We're live. Good morning, everyone. Welcome to Schwab's Summer 2020 Business Update. This is Rich Fowler, Head of Investor Relations, coming to you from a still sparsely populated 211 Main Street in San Francisco. We hope you and your families remain safe and well and coping successfully with all the challenges, both large and small, that this environment entails. A challenge in the Fowler household, which includes a rising college sophomore, is deciding whether a fall semester of all online and all off-campus instruction means it's time for a gap year or gap term or gap something, and I'm sure many similar discussions are unfolding across the country as we speak.
The good news is that life does find a way to keep going, and we've been especially appreciative to hear of the new family additions, creative coping mechanisms, and sheltering and travel adventures that you've been kind enough to share with us as we've kept in touch over the past few months. Thanks for spending some time with us in the midst of all this. Joining me today, both virtually and literally, are Peter Crawford, our CFO, and Walt Bettinger, our President and CEO. Per our usual practice with interim updates, we'll spend a focused hour with these two, sharing their perspectives on life at Schwab right now, starting off with some prepared comments and following up with Q&A until it's time to wrap up. Our goal, as always, is to keep you current regarding management's thinking as efficiently as possible.
Regarding questions, also as usual, we'll do so via the webcast console as well as the dial-in. To help us get to as many folks as possible, we very much appreciate your sticking to that one-plus follow-on approach to questions. Walt will start us off today to discuss our strategic picture, which, of course, includes the continuing story of the company's performance during the COVID-19 crisis. Peter will review our recent financial performance and current outlook before taking us into Q&A. Before that, let's spend that moment on the wonderful wall of words, back to a single exciting page this time around, the main point of which is to remind everyone that outcomes can differ from expectations, so please keep an eye on our disclosures. Finally, per our now usual practice, the slides will be posted on the IR site following prepared remarks.
With that, I think we're ready to get going. Walt, please start us off.
Thank you, Rich, and good morning, everyone. As Rich said, thanks for joining us during these extraordinary times. We all recognize that we're living in a unique period for our economy as well as for the clients that we serve. At the same time, we have confidence that the environment will eventually improve, and our efforts at Schwab are designed to continue building a world-class company to serve our clients and benefit our stockholders. We're not going to allow near-term environmental challenges to slow us down as we build for the long term. Our clients have been highly engaged with us during the past quarter. Ultimately, the measure of our success as a company will be largely dictated by how we serve our clients. This long-term view of our strategy through clients' eyes guides us today as well as every day.
Interest rates are going to rise, and they're going to fall. Equity markets will do the same. They'll rise and fall. Schwab has been there for clients for almost 50 years, and we're committed to being here for them today as well as into the future. Let's go ahead and dive into the quarter and put details behind what is happening across our firm as well as in the environment. Throughout the second quarter, equity markets rebounded. However, interestingly, investor sentiment did not mirror this rebound. Rather, overall sentiment continued its downward trend that began about midway through the first quarter of this year. Despite the overall negative investor sentiment, our client engagement was exceptionally high. As you can see in the slide here, we set records in several areas, including client interactions, trades, as well as new-to-retail households.
Net new assets were also strong during the first half of 2020. I think in fairness, though, an asterisk should be placed by the 2020 numbers because of the deferral of tax date from April 15th to July 15th. Even adjusting for this asterisk, the first half of this year was quite solid for net new assets. Let's take a little closer look at our units that serve retail investors as well as RIAs, and we'll start off here on the retail side. As a company that appreciates the importance of scale, we aim to serve a broad range of investors, self-directed, advice-seeking, newer investors, those who are more experienced, younger investors, retirees, and from the smallest clients to the most affluent. We've built a platform and model that attracts clients of all sizes and at all stages of their saving and investing lives.
