The feedback that Charles Schwab has received so far from its recently announced decision to eliminate trading commissions on stocks, ETFs and options across mobile and web trading channels has been “very positive,” according to Walt Bettinger, the company’s CEO and president.
And the “early metrics that we’ve seen support that,” he said Friday during the company’s Fall Business Update call with institutional investors that was webcast. But he stressed during the Q&A that Schwab didn’t make its decision to cut commissions based on what the company would achieve in short-term client metrics. Indeed, a recurring theme throughout the update was that Schwab was making major decisions based on its long-term “virtuous cycle” strategy.
With the implementation of zero commissions in online trading earlier this month, combined with the elimination of account minimums, Schwab has “removed the final barrier for many more Americans to become investors and participate in the growth of our country and economy,” Bettinger said.
Meanwhile, the “responses from competitors were precisely as we expected,” he noted. Schwab had come to the conclusion before the move that it would be in a better competitive position after all the online rivals followed it by eliminating commissions also, he told investors.
The elimination of trading commissions was something the company had been anticipating was inevitable for more than a decade and “we have been aggressively at work over the last couple of decades executing on strategies that reduced our reliance on commissions from” about 50% of Schwab revenue down to just mid-single digits now, he said.
Although some observers might have been surprised by the timing of Schwab’s decision, anyone carefully watching its strategy would have expected its move, he argued.
The ability of Schwab’s virtuous cycle to deliver strong business momentum has rarely ever been more evident than it was in the company’s third quarter ended Sept. 30, Peter Crawford, its chief financial officer, said in prepared comments at the start of the update. The company had nearly $57 billion in net new assets in Q3 — a record Q3 achievement for it, he noted.
The company’s strong Q3 was achieved despite a difficult macro environment in which the equity markets continued to “grind” higher, while pressure on interest rates intensified and U.S. consumer confidence softened, Crawford told investors. Despite those challenges, the company has still been able to attract just under $150 billion in net new assets so far in 2019, he noted.
Other business fundamentals demonstrated continued strength, with total active brokerage accounts growing 6% to 12.1 million in Q3 compared with a year ago, while total client assets grew 6% to $3.8 trillion and total advised assets increased 7% to $2 trillion, Crawford said.
“As we look to the future, we think we’re well-positioned to weather the environment, continue to grow organically and produce solid financial performance,” the CFO said.
Schwab expects Q4 net interest margin will be lower than Q3 assuming the Federal Reserve cuts rates further, as expected, he said. The company is still developing its 2020 plan, so it’s too early to project revenue performance, which will be dependent on factors including future interest rate cuts, he noted. But Schwab is “in a very strong position” as 2019 comes to a close, he said.
“We are on offense at Schwab,” Bettinger said during his prepared remarks, adding the firm is “pushing ahead aggressively” as it continues to enjoy competitive advantages of size, scale and operating efficiency to help drive profitable growth.
Its strategy continues to be to look at its business “long term” beyond the current rate cut environment and “tomorrow’s potential recession,” Bettinger said. Its goal is to widen the nearly $1 trillion lead it has on its nearest rival when it comes to total client assets, he said. Schwab now has $3.8 trillion in assets vs. JPMorgan’s $3.1 trillion, according to Schwab.
The company, meanwhile, is “dispelling some of the myths” about its retail business, Bettinger said. For example, about 57% of Schwab’s new-to-retail households are younger than 40, which should erase the “myth” that it’s not attracting younger investors, he told said. It’s also “approaching 1 million affluent households” (clients with more than $250,000 in assets) and approaching 20% of retail client assets under an advisory relationship, while “almost three-fourths of our flows into our retail advisory solutions” are those opting for those solutions for the first time, he said.
Schwab also continues to be the “leading advocate” for the RIA business model, he said, spending millions of dollars on national TV ads to promote the benefits of working with RIAs. It’s passed over 1 billion views of such ads to help RIA clients grow their firms, he noted.
We’re also “just at the tip of the iceberg” in terms of the “impact from our digital transformation,” he went on to say. For example, its continuous mobile app updates have helped drive a 20% increase in mobile users to 1 million-plus per month, according to Schwab.
During the Q&A, Bettinger predicted there could be more price disruption on the advisory side of the business, but “most of the disruption is likely to occur in the quality of the experience and the integration of people and technology moving forward.”
— Check out Charles Schwab Says Zero Commissions Will Benefit Advisors on ThinkAdvisor.