these numbers down. They are the exact same numbers that we showed you back in November when we announced the transaction. So there is no new information at this point to update you on other than recommitting to, these are the synergy numbers that we expect to be able to drive out of the transaction. We are starting to work to put plans together to be able to recognize these numbers and as those plans come together and we do have more updates, we'll share that information with you over time. But for now, we're still talking about $1.8 billion to $2 billion of expenses on the consolidated firm, that’s 60% to 65% of the TD Ameritrade expense base or 18% to 20% of the consolidated firm. We do see opportunities on the revenue side. So we've, I think walked through changes to the way the TD Ameritrade side handles some of the client cash managements and that IDA agreement that they've got. We do see opportunities particularly in the trading space to offer some additional capabilities to the Schwab client set and particularly in wealth management to offer some new opportunities to the TD Ameritrade clients set. And then obviously we've set aside some pretty significant dollars in terms of what we expect to spend to be able to get to that consolidated integrated company. This is a different kind of acquisition than what we did with the USAA transaction. So just to make a couple of points here, that was an account transition where we are going to literally close and convert over a weekend. So it's, the kind of transaction where you can take a team, you can put them together, you can tell them your job is to go execute on this. Obviously, they need help from a lot of the organizations, but with a much more focused and contained kind of effort, the TD Ameritrade transaction is going to be more of what firm does over the next two to three years to deliver this value. So, rather than being able to pull a consolidated team together to try to manage the transition, this is going to be work that's going to be driven broadly by the leadership of the company on a consolidated basis to get to those synergies. So, a little bit different approach here in terms of how we're thinking about the integration can work. So, what exactly do I mean by how we're thinking about the integration? So we developed a set of guiding principles to help everybody that's working on the integration team understand the priorities for how we intend to manage the transaction. And some of these may seem fairly obvious but they are important and we wanted to share them with all of you as well to just give you a sense of where we are in terms of mindset about how we're approaching the transaction. So number one, minimize client disruption. I think we would have attempted to do that anyway. We are Schwab. We serve clients. TD Ameritrade also affirmed that it is very focused on serving clients and does a great job at it. So, you've got two firms that are very focused on serving clients, serving them well. There's no reason to expect that we wouldn't anticipate continuing to do that through and past the integration. So, we have some pretty lofty retention targets. We could not do that if we did things that were highly disruptive to the client base. So, clearly here making sure that we continue to give them the capabilities that they would expect to have so they can continue to do business with the consolidated company becomes a big part of the planning exercise that we're going to engage in here. Capturing the synergies as soon as possible. So making sure that we are putting plans in place to actually recognize the kinds of numbers that we've been talking about and be able to go execute against those, make decisions quickly. So this one is a little bit more focused on the Schwab internal component where we have a capacity to do a tremendous amount of analysis and tremendous amount of socialization. We may not be able, in the timeframe we're talking about to get to the kinds of numbers that we need to hit, be quite as in depth that may mean that we have to make decisions a little faster and we may have some cleanup work that has to be done post-integration. We're going to be able to be okay with that. On that front, one of the decisions that we are going in with, unless it's proven that we can't execute on it, is we expect the Schwab systems to be the platforms of choice. So that sounds maybe a little bit narrowing when you think about the idea that there are definitely some capabilities on the TD Ameritrade platform that are superior and different than what we offer. So that's why we've got the caveat on this phrase here where except where there's a clear material advantage in what the TD Ameritrade approach brings. So, to the extent that there are opportunities out there in that TD Ameritrade capability set, particularly around areas like retail client trading or in some of their open API approach that they've used to help their RIA has used some third party providers. Those are things we're going to have to take a hard look at. Those are capabilities that we would expect that we're going to be able to largely bring across either directly or through build out in the Schwab platform. But to be able to recognize the kinds of synergies that the pace we're talking about, this can't be a system by system, platform by platform, pick the best and drive to an optimized platform over the long run that will just take too long. So we have to pick one of the platforms to start from. Our going in presumption is we're starting from the Schwab platform that, at the end of the day that is not meant to cast any aspersions on the TD Ameritrade platform. We've got two companies that have made great investments, have great platforms. It really is just a matter of how do we get to a consolidated platform the most quickly and allows us to get to the synergies. Again, a little bit of inside baseball. We've got a lot of work that we're doing on digital platform evolution and transformation. And we may have to reprioritize some of that and take some of those resources. Well we've got particular subject matter expertise and take things that are more important to the integration experience and maybe prioritize that over some of the new capabilities that we might have been thinking we'd be bringing to market. And then finally even though the two firms approach the market largely consistently to the extent that there are places where there are differences, the resulting firm is going to be Schwab. It's going to be our strategy, our vision, our values at the end of the day, our responsibility to make sure that the folks on the other side understand the importance of that and why it's critical to the ongoing success of everybody in the consolidated entity. So where are we specifically in the integration? I got a lot of questions in the few minutes I was down here before. So let me try to address what I heard and I'm sure there will be more when we get to the Q&A. So, we have stood up an integration program that is being led by Jason Clague. I don't know if most of you, I don't think he has ever presented, he is actually in the back of the room if you want to ask him questions at the break. Jason is the Executive Vice President that runs our Operations Group and we couldn't think of a better person to at that level really stand-up and run that integration management program. We've created an integration management office. We're in the process of staffing that office. We are organizing the work at this point. We have identified 14 work tracks. We have leads identified for all of those main work tracks. In parallel, a parallel exercise has been going on the TD Ameritrade side. They've got their head of integration, they've got their heads at the work tracks. We are all coming together later this week in Westlake, which is just outside of Dallas to have our first big integration planning kickoff meeting. So there have been some conversations that have occurred particularly among the track leads to start to get some of the work organized, but the big launch meeting is going to be this Thursday and Friday. So there are obviously a lot of concerns for a deal of this magnitude with this visibility where we are being appropriately cautious around sharing of information. Some of the work that has gone on is establishing the right communication protocols, putting the right controls in place, making sure people understand the rules of the road, standing up to things like clean room processes so that we can share information appropriately while we're still in the DOJ review. So, all of that work is in place now, so we can get together and have this meeting and be confident we're going to be able to do it in a way that still conforms with all of our obligations and all of their obligations to continue to operate as independent companies. Beyond that from a timeline perspective, we don't know at this point how long the DOJ review is going to take. As we get more information on that, we'll obviously be sharing it, but for now rest assured we are using every day as best as possible to start to plan for that integration so that we can hit the ground running on day one post-close when we know what that post-close date is. So, switching to tax a little bit here, I'd like to move over now and spend a little time talking about some of the work we've been doing in digital transformation on the Schwab side. And when we introduced the digital services organization not quite two years ago at this point, I think we spent some time talking to the investment community back then around what we were hoping to accomplish and so a lot of this should seem fairly similar to all of you – but – or familiar to all of you. But what we're trying to accomplish with digital is around creating those seamless experiences for the clients that allow us to bring products to market that not only are easier for clients to interact with, but also drive some additional benefits to the company. So, thinking about how those products are built and serviced in a way that's different than what we've done before. Looking, all the way front to back in those development chains and making sure that we are building the fulfillment capabilities that allow us to take advantage of the automation that the digital front end will create. And then finally to the extent that that is all working and we're driving some additional synergies, creating the ability to reinvest that value back into the client set to continue to feed that innovation channel that lets us continue to build the growth of the firm. That doesn't sound a whole lot different than what we've been talking about in how we're approaching integration. So, integration is about building scale across a platform, sharing and leveraging the resources more broadly across the two companies sets of clients looking for unlocks that come from the ability to drive synergies. So, there's a lot of parallels. So there are reasons to expect that the work that we've been doing might actually help to drive some of the benefits we'd see in integration. One of the goals we set up when we establish a digital services organization was to try to bring more product to market more quickly. So, in the old days we did what a lot of people did, we used what people generally referred to as waterfall development. So you spend a lot of time, you build a lot of specifications. You hand it over to the technology group, they go build something. 