The Charles Schwab Corporation (SCHW) Earnings Call Transcript & Summary

Okay. We are live. Good morning, everyone. Welcome to Schwab's Summer 2021 Business Update. This is Rich Fowler, Head of Investor Relations, coming to you on a top-down day out here on the West Coast. And we realize there's all kinds of fun weather going on across the country this summer. So here's to a top-down day in your neighborhood soon if it's not right now. In the meantime, we hope everyone on the call and your families remain safe and well, and we thank you for spending time with us today. I think we all know by now that my role in these sessions is to set things up and get out of the way, so here we go. Joining me today, both virtually and literally, are Walt Bettinger, our President and CEO; and Chief Financial Officer, Peter Crawford. We're giving Joe Martinetto the summer off from update duties, so integration commentary will be scattered across their 2 presentations. With just "the 2 speakers" today, we will plan to spend about an hour for Walt and Peter to bring you up-to-date on life at Schwab right now, starting off with some prepared comments and following up with Q&A. We will follow tradition on questions. We'll do so via the webcast console as well as the dial-in. [Operator Instructions] Walt will start us off to discuss our strategic picture. Peter will review the recent financial performance of the combined organization, and then move to discussing the current financial outlook before taking us into Q&A, which Jeff Edwards will moderate once again. Before that, another moment on the wonderful wall of words holding steady at one riveting page, the fundamental point of which is to remind us all that outcomes can differ from expectations, so please keep an eye on our disclosures. And finally, the slides will be posted on the IR site during Peter's prepared remarks, as we've been doing. And with that, I think we're ready to get going. So Walt, please take it away.