You can see on the slide that over the course of the past decade, we've lowered our average client age. Now, of course, that's no small feat, given that, of course, the 54-year-olds from 2010 age naturally to age 64 by 2020. We achieved these results by having great success acquiring younger investors, including large volumes of millennials, with over half our new-to-retail clients now being under age 40. At the same time, our average household account value continues to grow, and more of our retail investor clients turn to us to offer them advice and guidance in the management of their assets. I think the key point here is that Schwab is a company designed for a broad spectrum of investors, and as we develop services and capabilities, we design them to further this broad commitment. Now, over on the RIA side, our success continues.
Despite the difficult environment, we helped 12% more RIA teams transition to independence in the first half of this year relative to 2019. The RIAs that we serve are continuing to expand their usage of our digital capabilities, helping them deliver better service for their clients while also operating with greater efficiency. The ultimate measure of our efforts here is whether RIAs are voting with their client dollars to custody at Schwab, which clearly they are. Our client service results remain best in class in many areas, as determined by objective third parties. Now critically, as I discussed in April, we achieved these results while protecting the safety and health of our employees and also supporting them with special financial recognition, no-cost COVID-19 testing, and other efforts designed to support them and their families during this crisis.
Caring for our clients begins with caring for our employees, and our employees have demonstrated exceptional commitment and dedication throughout this crisis, and the success we've enjoyed with clients simply wouldn't be possible without their collective service attitude. Since we last spoke, we have closed on three of the four transactions designed to further our goals of scale, monetization that benefits our clients, and segmentation. Working very closely with USAA, we successfully completed the acquisition over Memorial Day weekend of over 1 million new accounts and $80 billion in client assets. As you may have seen, the purchase price was also adjusted to reflect deal terms that evolved from announcement to closing. The Motif and Wasmer Schroeder transactions also both closed in late June and then early July.
We believe that delivering these capabilities to our large client base will be consistent with our goal of enhancing monetization with solutions that serve our clients exceptionally well. From a people standpoint, we're excited about the capabilities and talent that joined Schwab in all three of these cases. The TD Ameritrade acquisition remains on track. Since we spoke last, we've received the Department of Justice response that we may proceed with this transaction, and stockholders of both Schwab and TD Ameritrade have approved the transaction. We're waiting on several more approvals. We still anticipate closing on this acquisition in the second half of this year. Our teams are working on the integration efforts. Joe Martinetto, our COO, is leading the integration efforts in partnership with Jason Kleber, our Executive Vice President of Operations.
As you would expect, the people involved in this effort currently measure in the hundreds and eventually will be measured in the thousands. It goes without saying that this is a complex integration, arguably the largest integration in the investment brokerage space that has ever been done. When we announced the USAA transaction, we spoke of the importance of the referral program that was key to the relationship. USAA has one of the highest measures of customer loyalty of any company in any industry, and their leadership is committed to ensuring that USAA members with investing needs are served in a world-class manner. Early results of this referral relationship are promising, with about 1,000 new funded accounts opened per week. We have more work to do to make this process seamless, and we remain confident in the long-term value of serving USAA members with Schwab capabilities.
As we've discussed in the past, we're focused on scale, monetization that benefits our clients, and segmentation. Slide 15 illustrates where a number of our recent actions and efforts align with these three objectives. I'll go ahead and comment on a couple of them. Under scale, the USAA and TD Ameritrade transactions add substantial scale to our business and should help us cross the $5 trillion threshold with approximately 25 million funded client accounts. Our digital transformation is enabling us to serve more clients in a manner that they prefer, while also helping us lower our costs associated with client service. Wasmer Schroeder will help us deliver high-quality fixed income management services for clients at attractive price points while ensuring we capture a larger share of the revenue opportunity.
Motif will open up investing opportunities for our clients in thematic investing, ESG investing, and help accelerate our direct indexing effort, all in a cost-competitive manner while again benefiting our monetization efforts. Our efforts to review all third-party relationships is being done with an eye to simply ensure that we are receiving our fair share of the revenue generated from what clients are already paying to third parties who utilize our platform. Our segmentation strategies are what allow us to appeal to a broad range of investors while benefiting from our scale. These are three examples of how we develop customized solutions to speak to specific segments of investors and savers. Schwab Stock Slices is particularly appealing to smaller, newer investors.