18 months later they give it back to the product management organization who evaluates it and maybe it hit the mark, maybe it didn't. If there's rework that takes time and then it gets launched and that's a long and cumbersome process. We've adopted like a lot of other folks, more agile processes. We're getting more product out to market more quickly. We're iterating on that product more rapidly. We're seeing more launches into the market than we ever have before. And the team has actually done such a great job that they've given me a large set of examples that we could talk about to effectively really talk about some of these things in a little bit of depth so you can get better sense of where we've gone with these. I'd like to focus my comments on three main areas. So on digital workflow and status for the advisor community on the enhancements we made to the mobile platform and experience and then some client experience enhancements for clients that are – and are approaching retirement. So digging in on the advisor side with the digital workflows, we've got some examples of things we've been doing here. Account opening. So account opening workflow is very different than in the old days what we might have done was take the form that existed in paper, turn it into a PDF, make it writeable and put it out on the website and people could type it in and they could either submit it or print it out and mail it in and it would go through the same old process. The digital process is dramatically different than that. So it's trying to figure out ways to allow the advisors to leverage information they already have in their system, whether it came from Schwab or came from a third party data source that they're using, helping them take that information and get it onto the form quickly and in the right way. Putting some smart edits in there so that we're checking that the information that's going onto the form is actually what needs to be in the fields that they're filling in. We at Schwab, our classic branding of everything have a phrase internally referred to as NIGO work that comes in not in good order and not in good order is a really bad condition for the advisor because that means that that work is going to have to go back to them. They're going to have to do rework. They're going to have to resubmit. It's not good for us because it means that we're not going to be able to put that paperwork straight through in any kind of process that's efficient. We're going to have to pull it out of stream, we're going to have to rework it with them. It's not a good experience for their client who's probably going to be asked to sign a form yet again, why do I have to do this? I thought we already filled this out. So NIGO is a bad condition for everybody and there's efficiencies to be gained all the way across the chain. So the more we can do to drive NIGO out by design, the better off it is for everybody. Moving into things like change address, which sounds really simple but – and it is, but if you don't realize that advisors tend to manage multiple accounts for their clients, you might set up an – or a change address form that only lets them change each account sequentially. We put in a capability where they can make the change once they can link to all the accounts they are managing for that client and make that change on an automated basis for all those related accounts. Move money. It's again the same kind of process. Move money can be complicated. There's lots of ways you can move money across the firm and journals and ACH and wire and making it a simple process for the advisor to be able to bring up a single screen, make that determination, kick off that process and get the right information in a form very quickly and then get it out to their incline in a way that's just as efficient. So, let that client review that transaction and approve that transaction with a couple of either quick touches on a cell phone or with a couple of quick clicks of a mouse if they want to do it on a website. So, better experience for the advisor, better experience for the client and again probably more efficient for us as well to the extent that the work comes in well structured. So in the event where it doesn't come in quite right or where an advisor just wants to ask that question, did you get the form? Are you working on the form? Were there any challenges with the form? So building in an automated status reporting capability that lets the advisor go in and see without having to call in and ask and describe the problem, they can go right in. They can track the work right out of the workflow process to the extent that there's something that needs to get addressed, making it clickable so they can go in right there in that system, address whatever needs to get corrected and send that rework back to get it processed. So it's a significant enhancement again for the advisors to be able to more quickly get in, get the work done and get it processed. It's an enhancement for us to the extent that it takes pressure off of our service calls as well. So, how do we know all of this is working? Over 50% of the advisors are using the status utility and we think we've driven down status related phone calls by about 15% as a result of the launch of that capability, so pretty significant reduction in capacity utilization is a result of that utility alone. More than 20% of advisors are now using the automated account open, so good opportunity there to continue to move that number north. But we are seeing some pretty good adoption for the advisors for that early stages, NIGO so this is one of the key deliverables that we've been able to actually deliver on. So it might be shocking to realize over 30% of the forms for new account open in the advisor space, they came into the firm in the old processes needed some form of rework, 30% over 30%. With the automated workflow, it's now down to about 3%, so 10 fold reduction in the amount of rework that has to happen. On top of that, it now takes an advisor about 10 minutes to get an account open. It takes us about six minutes and that's down from 19. So again, about a two thirds reduction in the amount of processing time it takes us to get through the work when the work comes in a digital form and the work is structured in the right way when it hits the door. So really good results driving some efficiency, creating some additional capacity, allowing us to continue to absorb growth without having to add head count. So what's next? We've done a good job on account open. But in a lot of cases the advisors open multiple accounts with various types of forms of accounts. This was the next step here in the process for us is to add more of those form types so that they can get an entire household opened automatically. The goal here is to continue to drive toward paperless transactions entirely. So, there is some reluctance among the advisor community. They are somewhat set in their ways and certainly some of them around the utilization of paper. But we're going to make this such a compelling way to do work that we think we're going to be able to break down even those, those naysayers who still like their paper and drive more and more paper paperless adoption here over time. Moving onto the mobile platform. So this is another case where we launched a significant number of new features into the mobile application last year. We had more than a 100 launches. So that was, I think even internally, a bit of a surprising number when people realized how frequently the launches were starting to happen in the mobile platform now. In the last year, we really prioritized a few key opportunities. So, ease of navigation, making it easier for clients to find those things that they're trying to do in the mobile application and get to it more quickly. Closing the gaps between what you can do in the website and what you can do in mobile. So to the extent that more people are using mobile as a primary channel, the gaps that exist between, well I can do that on schwab.com, but I can't do it in your mobile app to create some annoyance with the client set that we've been looking to try to drive down and give them more ability to do both in both places. We intentionally tried to focus on identifying the places where we were falling short on allowing clients to completely fulfill client service requests. So, there were a number of places where we had processes that clients were just falling out. So whether we designed them to be too complex or they didn't understand the phrases we were using, trying to constructively work to make it possible for people to get all the way through those service, self service capabilities, which candidly they'd rather do themselves and call into us. They call in as sort of a last resort that kind of work now. And again, I think we had pretty good results. It driving some, some enhanced capabilities there. And then finally client engagement, so we know that the clients that engage with us more frequently tend to be some of our best clients. They use more products and services. They also tend to be some of our most profitable clients, so looking at ways to drive additional engagement with the mobile app. So again Walt referenced that we have over 1.2 million clients now using the mobile app 30% to 40% of those in any given month are mobile only. So they are not going to schwab.com to do anything. They are using the mobile app on their phone as their primary channel of access to the firm at this point. Walt made reference too, we are getting some accolades. I hope this is early days, but we're getting recognized for the work that we've done to enhance the quality of the platform. And on the client's side, we've got 4.8 stars on the app store. So we're pretty happy that people are recognizing the work we're doing is actually making an impact. So where do we go from here? We're looking at rolling out an intelligent assistant or a ChatBot that again allows clients to be able to interact in a more relational way inside of the application. So that should be rolling out this year. We're also excited about bringing some more experiences into the pre-login space that there are things that sit in the app today that don't necessarily have to be behind a protected firewall that would give clients an ability to get to some of that information without having to go through the login process. There is a lot of capabilities that we can offer to people that maybe aren't Schwab clients yet that maybe are thinking about opening a relationship and might want to evaluate an application. I know that's not the typical way people download them and try to log in if they can't log in they throw them away. But if you think about what we do with the prospect homepage on the schwab.com site, there's a lot of information capability there, it lets people test and sample the firm before they ever become a client. And we're hopeful that by engaging in a similar kind of way in the mobile space that we're going to be able to drive some additional growth out of the mobile channel. So moving on into retirement, again I think we've made some really great enhancements. The first one here, investment reporting is probably my favorite. We have heard from clients for years that we were falling short in terms of their ability to understand what's the income I'm driving off of my portfolio? So the ability to see your dividends, your interest, see it broken down by month, be able to click through into the specific bar charts and look at the specific holdings that are driving those results. It's a really robust reporting capability. It's available both in schwab.com and in the mobile site. It gets a little small on mobile platform, but it's there and clients are using it and it really is a nice enhancement to the broad set of capabilities and for people that are in or near retirement and trying to make that transition to living off their assets it's important capability to an accurate assessment of how much income your pool is producing. For the folks that are actually in the place where they now are taking withdrawals out of their retirement accounts. One of the most confusing thing for our clients is the required minimum distribution out of their IRA accounts. It's driven by tax rules. It's complicated and trying to help our clients understand how do I do this in a way that allows me to be compliant with those tax racks and make sure that I'm taking out what I need to take and taking it out in the form I want to take it out. We have built some enhanced capabilities and workflows there for clients. We've seen very good adoption and we have very good scores on the client easy measurements related to the changes that we've made to that retirement capability. And then finally, Schwab Intelligent Income Walt spent some time in his comments talking about Schwab Intelligent Income. But what's really exciting about Schwab Intelligent Income is it's what I think of as another step into the solution based orientation. So as we start to move more and more away from specific products and more to solving the problems that the clients came here to ask us to solve. So, when you think about what we did with Schwab Intelligent portfolios, we gave them a professionally managed portfolio of individual ETFs that is automatically rebalanced, automatically tax harvested. And now we're overlaying a capability for folks that have those types of portfolios in a retirement account to automate the withdrawal process, to replicate that paycheck that they're no longer getting if they're in retirement, but do it in a way that is tax intelligent. And also sensitive to the concerns they have around, I don't want to outlive my money. So how do I do this in a way that makes me smarter about utilizing that cash that I spent all those years building up now that I want to try to live-off of it. How do I do it? So trying to bring technology to solve the problem of the clients that I think is going to more and more become the approach to trying to get deeper and stickier relationships with the client. So we started a lot of this digital work trying to just manage the growth of the firm and trying to continue to allow us to bend that cost curve down over time, try to drive more automation in so that we weren't just adding people commensurate with the growth in the number of accounts or number of positions to continue to drive more efficiency into the processing environment as well as serve clients in a better way. A lot of what we've been working on when you think about trying to bring it to bear, either directly in the integration process or post-integration into a larger set of clients, we'll deliver even higher value than we anticipated as we were starting to build some of these capabilities out. We will look through the integration to take advantage of those scale opportunities to leverage the best of both platforms. With that primary platform choice made at Schwab, we're looking to make sure that we're not doing anything that doesn't continue to serve clients really well and unlock those long-term shareholders synergies that we've committed to all of you in the investment community that we're going to hit. So with that, I'd like to open it to questions and see which ones I left unanswered. So I think Brian got his hand up first.