Thank you, Rich, and good morning, everyone. Thanks for joining us here as we approach the August period in which many will be on vacation. I'm appreciative of the time that you've invested with us this morning. So second quarter 2021 was a strong quarter for us at virtually all levels. Clients engaged with us throughout the quarter. And although trading did moderate from, I think, what's fair to say, the extraordinary and unprecedented levels of the first quarter, our no trade-offs approach to serving clients led to record levels of net new assets. Now long term, as you know, our primary focus has always been on the long term. We are a healthier business when clients bring assets to us, when they open new accounts, and they make prudent long-term investment decisions. Similarly, our internal efforts are also focused on the long term. And in the quarter, we made substantial progress on our integration efforts with the TD Ameritrade acquisition as well as client enhancements that we believe will help sustain our strong competitive positioning in the market. And importantly, these efforts are client-focused through clients' eyes, designed to further assist our clients in achieving their financial goals in an efficient and cost-effective manner. So let's go ahead and dig into the quarter. In the second quarter, interest rates, of course, slid lower. And while the stock market continued to climb to record levels, and despite relatively high inflation figures, the debate over whether the inflation we are seeing is temporary or part of a longer-term issue still led to falling interest rates. And of course, they have continued to fall even lower since quarter end. Clearly, it's a complex environment for investors now, they -- as they try to decipher where the economy is going from here. But nevertheless, investors continue to have confidence in making their financial decisions with Schwab. Core net new assets exceeded $0.25 billion for the first half of the year, and they exceeded $100 billion in the second quarter, really an exceptional result given tax season impacts in Q2. Our core net new assets in the first half of this year already exceed any full year in our firm's history say of last year, 2020. And as of today, our core net new assets now exceed the entire 2020 year, which, of course, was also a record year itself. Our 8% organic growth rate on net new assets exceeds what really was a strong 6% growth rate in the first half of last year. And new brokerage accounts exceeded 1 million in the second quarter. That's the third consecutive quarter that we've exceeded 1 million new brokerage accounts. I think it's fair to say that if there was ever a question about the strength of our franchise coming out of the pandemic, I believe these results provide answers. As I mentioned last April, this degree of trust from our clients is both humbling as well as a clear message of the confidence that they have in Schwab for their investing needs. Also last April, I said that we believe that 0 equity commissions and the popularity and ease of mobile trading imply an overall higher baseline level of trade volume than we would have seen in the past. And as we emerge from the pandemic and put the social media-driven stock frenzy of last quarter in the rearview mirror, I think it's fair to say that this prediction seems to becoming a reality. As I mentioned earlier, trading did moderate from the extraordinary and unprecedented levels of the first quarter. But that said, it remains strong, finishing above the same period from 2020. Frankly, that was a period where many thought that trading volumes were benefiting from the early months of the pandemic and might not be sustainable. In addition, our client engagement remains robust in other areas across the firm, including digital interactions and borrowing at both our bank as well as record levels of margin borrowing. Here on Slide 8, we talk about our commitment to no trade-offs regularly at Schwab. We believe one of the keys to our success is delivering world-class omni-channel service, outstanding products and services from a trusted brand and doing so at an outstanding value, because that leaves more of our clients' own money in their pockets. The impact of our no trade-offs approach is evident across many of our client metrics. This particular slide illustrates not only the extent to which clients entrust us with their assets but also the impact of our strategies in broadening out our appeal to investors of all ages, real investors. Even as we lowered the average age of our retail client base, which, of course, is no small feat, just given the math since we're talking about tens of millions of accounts, the average assets per household has actually increased by nearly 20% in the last year. We're attracting younger investors, but they also have a financial plan for the future, a long-term approach to investing, and they have real money as evidenced by the average assets held at Schwab for clients under the age of 40 as well as under the age of 30. Now moving over to the investment adviser or custody side of the firm, we continue to see success as advisers trust us to help them serve their clients and grow their businesses. We more than doubled our level of assets transferred from competitors in the second quarter of 2021 compared to the same period last year, and achieved a rather remarkable net transfer ratio of almost 3:1. Now similarly, our success in net new assets is evident with an 84% lift from the same quarter last year. And importantly, this success occurred among both existing investment adviser clients as well as new investment advisory firms. The trend of the breakaway broker shows no signs of slowing down, and the desire and ability of our existing RIA clients to grow their firms are as powerful as ever. Our success with both new as well as existing RIA firms sends a clear message that Schwab is a trusted custodian for investment advisers of all tenures. And importantly, as Bernie Clark has been emphasizing for years, of all sizes. Consistency is a word that we use often at Schwab, when speaking with our clients as well as when speaking with our stockholders. Consistency of strategy means that others can count on Schwab, and consistency of strategy also means that we can make long-term decisions and patiently focus on executing on them even if they require multiyear efforts. Our 3 corporate-wide initiatives remain intact, enhancing our scale and efficiency so that we can serve more clients in the way they want to be served and efficiently support our ongoing growth; ensuring win-win monetization that benefits our clients with more effective, lower cost and personalized ways to invest, while also benefiting our stockholders with revenue growth; and client segmentation designed to deliver tailored experiences to our different clients' needs and differing investment approaches. Now looking specifically at 3 of our recent transactions, you can see how they fit into those key initiatives of scale and efficiency, win-win monetization and client segmentation. Our TD Ameritrade integration remains on track. And in addition to the complex technology work, we're beginning to make progress on other revenue-enhancing efforts, efforts whose financial benefits we were quite cautious about quantifying when the transaction was announced because we wanted to be confident in our ability to deliver the revenue synergies. That confidence is now growing quarter-by-quarter. Our Wasmer Schroeder transaction is also exceeding expectations despite the ultra-low interest rate environment. Net flows this year to date are already almost 1/3 of the entire AUM of that firm when we acquired them. This is a classic example of win-win monetization because our clients who invest with Wasmer are benefiting from solid investment performance, while at the same time paying fee levels that are generally lower than what they were paying with other fixed income asset managers on our platform. And our USAA transaction continues to deliver, not just in terms of the synergies we committed to but also in terms of referrals to Schwab from the USAA member base. If I could, I also want to add a personal comment about working with USAA. Next summer, I'll complete 4 decades working full time in the business world. During that period, I've experienced almost every type of organization and businessperson, good and bad, forthright and less than forthright, honoring their word and maybe inconsistently honoring their word. But I can say without reservation that in my estimation, USAA and its leadership, and frankly, also its members, set the standard for professionalism, honesty, integrity and fair dealing. And it truly is an honor to work with USAA and serving their members. Now periodically, we share our long-term views on industry themes. And those of you who follow Schwab are familiar with our doing so. We share these themes because as part of our efforts around transparency, we want to ensure that close followers of Schwab can better understand and maybe even anticipate, at times, strategic moves that we make. Also, by debating which are the appropriate themes internally, we're able to reach a common agreement on where we should be making these strategic moves. And of course, therefore, also what efforts should be prioritized versus de-prioritized. Now while reviewing our themes during the first half of 2021, we recommitted to our belief in their accuracy. And we believe our commitment to them continues to help guide our efforts in building market share domestically. I believe when we publish the slides during Peter's section, we'll include those themes in the appendix of the presentation. So earlier, I referenced some comments I made last April. And in closing, I'd like to do so again. Last April, I shared that Schwab is never quarter-to-quarter. We're always focused on the long term. We recognize that the path forward will always have mountains and valleys. That's the nature of the investment business. But during those periods of economic upheaval, our strategies, our priorities, our strategic initiatives remain consistent, and they remain intact. So before I turn it over to Peter Crawford to review our financial results, I just want to emphasize again our long-term perspective. We all know that markets will rise and fall, and interest rates will rise and fall. Regulatory approaches will shift over time, often in concert with political wins. But in my opinion, through a client-size strategy that delivers a no trade-offs approach for clients will always win in the long run. And that is what you can count on because that's what we're committed to at Schwab. Peter, let me turn it over to you.