Our expanding lending capabilities help us compete against brokerage firms that do not offer bank lending, as well as global banks who offer combined brokerage and private banking. Our burgeoning high-net-worth efforts are supporting family offices in the RIA space and a growing desire among large retail clients to receive a higher degree of customized services from Schwab. As I mentioned at the outset of our time together, Schwab has thrived for almost five decades, in good times and bad, through difficult times in the economy and through periods of exuberance. This time will be no different. We're continuing in our efforts to build a world-class company designed to serve our clients and benefit our stockholders.
We will not allow near-term environmental challenges to slow us down as we build for the long term, because the long-term view has always been the way that we've operated, and today is no different. We're confident about the future for our employees, for our stockholders, and for our clients. Peter, let me turn it over to you.
All right. Well, thank you very much, Walt. It's certainly great to be here today and a nice excuse, frankly, to get out of the house and escape my tiny home office. Now, Walt talked about the strong momentum we continue to enjoy in spite of the angst among investors and frankly, society at large. The progress we're making in driving our strategy, both with the various acquisitions we've closed or are in the process of closing, and with our organic efforts around scale, monetization, and segmentation, and the confidence we have as we look to the future. In my time today, I'll talk about how that momentum, while quite constructive longer term, wasn't enough to offset the current challenging market environment, and especially the pressure on interest rates. I'll discuss the actions we're taking to navigate through this storm.
Finally, I'll provide an update on the 2020 outlook we last shared the spring business update, recognizing that there's still a lot of uncertainty ahead of us. The overall takeaway is that we're obviously impacted in the near term by factors outside our control. Even as we take prudent steps to navigate through this crisis, our top priority is continuing to build a strong and resilient company positioned to prosper over the longer term. The significant progress we've made on that front is what fuels our confidence and our optimism about the future. Walt talked about the high engagement level of our clients and our ability to continue driving strong organic growth in spite of market volatility. That success translated into dramatic year-over-year increases in key measures of our success in winning clients and in building scale.
Net new brokerage accounts up over 300% from the prior year, or more than 50% when you exclude the accounts acquired from USAA. Total brokerage accounts up 18%, or 9% excluding USAA. Core net new assets, which excludes the USAA conversion as well as a $10 billion mutual fund clearing conversion, were up roughly 25%. As Walt mentioned, there should be an asterisk given the delay in tax season. Total client assets up 11% year-over-year, despite a choppy market over the last few quarters. Our financial performance was clearly impacted by the large reduction in interest rates across the curve. Overall revenue fell 9% year-over-year. This is almost entirely due to a 14% decline in net interest revenue.
Average interest earning assets rose a remarkable 37% year-over-year, but that wasn't enough to overcome an 87 basis point reduction in our net interest margin as the Fed cut rates by 225 basis points over the past year. Asset management and admin fees were up 2% year-over-year, despite the return of money fund waivers, which totaled $15 million in the quarter. Trading was down only 7% year-over-year, despite last year's commission eliminations, as daily average trades more than doubled from a year ago.
Expenses were up roughly 8%, but that would have been only roughly 2% without the acquisition and integration expenses for USAA, TD Ameritrade, and to a much lesser extent, Wasmer Schroeder and Motif, as well as one month of acquired intangible amortization related to the USAA transaction. Speaking of expenses, as we have foreshadowed previously, with the impact of the USAA and pending TD Ameritrade acquisitions now having a material impact on our financial results, we have decided to introduce a handful of non-GAAP measures to complement our GAAP results and provide you with another perspective on our, quote, "core operating financial performance." These non-GAAP measures fall under really two categories. First is adjusting expenses to remove the highly variable acquisition and integration costs, as well as the amortization of acquired intangibles that is created via purchase accounting and, of course, is a non-cash expense.