Joe Martinetto:

Yes, so again, I don't think any of us came into this anticipating a tripling of volume on our existing platforms neither us nor they, so there's work that's going to have to get done to stress test those platforms to assess their capacity limitations to build up in places where we may not today be able to immediately double the number of accounts and transactions and make sure that we've got appropriate head room for those days where our clients get really active or for those windows of time where we're successful in the market and bring on new accounts. So there is work going on internally already to try to make sure that we've got a complete look through the technology stack to build the confidence that we can actually bring those accounts onto our platform and absorb that kind of growth with the appropriate degree of head room. With respect to the team, for now I'd say that there's kind of parallel efforts going on. So everything that's happening in Schwab is largely happening in the TD Ameritrade side. They've got ahead of their integration management office, who is somebody who has been involved in their transactions in the past. A lot of the team members that they're bringing in for the work streams are people that have been involved in those transactions in the past. So, for now I'd say they are leveraging their capabilities as best they can. We would expect over time to be able to build bonds across those teams and try to leverage some of the best of their thinking as well as ours. As we get through the DOJ review, it will be easier to share additional information and start to more closely work directly with them and clearly post-close those teams will continue on into the future and both be working for the success of the consolidated entity. So we would very much look to take advantage of the knowledge base they have built up around how to manage these kinds of transactions. Even developing a set of guiding principles I think is a best practice that we may have stolen from them that – what we're actively communicating and trying to make sure that we're getting the best of their knowledge as well as the best of ours as we work our way through this.