All right. Well, thank you very much, Walt. So Walt talked about the strong client engagement we're continuing to experience; the success we're enjoying in both our retail and advisory businesses; gathering assets and attracting new households, both newer investors and those leaving our competitors; and the progress we're making on our TD Ameritrade and other acquisitions; and finally, he talked about our commitment to advance a set of priorities that will help our clients and our business, capitalizing on some long-term trends shaping our industry. In my time today, I'll talk about how we're able to translate that high level of client engagement and business momentum in the financial results that were off Q1's record levels but still quite robust. I'll also provide an update -- an updated outlook for the rest of the year, rolling forward, once again, the "mathematical illustrations" we shared back in April, which reflected difficulties in predicting the evolution of client engagement in the near future. And finally, I'll provide an update on our capital and liquidity position, both of which are the best they've been in over a year. And what you'll hopefully hear is that this company continues to drive exceptional operating and financial performance, despite an anticipated moderation of trading activity and continued low interest rates. And that's a function of our unrelenting focus on seeing through clients' eyes, the competitive position we have established, our all-weather business model and continued expense discipline. In short, we're pressing forward on our strategic agenda from a position of strength, proceeding through these uncharted waters with humility but also with a lot of confidence and a lot of optimism. Now let's talk about some of the factors that contributed to our strong financial performance in Q2. Unlike the first quarter, we faced a mix of headwinds and tailwinds. Our performance was helped by an economy that continues to improve, highlighted by higher equity markets, and at least in the first half of the quarter, slightly higher interest rates as well. Though trading activities slowed from the record shattering pace of the first quarter, investor sentiment remain bullish, as indicated by growth in margin balances and continued net equity purchases. What endures amidst this choppy environment is our unmatched ability to drive hearty organic growth, over $250 billion in core net new assets in the first half of the year and 4.8 million new accounts. Our financial performance for the quarter reflected that mix of crosscurrents. Revenue decreased 4% sequentially, driven mostly by a 21% decrease in trading revenue as a 28% reduction in DATs, or daily average trades, was partially offset by a mix shift towards more derivatives activity. And I said back in October that we seem to be at a turning point in terms of net interest revenue, with the potential for sequential decreases in NIR to give way to sequential increases. And sure enough, we've now had 3 consecutive quarters of increased NIR, despite interest rates that continue to be quite low by historical standards. In Q2, NIR increased 2% as growth in interest-earning assets offset a 2 basis point reduction in our net interest margin. And while reinvestment rates remain below our overall portfolio yield, the growth in margin balances was accretive to NIM. And we benefited from a $24 million reduction in premium amortization from the first quarter, while asset management and admin fees increased by 3% to a record $1.05 billion due primarily to increased balances in our advisory solutions in part due to record net flows in the second quarter, which offset a slight increase in money fund fee waivers due to continued reductions in short-term rates. And growth in other revenue was boosted by a $25 million gain on investment we had in an entity that was acquired in the quarter. Now our adjusted expenses increased 1% sequentially, reflecting the $200 million reserve we recorded relating to an ongoing SEC investigation. And I'm sure many of you want to know more about that, but I -- hopefully, you'll all understand there's really nothing Walt and I can say beyond what we disclosed in our 8-K a few weeks ago. And that reserve amounted to 8 percentage points of adjusted expense growth. Offsetting that growth was a decrease in some seasonal expenses from the first quarter as well as a reduction in trading-related costs. With the decline in revenue and the large onetime expense, our key profitability metrics fell from the heights achieved in the first quarter, but our adjusted pretax margin remained just shy of 45%. And our return on tangible common equity was 20%, which I hope you all agree is quite healthy under the circumstances, a reflection of the durable business model we have created. And that was about -- that was the income statement. Let's turn our attention to the balance sheet. Our balance sheet grew 2% sequentially, reflecting mostly flat client cash balances as organic cash growth was offset by tax payments and net equity purchases. And we thought we might begin the initial migrations from TD Bank to our balance sheet on June 30, but that actually happened on July 1 instead. And since that time, we've actually moved almost $10 billion in balances, of course, not reflected in the numbers that you see on this page here. As I mentioned previously, we saw a strong growth in margin utilization. We also continue to see remarkable growth in bank loans, which were up 14% sequentially and to 38% in the last 12 months, a function of the low interest rate environment, certainly, but also of our incredibly competitive rates that still provide an attractive spread relative to the securities we'd otherwise buy. To support the growth in margin balances while meeting our liquidity coverage ratio obligations, we bolstered parent liquidity with a net $1 billion increase in debt. And we also used some of that parent liquidity to inject capital into Schwab Bank and Schwab Premier Bank, boosting their Tier 1 leverage ratios to 7%. And finally, after redeeming our Series C preferred, our consolidated Tier 1 leverage ratio remained at 6.4%, still a little below our operating objective of 6.75% to 7%, but well above the regulatory minimum. I mentioned that client cash balances were flat in the quarter, and here you can see why. Though net new assets remain quite strong, organic cash flows were a bit softer than Q1, reflecting, of course, seasonal tax payments. In addition, clients continue to be net buyers of equities in the second quarter, though at a lower level than in Q1. And with the rise in the equity markets, client cash allocations dropped to 10.5% of assets, which is actually the