With 100% of RIAs and 80% of TD Ameritrade retail clients fully transitioned to the Charles Schwab platform, the company reported third quarter earnings on Monday that beat industry expectations slightly but were still down from the same time last year.
Net new assets in its RIA custody channel were $19.6 billion in the third quarter, down 67% year-over-year and 46% sequentially. The firm attributed this largely to outflows in the two months ahead of Schwab’s long-awaited conversion event as certain former TD firms were not moved over to the Schwab Advisor Services platform, an exodus CEO Walt Bettinger said has ended.
“Almost all RIA attrition occurs before the conversion date because a 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,” said Bettinger.
Schwab President Rick Wurster said there were three primary reasons for advisor attrition.
“It just didn't fit, either for economic reasons or for services that the RIA firm wanted that we weren't going to provide,” he said. “Second reason, there may have been some other business reasons why it didn't make sense. It used to be an advisor maybe that we had served, and the relationship didn't make sense for us to serve in the future. So, there was a chunk of relationships where it didn't make sense for both parties for us to serve them.
“And then there was some element of regrettable attrition—clients we would have liked to have served, but for a variety of reasons they chose to go somewhere else.”
“We feel exceptionally good about where we are despite the very few RIAs who did choose regrettably to go somewhere else,” said Bettinger. “But that was a small number overall and a significant amount of the attrition were clients that we had previously terminated relationships with who had 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 advisors who have decided to principally go fee and get largely out of commission side.”
The “vast majority” of former TD Ameritrade firms are already opening new accounts and placing trades on the Schwab platform, said Bettinger, noting that Schwab is proactively responding to requests and suggestions for improvement.
Schwab reported overall revenue of $4.6 billion, a 16% year-over-year decrease, and earnings-per-share of $0.77, down 30% year-over-year. Bettinger encouraged investors to remain optimistic about the company’s future during an earning call Monday.
“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, but I encourage you to consider the entirety of our position and the potential it creates for the future,” he said.
“We assess that Charles Schwab is fine from a liquidity and capital standpoint, but that it could take a couple of years before earnings are on a tenable upward trajectory,” Morningstar Analyst Michael Wong wrote in an update. He attributed the decrease in earnings primarily to a nearly $700 million decline in net interest income driven by increased funding costs.
“We don't anticipate making a material change to our $80 fair value estimate for wide-moat Charles Schwab and assess shares are undervalued,” he wrote.
The firm’s stock price rose by more than 4.5% on the news Monday morning, and shares were trading at $53.72 near the end of the day. That’s still more than 37% below the yearly high of $85.62 in early January.
Even factoring in RIA attrition, Schwab has added $248 billion in net new assets year-to-date, posting 6% growth on an adjusted basis. Across all business segments, Schwab oversees around $7.82 trillion in assets across 34.5 million accounts, including nearly $3.7 trillion under its advisor services business.