Joe Martinetto:

Yes, so it's – I'd like to stay at the capability level and away from the specific platform level because it's way too early to make a commitment to say, we are going to port that platform over. What I think we're focused on now is to the extent that there are specific capabilities that are really important to clients, we're going to try to identify those first and then make sure that we have integration plans in place that allow us to deliver those capabilities. So if that means keeping a thinkorswim platform alive, because that's the most efficient way to deliver those capabilities, that's a choice we might make. If that means taking some of those capabilities that don't exist in a Schwab platform today and embedding them in a Schwab platform, that's a choice we may make. And those are decisions that have to be made over time as we get deeper into understanding each other's capabilities. So it's too soon to comment on specific platforms, but clearly with the retention goals we have and our focus on client experience, there's no way we're going to abandon significant capabilities.

Joe Martinetto:

Yes, so we stood up in enterprise internally called digital services and pulled all those client facing technology channels together into that organization, so schwab.com and sac.com, mobile, the ChatBot, all of that is now sitting inside of a single enterprise. We have organized that by client-facing segment, largely with some utility capabilities. So a portion of the reason we're able to go faster is we're thinking in more of a utility or service oriented architecture where something like an account open capability is best built once and leveraged in multiple dimensions across multiple platforms as opposed to building a unique client or account open capability for every specific silo. So we've largely organized that way on the digital services organization. We've enhanced their capabilities and skill sets either through recruiting or training around product management. So in a more agile development world, having strong product managers who understand both the client needs as well as the technology platforms is critically important. So they are that bridging organization and product management. And then we've also built up a pretty significant team around user experience and client experience. So a lot of that had been outsourced on a project by project basis in the past. And we found by bringing it in-house, it has allowed us to build some expertise that we're able to again, leverage more universally across the broader set of platforms. In the technology world, then we have been a large scale adopter of agile, so we've got a very large footprint of teams that are structured in agile development capabilities. We are still working on I'd say transforming our understanding and knowledge around making the transition from what was more of a classic product development shop into something that operates more like a platform management shop. And so making sure that we've got clear lines of sight into exactly what each of those teams are doing and which platforms they are decked against. We're I think, still somewhat inflight, but that's the direction that we're going. So it's a much more platform oriented approach to development and product management as opposed to, which was a much more sort of project oriented approach that we took in the past. But along with that comes some real advantages around being able to think longer term about how do you deploy some of these platforms. In the past, I would say that we often built what got funded. So if an organization had money, they could get something built. Today there's a much stronger front door process to say, where does that capability sit on the roadmap? And we're going to build the things that are most strategically and competitively important first. Just having money isn't enough to get you to the top of the list anymore.

Joe Martinetto:

Sure. So I'd say, I mean there are multiple examples over the years where I'd say that's exactly the strategy we've followed where we look to build additional scale benefits and we don't drop it all to the bottom line. We are making that trade-off around what do we invest in, how do we invest it, whether it's in new technology platforms or movements in prices or new products and capabilities, but really trying to identify those things that are important that we think are going to drive long-term growth, freeing up enough capacity to make those investments to continue to keep that virtuous cycle moving as opposed to trying to cut ourselves to greatness by reducing expenses, dropping it all to the bottom-line, but under investing for the long-term benefit of our shareholders.

Joe Martinetto:

Core platform.

Joe Martinetto:

So I'd say we've shared them with the other side. But that there are there some places and that one in particular where I'd say we probably took a heavier hand in saying this is the direction we want people to go. Without getting too deep into this both firms have been making modernization efforts over the past several years and we find that there are parts of our stack where we're ahead and parts of their stack where they're ahead. So there's not a clear superior platform, but there are elements of both that are probably better or superior to the other. The places that probably wouldn't be a surprise because of the focus of the Ameritrade firm. They are probably further along in some of the modernization work around a lot of the trading capabilities. We are further along in some of the wealth management capabilities and some of the relationship management capabilities. So, how do you pull these pieces together, becomes, the question of the day beyond some of the client facing capabilities there are absolutely some components of what sits in their technologies today that we would want to evaluate very closely to make sure that there, if there are opportunities there for us to get significant advantage that we will look to deploy them. So I'd say even though we have said core books and records, core processing platform is Schwab we are just starting conversations now around those, those deeper components. And if we can enhance the quality of the platform and still hit the timelines and the targets we are very open to picking the best of the stack on both sides. But again, it's got to be, it's got to have enough advantage that it's worth any potential constraint on the timeline.