lowest quarterly figure since Q3 of 2018. Now at the winter business update, we debuted a new approach to describing our potential financial outlook, sharing 3 mathematical illustrations demonstrating how our 2021 financial performance might unfold given changes in trading, margin balances and client cash balances. And as a reminder, we did that given the difficulty in predicting how client behavior would evolve from the then record activity levels we saw in Q4. And then we updated those illustrations at our spring business update using Q1 activity levels as a springboard. Now those latter 3 illustrations shared a set of common assumptions around "normal" long-term equity market appreciation, relatively stable interest rates, a securities lending activity on par with prior quarters and overall balance sheet growth in line with the outlook we shared at the beginning of the year. As we've discussed, the quarter unfolded differently than those illustrations assumed, with the equity markets moving sharply higher, interest rates actually dropping, securities lending pretty much comparable to the illustrations and maybe a little bit lighter, and balance sheet growth that may look like but is actually close to expectations given what are typically stronger seasonal flows in the second half of the year. Now as a reminder, where the 3 illustrations varied is in their assumptions about trading, which reflected at plus 20%, minus 20% and flat to the Q1 level; and margin balances, which were reflected at plus 10%, minus 10% and flat again relative to the Q1 level. Now interestingly, trading and margin balances moved in opposite directions from that Q1 level with trading down 28%, as I mentioned earlier, and margin balances up 11%, both just outside the respective illustrative bands. And not surprisingly, therefore, revenue was in line with what the illustrations suggested, while adjusted expenses were above the range due entirely to that unanticipated $200 million reserve. Now these illustrations seem to have achieved their intended purpose, and given that, we're once again using that approach and sharing our thoughts on how the rest of the year might unfold. These illustrations have the same underlying assumptions, but are refreshed based off of the latest conditions, including rates that follow the current forward curve as of early July, so pretty close to where we are today; equity markets that grow modestly from here; securities lending revenue consistent with recent levels; and growth in balance sheet cash, excluding, this is really important, excluding the IDA migrations, similar to what we suggested back in February; and once again, reflecting trading and margin balances with Q2 now our launch point rather than Q1, but the same variation, plus or minus 20% for trading and plus or minus 10% for margin. Each of these 3 illustrations would produce different levels of revenue growth relative to our annualized Q4 revenue. And you can see that depending on how the year unfolds, we could see revenue growth of 11% to 13% in the first illustration to 6% to 8% in the third illustration. Now that range is tightened from the last quarter since we only have 2 quarters left in the year rather than 3. And the growth rates have come down a bit since our starting point for trading -- again, these are just the illustrations, but our starting point for trading is now lower. Adjusted total expenses would also vary from 6% to 8% growth off our annualized Q4 number. This is about 100 basis points higher than what we shared at the spring business update. But that is entirely a function of that reserve amount, which equates to roughly 200 basis points of adjusted expense growth and was not part of our April numbers. And across all 3 of those illustrations, we'd expect an adjusted pretax margin of at least 45% even as we advance the priorities that Walt talked about. Now embedded within this updated expense outlook is our latest assessment of the progress on the expense synergies related to the TD Ameritrade acquisition. We previously said we expected to capture 1/4 to 1/3 of the $1.8 billion to $2 billion in overall expense synergies by the end of the first year on a run rate basis. And I'm pleased to report that we have already captured 1/3, and now expect to achieve closer to 40% of that total amount by the end of the first year. These mathematical illustrations I shared would result in a NIM in the mid- to upper 140s for the full year, and potentially, the upper 140s for the second half of the year with the usual caveat that the trajectory of NIM is influenced by a number of factors, including how soon and to what extent prepayment speeds slow as the industry works through the pool of potential refinancings; the trends in reinvestment rates; the growth and composition of interest-earning assets, including margin utilization; and of course, what happens with securities lending. Our #1 priority for capital management is enabling the continued growth of our business, supporting our clients who choose to entrust us with their cash allocation. Our consolidated Tier 1 leverage held steady at 6.4%, still below our operating objective of 6.75% to 7%, but well above the regulatory minimum. Our preferred to Tier 1 leverage ratio remains at the upper end of our range, so it's possible that our first step, once our capital exceeds our operating objective, will be to redeem some of that preferred. And as I mentioned earlier, we have migrated $10 billion in balances from the IDA to the balance sheet of Schwab Bank and the TD Ameritrade broker-dealers, leaving us a few billion dollars more we're able to move over the next 11-plus months. Let me close with a few thoughts. We're certainly gratified by the financial and operating performance of the company amidst an environment that continues to be relatively challenging. But as much attention as we pay on meeting our near-term commitments, our priority remains, as Walt discussed, as always, on building for the long term and seeing through clients' eyes and anticipating our clients' needs; capitalizing on the potential of the TD Ameritrade acquisition; advancing our other initiatives around scale, win-win monetization and segmentation; reinforcing our significant competitive advantages; and delivering for our clients, our stockholders and our employees. Those priorities should sound familiar. But that consistency is something we're really proud of, and it's something we believe has been a key to our success. And that focus on clients is what enables us to tune out the noise, the swirl, to not get distracted, but instead continue to advance our strategy and drive long-term success. With that, let me turn it over to Jeff for our Q&A.