Joe Martinetto:

Sure. So yes, we have a very active client set and I think I would say that we’re even sometimes surprised that we will turn on a capability and find people who are using it before we've even made any kind of announcement. So status was one of those, we turned it on and we sort of soft launched it. And the next thing we knew we had a lot of people in the status engine already starting to use it. So that gave us confidence that we should continue to develop it and continue to enhance it. And it's different with different capabilities. There are some things where it takes a bigger push in some kind of awareness raising. There's other things, where the changes are more incremental and to the extent that you can sort of put them in the process that the clients are already using and in essence, maybe nudge them toward an answer that's easier. We can find that we can drive adoption pretty quickly without having to do a lot to really sort of raise broader-based awareness. So it really depends on the specific capability and where it sits in the transaction flow that the clients are using, how big of a push we'll make around awareness and whether we think they're going to find it on their own and start to deploy it. And I think ideas come to us from a lot of sources, but the number one source of the things that we work on come to us from clients. So, we're in a constant feedback process where we're listening to what the clients are asking for and trying to find ways to prioritize those requests. Sometimes they may not even know they're asking for them. So like some of the work we did on the mobile platform around trying to make it easier to fulfill your service experience completely in that channel. We noticed that there was a pretty high fallout rate that was driving call volume that clients didn't really want to have to make that call, but they did it because they couldn't do it in the channel. So, some of it is identifying through their actions where there are things that we are maybe not doing as well as we could or hearing directly from them, Ji, we wish you had this capability. Those things will get a high priority in the prioritization process.

Joe Martinetto:

Sure. So some of the things that are going to continue to move on regardless the data center is up. It has its core technology stack in it. We're starting application migration. So I mean some of these things, a year later or in some cases, two or three years later have moved pretty far beyond. It would be naive to say that there will not be some interruptions in some of the modernization processes as we work our way through integration. But there may be things that we do in integration to prioritize some of the modernization work. So to the extent we identify things that are capacity constraints that, we're going to want to enhance that work may come forward, other things may slip back. I don't think we're going to be able to bring enough resources to do all of it, but how do you prioritize what needs to pull forward and how do you get maybe twice the benefit out of some of the work is part of what we're trying to identify now. Clearly we've set aside a fairly large bucket of money to work through integration. So to the extent that resources are necessary, we're going to be able to secure those and pay for those inside of that number. The challenge really starts to become subject matter expertise. So where do you start to hit limits around who knows how to address that specific problem and there may be some resourcing constraints that will get pulled into integration and then ultimately move back to some of modernization. But I'd say that at this point, given what we know about how far along we are, we expect to continue to make progress, although it may be slightly diverted in places based on some of the pieces that need to get accelerated for the integration efforts.

Joe Martinetto:

Let me, let me step back and so if you are an advisor who is leaving a wirehouse and going independent, it is a very cumbersome process. Right? So any you talk to any advisor who has gone through that and Bernie, if I get ahead of myself, please whack me for what I'm saying. But literally for those advisors, it's often a very paper based process where applications are printed. It can be pallets of applications that are mailed out, collected back, processed. It's a time intensive process for the advisor and for us. And I think a lot of them have that in their mindset as they're thinking about going through an integration. The integration should not be anything like that process. So this is two broker dealers under the control of one company. We expect to be able to get approval to do this on a negative consent basis. So, we should literally be able on the day we're ready to convert, move those accounts from one platform to another and they should be up and they should be working and it shouldn't require additional applications. So it shouldn't, not only is it not paper-based, it should not have to go through an automated application process for the vast majority of accounts. I can't say that that it's 100%, but for the vast majority of counts, both on the retail side as well as on the advisor side, we expect to be able to bring the accounts over in an automated fashion.

Joe Martinetto:

I don't know that I'm going to be able to give you an assurance that you're going to completely buy, but this is so far a pretty open process. So we're working closely with our peers at the TD Ameritrade organization. They're a great company with very proud organization. They want to have this go smoothly for their clients just like we are a proud organization and we want to have this go smoothly. So everybody incentives are focused on making sure that this integration goes as smoothly as possible for the clients. So yes, hey, where there are people, there are always going to be politics. I think, yes, part of the reason that I'm standing up here talking about integration, my job is to try to ensure that the process works as effectively as possible across all of those work tracks across both of the organizations to get us to a place where the integration is successful for the benefit of our clients, for the benefit of our shareholders. And so we are putting a lot of time into making sure that we've got the right processes in place, we're using the right advisors, we're picking the right models, communication processes are getting built early. I think we're doing everything right at this phase to ensure success. We'll continue to provide you with updates as we have meetings like this on, evolution on timelines and dollars and every anything else. It will be up to you to ultimately judge. But it's got our attention and when I say that it's everybody in the executive leadership team. I mean, you look across the tracks and the track leads and our executives are actively involved in making sure this transaction is going to be successful. And maybe in a way that hasn't happened here before. You got on Jeff on the web or nothing. Okay. Brian?

Joe Martinetto:

Yes, it's too soon. We're going to need a little time to build those plans. So at this point we're still in the, we are active competitors in the marketplace, so there is not a lot of conversation going on around what they're doing to preserve their client base versus what we're doing in the market until we get approval from the DOJ, we are preserving competition in the marketplace. So that's, it's a little too soon for us to say that we are working together to try to manage that risk. They're taking actions on their side as they see fit. We're taking actions on our side to manage our firm. And, that's probably about as much as I'm able to, as I'm looking at my lawyer. That's probably about all I can say on that topic. So beyond that, things like service, they have a very strong culture of service just like we have a very strong culture of service. Ultimately, we're going to have to make decisions around how do those organizations come together to be able to support the consolidated client base. But again, this isn't really rocket science. I mean there's, there are lot of models that you can deploy around what, how do you build staffing to be able to provide the appropriate degree of service? I think we're both pretty well developed at this and offer really high levels of client service. There's no reason I could think of that, anything in the integration would degrade the service experience to the client set. I got time for one more. If not, I can say let's go to break and we'll see you back in what, 15 – 15 minutes. Thank you all. [Break]

Bernie Clark:

Jonathan always does that he switches out my mic, so I can’t say as much as he says. And then we get started here. I really appreciate as always the opportunity to be in front of all of you and the thoughtful consideration you give to our different businesses, its fabulous conversations as well as talking to you from stage. In fact, the questions today are awesome. And one of the things I want to highlight and Walt give me a great lead in for this, I think is the fact that we get to answer these questions here. And too often what I do is I read things out in the marketplace and I read things that I don't necessarily think people have taken the time to ask the appropriate questions to really understand what's going on and what we're trying to do in this business. And so I just wanted to start with a little definitional on some of the things I've been reading. And I don't think people have taken the careful attention to understanding who we are and what we stand for. To start with, we love small clients and I hesitate to even use the word small because these are clients that they're all in. This is their business. This is what's so important to them. And the “under $100 million client is a sweet spot”. It's how we built our business in effect from the beginning. And we'd like all sizes of clients and because it is such an important part to help someone run their business and the responsibility we feel for that, we have to have great service. There's just no question but having great service for that group of clients. Often we talk about technologies and where we want to go with technologies, I will tell you that post-integration, we will be using the best technologies available for advisors, which will include extensive use of APIs. We have a lot of APIs, obviously the proposed merge with TD. TD has a lot of APIs and bringing those to bear on behalf of the clients because they know that they’re most important to them. And lastly, just a point of clarity, we have no intention – we have no intention of raising fees and small advisors – and advisors at large in effect. And more importantly, we don't want to change the economic relationship we have with them by instituting some other kind of different fee unless of course as always, for some reason their voice tells us, they'd like to do something differently. So these are the kinds of questions that I think we have to be asking ourselves as we think about integrations. Lots of it is, Joe has done a great job at, was around the technicals. There's no question about how we're going to be able to do those things, but it's also about the intention, intention of what we want to be doing in all of this. So I wanted to start there, just to create some clarity if I could in the marketplace around some of those things that I think require more attention. Today, in presentation, I'm going to spend a little more time on the space than I normally do. I think it’s important because it's so evolving and so opportunistic, I think in how the growth is starting to happen. I of course have to tell you about the success we've had in 2019 and we have had success. I want to make sure that's well understood in what we're doing. And then a nice conversation I had during the break, the 2020 vision. We have a lot to do on the offensive. I think the conversation will be somewhat dominated in the early days around integration. But there's a lot of good stuff going on and a lot of opportunity within the space and a lot of others wanting to come into this space. So let's look at what's happened over the last decade, we've seen a tripling of assets. We've seen extensive growth within advisors. And I would highlight to all of you that one of the important things we have to get our head around is the fact that independent advisors simply provide wealth management in a slightly different way than what may be some of the other models are doing. They're open architecture, they're fee-based, they're open architecture of technology and product and that's how they provide wealth management. And we've defined that in the purpose field sense is almost a $5 trillion space and we've talked about – a lot about that together as we've come together in these sessions. The reality is they're looking out at a market that's almost $20 trillion big. In fact, it was a 2018 number, so I'd argue that $20 trillion is probably much, much higher after the success of 2018 and 2019 as we start to think about where the market has been going and that's the market really that advisors and models are trying to penetrate. There's $7 trillion in the wirehouses still, there's $4 trillion – almost $4 trillion in the IBDs. These are opportunistic areas in growth and really what we want to look at is sort of this broader wide reaching market on going forward. The opportunity in the market has been so pervasive that we're starting to see more and more venture capital come into the space. We've often talked about the different kinds of platforms we have. If you think about the top one, which is really the floor rent, if you will, platform, this is a group of individual firms that like to try and bring advisors in. You can think about it as Raymond James either on their capital for their independent side. You can think about it as LPL. You can think about it as almost any wirehouse or bank that is actually formed these, they're all custodians within this space and they tend to focus and trying to bring teams in and assets in and hold them captive within their own models. The financial acquirers, these are groups that have been going out and systemically buying firms, looking for opportunities for all ups, I mean the names are quire clear as you stick to think about and I think you know most of these names. But I think back of what’s happened and even as we think into the strategic acquirers, what’s happened over the past couple of years and seeing the opportunity in the space as private equity has come in, as other capital has come into the space, we've also seen some monetization activities. United Capital does the largest deal. Goldman has done since the financial crisis at $750 million in acquiring United Capital, which had previously been a collection, if you will, of financial acquirers, a collection of firms that had been independent, now actually part of the Goldman Wealth Management System, kind of interesting how that goes. We've seen Envestnet come in with a minority interest into Dynasty. We've seen Focus Financial, the largest in the class at $124 billion. We've seen Focus Financial go to the IPO market and create a public offering and there are more joining this group on a continuing basis because, again, they see it as opportunistic. They also see that there is a crisis of succession. We've often talked about that aspect of it. Firms by and large want to continue well into the future. And in doing so, they need more capability, more services, and they need to have a future chain of individuals, who can run those firms, principals as well as quite honestly support systems. More of these models are starting to form in a way that don't just allow the firm to be independent, but they actually bring them into a model that one could almost liken to a rent me model where they build all the back office capabilities into a single session. That's helping this space grow again, in what really as a 20 trillion plus opportunity on a going forward basis. Some of the firms have elected to actually start to push more of their capital deeper into their acquisitions. And this is an interesting place because it's really almost the sub-acquisition category where they're providing the capital so that teams that they've brought in can go out and acquire teams and fold them into their business models. Because remember, the choice here isn't simply to put their name on the door, it could simply be to come out and provide a different type of service to a wealth management client and do it through a firm