Great. Thank you, Peter and Walt. Operator, let's go ahead and turn to the phone lines. And can you please remind everyone how they might ask a question?

[Operator Instructions] Our first question over the phone lines comes from Rich Repetto.

I guess the first question would be on -- to Peter on the BDA. And you mentioned that you can still sweep over a few billion. Based on the calculations, we're kind of -- could you get a little bit more specific. Is it a few $6 billion to $8 billion? And then, I guess, the reinvestment rate on these balances? And what's the timing that you'd actually deploy the 10 -- $9.9 billion that you brought over on July 1?

Thanks, Rich, for the question. So a couple of things. So to get more specific in terms of the IDA or the BDA. So at legal day 1, we had roughly $156 billion, I believe, in the -- across the BDA. So the agreement is that we can reduce that amount by about -- by $10 billion. Today, I want to say we're roughly $150 billion, so that would leave us about $4 billion or so left that we could move over to our balance sheet over the next, again, until -- between now and June 30. In terms of the timing when we might do it, really TBD. In terms of the investing, the timing to invest the $10 billion, we actually essentially did a little bit of pre-investing on that. We actually reduced our liquidity to the lower end of our overall 5% to 7% target. So we take -- took advantage of some of the opportunities that we saw in June, got a little bit ahead of that investing knowing that, that was coming on July 1.

And my -- one follow-up would be for Walt. Walt, you highlighted as one of the strategies that's been a long-time strategy is client segmentation. And there is a peer, sort of, testing the waters in the market here right now that's been focused on the small, younger investment with significant amount of success. So I guess the question is, do you feel like Schwab needs to focus more efforts or -- on the younger entry level -- that just first-time brokerage accounts? Or do you think that -- or do you -- has there really been no impact to Schwab, I guess? So how are you thinking about it?

Thanks, Rich. I want to appreciate your question. I think we've had a pretty strong focus on younger investors for quite a while, whether it's programs like stock slices or our checking program that is very attractive for people without minimums and reimbursing ATM fees. And so I think we've had a fairly strong focus on them. And we've continued to have great success in winning younger investors. The one slide I showed earlier indicated a couple of year decline in our average client -- or average client age, which, again, is tough to do when you're talking about 30-plus million accounts. So to move that number means you're winning a lot of investors at a meaningfully younger age than our averages. The other thing we're doing is we're really putting a lot of effort into winning younger investors who are likely to view the relationship with Schwab on a long-term basis with a long-term investing time horizon. Again, I think that same slide showed that new investors that we're winning under the age of 30, average about $25,000 with us. And that is multiples -- many multiples, I believe, of what you would see for average investors under the age of 30 at firms that may have a focus on younger investors themselves. So I think we feel fairly confident about what we're doing. At the same time, we have respect for every competitor, and every competitor brings something unique to the marketplace, and I think, encourages us as well as all competing firms to be on their best games.

Our next question comes from Devin Ryan.

Walt, Peter, Rich, maybe one just on the net interest margin outlook in Richard's prior question. If you can, where you are seeing reinvestment rates today? And then also what you're modeling for premium amortization kind of movement from here? It's good to see that you saw a little bit of relief this past quarter. Obviously, rates have moved lower. So are you still expecting that to improve or deteriorate? And any other kind of just thoughts around the NIM would be helpful.