that exists already. Colony Group has done an unbelievable job with this working with Focus Financial. Focus Financial has brought in 26 sub-deals that come into this. And what I hope to kind of impress upon you is not so much the magnitude of the deals themselves or the numbers that exist today, but the fact that we're in an evolving model, changing all the time, critically important to make sure that you're staying on the curve of what's evolving. And while I talk about that – while I talk about that 7 trillion opportunity in the wirehouses, all of the existing models are evolving as well, most of which have already created RIA arms within their model or an E offering of some sort that that makes sense for them to continue to make sure that they're playing in the space. And so, I think the evolution in this space has to begin to address it at that macro level, which is why I said I wanted to talk a little bit more about the industry here as opposed to simply the slice that we continue – consider to be the sort of the purpose built slice that. I've talked so much to you about over the past several years, important to note and important to keep an eye on. Firms themselves, they have begun to add more and more services to their clients. And that has been a key to their success. They deepen the relationship. They accumulate more assets. The model itself serves them well in doing so and in many cases because they are independent of sort, they're able to do those things under the umbrella of their firm's name. If not, they go out and they find third-party providers that can help them to do that. But you can see that the penetration here of what they're doing and coupled with the fact that almost 86% of the time just follow along the chart, they're doing these things without adding to the expense space for the end client, lowering the cost for the end client. Insurance products may be being the exception and that's understandable. But by and large, bringing those capabilities to the client and maintaining the same fee, which you can see here, they've not changed their fee structure. And in an industry where most of the day we've talked about price compression, they've not seen price compression, but they have seen margin compression because they're doing more for the same amount of money. And so scale and the kinds of conversations we've been having and the importance really of bringing together more scale capability for these firms and making their back offices easier to do business with is going to be incredibly important. Serving more assets with the same amount of cost dollars is going to be part of their success component, which synergistically puts them right in line with us. I would argue synergistically it puts it right in line with the idea of having larger organizations serving these clients. And of course safety and security remains an important aspect of that as well. I look about what we've done because I promised I would talk about the success of this year once again in excess of $100 billion in assets. That's significant. We saw this climb over the past several years in what we've been doing. It certainly is fueled by organic growth. And also if you look on the right hand side, you can see the consistency of teams coming out into that very difficult process of transitioning from a wirehouse. Thank you, Joe. We actually have built quite a model, a nice model to transition them, but it is a paper model. It is and will become an electronic – more of a digital model, it's harder to come from a wirehouse than what we were describing as sort of a broker dealer to broker dealer type transition that we would be going through obviously in an acquisition with TD. Their success of firms coming out though they have come out and they are actually growing their businesses organically faster, faster than firms that have been out and in an independent space. And part of that is because they're actually bringing team members out with them as well. And so, you can see the spread here. It is predominantly those who are coming from independent broker dealers and wirehouses and they're making a decision that they want to do something different. They want to serve their client in a different way. They might be chasing open architecture of product when they're doing that or open architecture of technologies and capabilities. They might be chasing that chart a little bit on the other side where they want to bring more services to their clients that may not exist at the firms that they're with, whether that's on an IBD platform or perhaps even in a wirehouse. Going into 2020, I promise you that we are very focused on making sure we're creating and driving excitement into the marketplace as I had talked about an impact this year, there's a lot more we can do in the space. I'm not going to dive into digitization because Joe has already done a fabulous job with that. But we have to keep helping our clients scale. We have to keep scaling. We have to simplify their integrations with us and we will do that I believe through making sure that they can contact us in the ways that they want to, little as Jonathan has talked about omni-channel, but more importantly, making sure we lead with people and support with technologies, which is a position that we will always want to be in. Specialization is something we've become extremely focused on over the past several years. Really what that's talking to is clients that look like each other, like to be with each other. They like to integrate. They like to in effect network with each other because they learn from each other and we get a lot of value out of those things, so specializing the services for the needs of the client. We too often, I think, talk about big and small when in reality what we should be talking about is complexities and needs and capabilities that we want to be bringing in and that’s what specialization has taught us in trying to bring those together and then of course the service evolution. There could be nothing more important in an advisor's life than helping them through the services, the people, the technologies that we can bring to bear. So they can in effect be in business. And so, we have an integration of plan, which we've been working through for again probably a year and a half now well before conversations about what we might be doing in the marketplace and it focuses on all sizes of clients, which we believe is critically important to the success of our organization in serving everybody. An example of that I would go into quickly is just looking at this and we've kind of looked at it in two different ways here. We've already begun a core model as we would call it the under 100 million space. Interestingly enough, you can see that we have 4,500 clients with under a hundred million in assets with us and making sure that the capabilities that they need are brought to them. And I just highlight on a very high level, these are smaller firms. These are firms that don't have as many people quite honestly. These are firms that sometimes require more help on things like safety, security, compliance than they do on maybe the sophistication side of products and technologies. And so not to put them in sort of a broad brush, but we want to make sure we provide those kinds of things to them. And one of the things I'm super excited about and I think opportunistically we'll be able to do and you talked about integration and we don't know when accounts will integrate, but I'm super excited about all the intellectual capital that we've created within Schwab that's available something like a benchmarking study available with a trillion dollar, trillion dollars in assets of information included in it, making that available to two small clients that that may be joining us, should we have again approval on the deal that we're going through and that can happen virtually on day one. It's an area that we've specialized in. We think it's additive to the relationship in addition to all the other things we're talking about. We hired Tom Bradley, many of you know him from the past an expert in this space. We think it's incredibly important to have somebody like that who fully understands and bring some knowledge quite honestly of TD in the industry to the table as well. So excited to have Tom here, who has been here about a month fitting in great and he and I are working very, very closely together. On the right hand side of the chart, I just chose another, if you will specialization and service cut on it and its family office. We've long had family office services. I've talked to you about those kinds of things. And in reality what we've done is we've begun to brand it and it's made a big difference and we hired an expert in that space too, Eddie Brown. You'll get to know him a little bit more, not as maybe as well known a name in the industry, fabulous, fabulous individual. He's worked around family office wealth for quite some time and he's making a real difference in that space. And we're going to continue to fill out the specializations that fit within every size of client because that's how we grow. We know clients want to have a continuum of being able to start with us at the smallest levels that they could possibly be in business and grow all the way up perhaps into the family office space, we're premier wealth if that's – if what they so choose. So with that, I think I'll bring it to close and invite my colleague Jonathan Craig up because the questions are proving to be the best part of the morning.