Sure. So on the reinvestment rates, so I'd say that the overall reinvestment rate is probably somewhere in the 105 to 115 basis point range. That's a mix of roughly 30-ish basis points or so on the floating rate assets we purchased, which is pretty consistent with the previous quarter. And then on the fixed rate side, more like 120, which has come down a little bit, we can -- continue to see credit spreads at historically tight levels. And with the decline in benchmark rates since our last update, we've seen that manifest itself in slightly lower reinvestment rates on the fixed rate side. So a blend of that 30 and 120-ish or something like that at kind of 85%, 90% fix gets you to sort of in the 105 to 115 range. In terms of the premium amortization, that's a tougher one to answer. And just to take a step back, I know you know about premium amortization, but maybe for some of the folks on the call, the premium amortization amount that we have in any period of time is a function of the size of the balance sheet, the amount of the securities that we buy above their par amount, which basically, therefore, have an embedded premium that we need to amortize, and then the level of prepayments, which themselves are a function of the interest rate environment and how the mortgage originators choose to pass those interest rates along to their borrowers, and then, of course, the reaction function in terms of refinancing. And of course, with the drop in interest rates, we saw a surge in that refinancing activity, and therefore, in our premium amortization relative to early -- in 2019 and early 2020. Now we did see that premium amortization drop, as I mentioned, from the second quarter to the first quarter, and we actually saw a drop from April to May and then May to June. So we saw a month-over-month sequential decreases in premium amortization as well. And our expectation would be that if interest rates continue to stay at these levels, it would be reasonable to expect that, that premium amortization would continue -- at least, on the existing book, would continue to fall in coming quarters. And potentially, that effect in isolation might improve -- everything else being equal, which, of course, everything else is rarely equal. But everything else being equal, would help on the -- help with the AFS portfolio yield by a handful of basis points. I will say that if -- should we see a rate increase, we could see a relatively significant reduction in that premium amortization. We've done some modeling that would suggest that if we saw about a 25 basis point increase in interest rates across the curve, that would lead to potentially a 5 to 7 basis point reduction in that premium amortization. So -- but I think over time, as we work through the pool of potential refinanceable mortgages, one would expect that premium amortization number to come down anyway. And of course, it will happen more quickly with higher interest rates, more slowly with lower interest rates.

Okay, Peter. That's incredibly helpful. And then a follow-up probably for Walt here, just -- incredible net new asset growth year-to-date, exceeding all of last year, which was obviously a terrific year. We're seeing very strong engagement across the industry, but then Schwab has a number of kind of idiosyncratic growth initiatives and the acquisitions, et cetera. You highlighted retail asset gathering up 65% relative to last year, the deals on the custodial side or larger and new customers. I guess what I'd love to try to parse through a little bit, I know it's not easy, but how much of this north of $100 billion of M&A do you feel like is a function of the environment engagement being kind of at record levels versus all the positives going on at Schwab right now? And ultimately, just trying to kind of think about the sustainability of a level that may be quite a bit higher than we've seen historically for you guys.

Yes. So Devin, certainly, as you indicated, the engagement level across the investing universes is at a high level. And so some percentage of the records that we're achieving in net new assets would certainly be attributable to that. I think the key metric that we tried to emphasize when you go underneath that is what's going on with transfers. Because transfers are, in many ways, a better means of evaluating your competitive position. And whether you are not just riding the wave of the level of engagement from investors, but riding that wave to maybe a more effective extent than some other firms you're competing with. And when you look at our TOA numbers, they're also performing at or above record levels across our business lines. We shared, I think, some details in this presentation around, specifically, in the RIA side, approaching 3:1. And those are ratios -- 2:1 is an extraordinary ratio. When you start approaching 3:1, you're having tremendous success relative to competition. So I think we feel very confident with the fact that we are gaining share to a meaningful extent. And yet, the best is still to come. Many of the things that we've been talking about, you'll see introduced in the coming months and year around personalized investing and other capabilities that we'll be delivering to both new clients as well as existing clients. So we like our position. We always bring it back to the philosophies that we talked about through client size and offering no trade-offs. And we think, therefore, our competitive performance is likely sustainable.

Our next question comes from Brian Bedell.

Excellent. Great. Just to go back on to the revenue synergies that you mentioned, Walt, early in the presentation that, I think, things are tracking better quarter-by-quarter. If you can just maybe outline in which particular areas more recently, have you seen better progress? And then is -- I guess, is there any sort of update to the overall revenue synergy guidance, or at least, how you're tracking in, say, the next year?

So Peter, I'll try to take the first part of that. And I don't know whether we have an update we want to provide. But if so, I'll turn that to you, Peter. So it's in a number of different areas. We see it in the interest in former legacy -- or TD Ameritrade clients and capitalizing on some of the Schwab capabilities, whether that's in the borrowing side, in the digital advisory side, in the personalized advisory side. We've seen it in areas that revolve around trading, routing capabilities around trading with a great engine at TD Ameritrade. We've seen it in some of the areas of sec lending. So it's pretty broad across the client base. And again, I would suggest without getting into math on it that we're just in those early stages. And that's why I shared it in the context the way I did that on deal announcement, we didn't want to explain the economic value of the deal from revenue synergies because so often those are either less believable, or at least, discounted to such a great extent. So I think we sort of want to apply the same approach today, which is, as we deliver it, we'll identify it. And then it's real, and it's less a speculative-type approach as so many firms tend to do when they're involved in M&A. But Peter, let me turn to you. I don't know whether we actually have any updates that we are in a position to provide or want to provide on the -- on more specifics.

No, that's exactly right, Walt. So we did provide -- Joe provided an update on the revenue synergies back in April. And so there's nothing to say beyond what he shared. And I would just echo what Walt said, we certainly feel very good about our ability to capture some of those. We also don't want to be too specific in terms of sort of setting those goals from one quarter to the next. As Walt has talked about many times, when you set specific goals like that around, let's say, advice penetration among legacy TDA clients, you can start to do things that may not always be in the clients' best interest. So we want to keep those goals relatively high level for now, and we'll certainly be giving you an update on our success in capturing those revenue synergies, but it will be more in arrears.

Yes. No, that makes total sense. And then maybe just on the expense synergy you are running ahead of schedule there. Does that change that 30- to 36-month integration in your client day 1 time line at all? Or are you advancing in that effort? Or are -- I guess, where are you capturing the additional expense synergies?

It doesn't change the overall time line. We still are looking at that 30- to 36-month time frame that Joe had talked about back in April. And I would expect that as we -- what I'd say is we probably moved a little more quickly in the first year around some of those -- sort of those duplicate functions and sorting that out. And then there'll be another big sort of aspect or a big piece of this expense synergies that will happen soon after client day 1. But it doesn't do anything in terms of changing the overall time line we still are targeting that time line right there and working towards that.

Our next question comes from Ken Worthington.

Last quarter, Peter, you spoke about the transition at Schwab from a warehouse to more of a stitch-fixed model with deeper relationships with high-quality partners. Can you or Walt talk about the progress in this transition and how we should expect it to evolve over time? And there's probably a number of parts to your win-win monetization priority. Where does deepening these relationships fit in and towards that win-win monetization?

Walt, would you like to start with that?

Yes. Yes. Sure. So we are making steady progress on the first part of your question, Ken, that you asked, as we work through relationships with some of the firms that we've historically worked together with to serve clients and make available to clients investment products and services. So we are working through that. I'm very optimistic about where we are, but not ready to probably give a time frame on some of the announcements. But when we are ready, you will -- of course, we'll be public about it, and you'll recognize probably why we wanted to be cautious and not presell or preannounce things other than talk about the strategy.

Maybe asked differently, how big a priority is this for you? Is this super important? Is this number 5 or 10 on the list of other very important things? Or is this towards the top end of the priority scale?

Well, what we try to do is anything that we put in our priorities is important. And anything that would fall down that line, we de-prioritize. So rather than peanut buttering a series of initiatives, we can identify the couple of handfuls of ones that are most important, and then put an intense focus on that. And certainly, I would categorize this in that group. The economic implications can be meaningful over time. They certainly will need to build over time. But when you're talking about approaching $7.5 trillion, you can have a meaningful impact on our economics by working closely with partners where we believe the allocation of the revenue generated in best-serving clients, it might be more balanced.

Our next question comes from Brennan Hawken.

I have one on order routing and sort of just thinking about things going forward. I understood that we don't know what the regulatory shift will be here or whether there would be one. But if you think about things in your own approach philosophically, in the past where you've been a disruptor, have you considered maybe getting in front of things, internalizing this flow or even internalizing a portion of it and explaining what that impact would be? And then considering it as a point of differentiation, one of the disruptive competitors, as we mentioned a few times, and certainly, it would be pretty disruptive to some business models. So have you considered maybe embracing that end of things and pressing ahead? And what would that impact be?

So I guess, 2 different parts to that, that I guess I'll touch on. First, let me touch on the early part of your question, Brennan. You're right that it's very difficult for us to speculate on what we would do under a variety of different circumstances. We do feel very confident in the strategy that we pursue that supports best execution for our clients ahead of any order-handling revenue that might flow to us. The other thing, I think, it's very important and maybe gets missed in looking at our approach is that approximately 80% of the order-handling revenue that we generate at Schwab already comes directly or indirectly via an exchange. So I think that's just a very important metric to keep in mind. As it -- let me now switch to the part of your question around disruption. And I don't want this response, I do not want this response to come across as specifically applicable to the issue of order-handling revenue. But we do consistently look for opportunities to be disruptive that would be in the interest of the investors that we serve. However, when we do so, we also evaluate the timing as to when we want to be disruptive. We evaluate when we think the actions could have the greatest impact. And that's something that we'll always take into consideration when evaluating moves that we could consider making that would benefit investors. So we're not going to speculate on specific actions or giveaway the timing at which we might make moves. When we made the move on zero web and mobile equity commissions back in 2019, I think we did so at a point that caught a lot of people by surprise. They thought that why would we do that when rates were starting to go down, wouldn't we do that when rates were going up. While our exact reason for doing it at that point was because rates were going down, and it would put that much more intense pressure on those who are more reliant on commissions. So we are a firm that believes in disruption that benefits investors. And to the extent there is disruption action to be taken, we'll always consider it. But again, I'm speaking broadly about disruption, not necessarily about order flow.