Jonathan Craig:

Yes, I mean, we haven't seen anything material since the commission of material change. But I would say they're worthy competitors and they're out there gathering assets where both couple of ways. One is originally through low price and they're continuing to bring low prices now on the lending side or cash management side, certainly in the case of – one of them, Robinhood. And so – there's also – there's a brand value that they bring to the table that – for some clients that they're attracted to. But overall, I would say, first from a broad competitive standpoint. I don't spend a lot of time thinking about any one competitor because we operate in such a fragmented market that I'm looking at wirehouses, I'm looking at fintechs, I'm looking at fidelity, TD, E-Trade, Vanguard, banks and who am I missing? And it puts me in a pretty lucky position because rather than having to focus on one individual competitor and how we are going to win against them, it's much simpler to focus on what the client's looking for and what the client need is and serve that. So, I would say, we watched the fintechs, how their growth has been, some of them had a lot of accounts, question a little bit how value of those – how valuable those accounts are, but they've certainly publicly announced some account growth. And we've watched it, but nothing material changed since the commission move.

Jonathan Craig:

Hi, Rich.

Bernie Clark:

Yes, I think it's a great question, but when you look at the segment itself, we have already begun to do so many things for that group of client that as you bring them together and we add digitalization and more scale to that, I think the opportunity there is, is helping them to grow, which is what advisors always ask us to do in reality is to help them grow. And there'll be a lot of competition within that space because what you're seeing really is, is that the space is getting a little more crowded by that those other rent me platforms, so I hate to call it that kind of thing, but the LPLs and the Raymond James wanting to have custodial platforms that can retain those assets quite honestly that had been being a one into the independent space. So we will have fierce competition there. And so, our service level will have to remain extremely high, safety and security of course will be of paramount importance to that group of clients. But one of the things that I touched on, which I think is really, really important to consider, we've spent a lot of time on intellectual capital over the past years. And when I talk about that I can talk about competitive things and growth things like benchmarking, but we have a consultative program for cybersecurity awareness. And I think those are going to be the things that I get excited about bringing to that group of clients and then allowing for the digitization really to take care of the scale of executions and those kinds of things. We've got a lot more smart technology coming quite honestly and we think about digital assistants and chatbots. And these are not things that necessarily people look at and understand upfront what that benefit will be or that scale will be. But I will tell you, I sit with a lot of these small clients and if they've got to call you, they're really kind of unhappy because there's only two or three people in the office. What they really want to be able to do is go out and check digitally their status and just understand what's happening with it and save the questions and the interactions for different times, so they could stay focused on their clients. I think we're going to net a lot from that as well.

Jonathan Craig:

Sure. Let me just answer – Craig, I was thinking about your question. I thought you were asking me what are they doing different as a result of the zero commission? I think you might have been also asking what are seeing differently. And I just want to close that. We certainly saw some wins from the folks who are out there offering zero commissions. Right after we went to zero, we saw significant numbers of clients coming to Schwab from those firms. It just doesn't add up because they're still small firms. They're still small accounts and we operate in a very complex, fragmented, competitive environment. So I want to be clear, when we went to zero, we definitely took away an advantage of some of those fintechs and started to see some volume coming our way. In terms of, the activity that we've seen post zero commissions, it's hard – the analyst and me, it's hard to analyze this early. There's lots of factors at play, investor sentiment, some of the market movements that we've seen. There's lots of factors at play beyond just the zero commissions that drive client fundamentals, but we did see really strong client fundamentals in a fourth quarter, continue to see strong numbers in January. In our case, it's not huge amounts of incremental trading. That's not our client base, but it's significant new engagement. What we've learned over and over, I think, at Schwab is when we do something disruptive in the industry, clients and prospects tend to lean forward. They tend to engage, they want to ask what's going on, they engage with their portfolio and that causes us to have meaningful conversations, that causes them to do something different. We've seen significant upticks in advise flows. We've seen good flows into our automated solutions. So I would say, the zero commission move was a significant move that created news in the marketplace place position Schwab as a leader that caused people to lean forward and engage at the right time when the markets were moving positively. And some total of that created some strong numbers.

Brian Bedell:

A question for Bernie. On the RIA, it's Brian Bedell from Deutsche Bank by the way. On the RIA, the concern from some RIA is that they prefer to use two separate platforms, just from a risk control perspective from two different owners, let's say. So what do you – how are you assessing that that concern right now? And what other major concerns are you hearing from the RIAs about the combination? And how are you addressing those concerns?

Brian Bedell:

And then on the cash offer side, that was obviously a topic in Walt's presentation. Are you seeing any type of that activity on the RIA side from other competitor – competitive RIA firms? Or is it a different sort of angle from the other firms in terms of trying to attract the Schwab and Ameritrade customers…

Jonathan Craig:

I think Brian the question is around cash offers…

Jonathan Craig:

Like in retail, we have competitors buying our business with cash. Are you seeing the same?

Brian Bedell:

It's so interesting.

Brian Bedell:

Thank you.

Bernie Clark:

Well, I think we have a huge opportunity to scale in this space and I think that's part of the opportunity, but I also mentioned some of the services that we've been building. I always refer to them as intellectual capital. It really has to do a lot with consulting and virtual consulting and making sure that we're educating the marketplace and making sure we're building strength. I talked about succession planning. I think it's incredibly important on the smaller end of the space that we're building good succession models that exist for these firms and making sure that we're scaling into the regulatory and compliance space as well. And I think all of those things we can help at the collection of our clients. One of the things that we've learned with advisors is they grow faster when they network with each other. They grow faster when they get to know each other. We do things and this is just one example of things, but we have many advisory boards and groups that we bring together, communities that we bring together. We so often find that those communities end up coming together and after some period of time we find that they're doing deals with each other or they're joining each other and they’re creating stronger organizations. So really, I think one of the opportunities here is, is strengthening sort of the independent space.