Yes. So that's really helpful, Walt, and certainly, really fair. Another maybe more -- a question more in the lines of controversial. The net new asset dollar numbers have been really quite remarkable, record setting as you point to, but your baseline, your base of client assets is also substantially larger. And so the growth rate impact has actually been far more muted, especially when we consider since the pandemic broke out, the kind of acceleration that we have seen with some of the other platforms. And so why do you think that is? And you made reference earlier, Walt, in response to, I believe, Rich, indicating that you've been successful and you're pleased with the momentum with younger investors. But clearly, those younger investors, the amount that is engaging with electronic platforms is -- you could suggest that your share of that versus your historical share is probably your -- suggests you're losing share. And number one, have you looked at that data if the conclusion that myself and many others are drawing is right, what changes are you making? It's particularly interesting given that now you have Ameritrade, and many had assumed that, that would really help in your -- in the asset gathering in some of these cohorts, and it just did not come through because of the integration, so therefore, this is temporary. What -- how have you thought about it? And what changes are you all making to address some of this relative weakness on a rate basis?

Yes. I guess I would take exception to the notion that there's a weakness in both of the areas that you referenced. First, 8% organic growth rate on net new assets is very, very strong. And I think we have to be very careful around apples-to-apples comparisons here, with some that might be publishing higher numbers or maybe changing even methodologies in some of the reporting. But the bottom line is dollars are what determines growth, not percent. You can grow a very high percent on different basis, and actually be losing ground. We've been -- we've made the argument for years, and I think, it's been proven out. On the second part of your question, I think what's being missed is there's some kind of an assumption in there that people who opt in to a given platform that, that is the only place that they are investing. And therefore, they have made a decision that, that is where they're going to invest. When in reality, most investors end up with multiple relationships. They may have one that they utilize for a given type of trading, or maybe there are securities that they want to trade that we are less apt to want to trade and make available to them. But then they also maybe have an account at Schwab where their real money resides. So I think you have to be really careful about drawing conclusions that might imply that somehow we are not having great success at winning younger investors when, in fact, we are. So therefore, I guess, in summary, Brennan, the idea that we need to change something, I think, is erroneous. We have a great offer for younger investors. We continue to enhance it, and it continues to win younger investors with meaningful assets to invest at a relatively rapid pace. That said, we're always looking at our competition. We're always respectful of our competition and seeing what we can learn from what they're doing. And as I said earlier, I think great competitors help the entire industry because it sharpens the focus and the efforts of everyone.

Operator, I think we have time for one final question.

Our final question comes from Michael Cyprys.

Walt, we've seen a number of firms introduce money apps with a goal toward becoming a single financial app that handles saving, investing and spending. It would seem you already have most of the pieces that Schwab have perhaps an opportunity around marketing your capabilities as a single financial apps. Just curious your thoughts around that? How do you think about the potential opportunity to reach new customers that are maybe more mobile savvy? And what might that require just in terms of a build-out of any new capabilities, whether it's around payments, peer-to-peer, et cetera?

Sure. So I think you're right in saying that most of the capabilities that you're talking about are available at Schwab, with -- but with probably a peer-to-peer exception, which is right around the corner. Whether that strategy is a winning strategy, I think, still remains to be seen. I know there are parts of the world where people are very comfortable with a single app or a single provider. But in The States, people have tended to not just segment their money, but even view having multiple relationships as a diversifier. And so I do think it remains to be seen whether there's sort of a single, I guess, killer app or killer capability from a one company that will motivate people to consolidate everything to that one company to do everything through them. I do believe we're probably as far along as anyone in the industry in offering that and offering FDIC-backed banking and saving capabilities as well as investing. Certainly, the folks at the banks would probably be a bit ahead of us on the banking and behind us on the investing, and the opposite would be true with us relative to them. So I believe it may be an opportunity. But Mike, I think it's still to be proven whether that is the direction that consumers want to go. If we transition from what I mentioned to having more confidence, then I think you would see us likely package and promote it in the manner that you suggested.

That's it. We'd like to turn it back over to Peter Crawford to close out with any final remarks.

Well, thanks, everyone, certainly, for your time today. And there is a sensitive page in the appendix that shows the revenue lift from the single Fed funds increases -- approaches, I think, $1 billion. I think it was $750 million to $900 million. And certainly, given that, it would be very easy for us to simply buy at our time, build up our earnings potential and wait for that -- the spring to uncoil. And it'd also be easy to get distracted by all the open questions around the virus, economy, inflation, our competitors, client engagement, regulatory policy and so forth. But I think that's where having a clear and consistent strategy is extremely helpful, really allowing us to focus on what we can control and to tune out the noise. And if you look back on this quarter, 45% adjusted pretax margin, 8% organic growth rate for the first half of the year, 4.8 million new accounts, all in this environment that has certainly been challenging from a -- to a business model standpoint. We certainly feel good about where we are. But of course, we're not as Walt just talked about, as I've talked about, we're certainly not satisfied. We think there's a lot of opportunities for us to continue growing. We have a relatively small share of the investment in wealth in the United States, and we have a lot of opportunities in front of us to better serve our clients, to drive greater efficiency, that's where we're focused on, and that's where we'll be focused on going forward. So thank you all very much for your time. We look forward to talking to you again in October.

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