This adjustment flows through into other downstream measures, pre-tax margin, net income, and EPS. Second is return on tangible common equity. The return part of the equation includes the same adjustment to expenses I just described and the denominator is also adjusted to exclude goodwill and acquired intangibles from the equity base. Two items which, as I mentioned, are created via purchase accounting. Those adjustments encompassed $93 million of expenses for the quarter which makes the adjusted pre-tax margin 4 points higher than our GAAP number and makes adjusted EPS $0.54 versus the GAAP EPS of $0.48. While ROE was 10% in the quarter, ROTCE was 12%. Both of these numbers are much lower than the levels we saw last year.
A big factor in that decline is the now $5.6 billion mark-to-market gain on our available-for-sale portfolio, which has the effect of increasing equity, though not regulatory capital. Turning our attention to the balance sheet. With lower rates across the board and therefore little for our clients to gain by moving their cash into purchase money funds and CDs, our expectation has been that we'd see continued growth in balance sheet cash until either investor sentiment turns markedly bullish or interest rates increase. That tendency for clients to accumulate cash on the balance sheet continued in the second quarter with 9% sequential growth in bank deposits. With a portion coming from the USAA accounts at conversion, but a majority coming from organic growth. We issued $2.5 billion of preferred equity in the quarter to support balance sheet growth.
Even so, our Tier 1 leverage ratio, which of course is based off of average assets, declined to 5.9%. That is lower than our operating objective of 6.75%-7%, but still well above the regulatory minimum. Let's look under the hood with what is happening with client cash, a subject about which I know there's always a lot of interest. Of the roughly $25 billion increase in client cash on our balance sheet in the second quarter, $15 billion was organic growth, with the remainder, as I mentioned, coming via the acquisition of the USAA accounts. As we discussed at the winter business update, we anticipated we might see clients continue to be net sellers of equities and that continued in the second quarter despite the strong market rally.
After some pronounced selling of fixed income in the first quarter, clients actually became net buyers of bonds and fixed income mutual funds in the second quarter. With lower interest rates across the board, the quote "sorting process" we talked about on many of these calls feels like a lifetime ago. In fact, what we're now seeing is the opposite with clients co-mingling their transaction and investment cash given the lack of benefit from moving their cash off the balance sheet into higher yielding alternatives. As CDs mature or clients liquidate purchase money funds to pay taxes or buy equities, there aren't as many new purchases to offset that. Those net sales, along with contribution from net new assets, accounted for $17 billion of the growth in client cash in Q2.
This behavior is quite consistent with what we expected, as I mentioned, and what we've communicated previously. As interest rates fall, we often see client cash increase and the portion of that cash sitting on the balance sheet also increase. Even as our net interest margin may fall as interest rates drop, the interest earning assets on which we earn that NIM can rise. As I mentioned earlier, if history is any guide, that cash will likely continue to build until interest rates move higher. Even then, our experience after the financial crisis suggests that cash tends to get reinvested more slowly than it got, quote, "uninvested." Our Q2 NIM fell 61 basis points from the first quarter of 2020. That sharp drop was a function of a sort of perfect storm in the quarter.
We entered the quarter with very high levels of Fed reserves yielding almost nothing, a function of the rapid increase in client cash in March. It took some time to invest that liquidity. We saw a dramatic reduction in both short-term and longer-term rates from early Q1 to the middle of Q2. During the quarter, we also saw spread tightening across most of the sectors we invest in, a product in large part of the Fed's entry into the markets. With the decline in long-term rates, we saw a surge of refinancing activity across the country which led to more rapid paydowns and a higher level of premium amortization. We've taken a lot of convexity out of the investment portfolio in the last 10 years, but there's no way to completely inoculate ourselves from such a dramatic downward shift. Where do we go from here?
Assuming flat rates, it's reasonable to expect our reported NIM to decline by a handful of basis points from Q2 to Q3 and perhaps reach the mid to upper 140s by Q4. Why do we expect NIM to be more stable going forward from the first part of the year? First of all, our assumption built into this scenario is that rates stabilize and so do credit spreads. We've continued to shift more of the portfolio to fixed rate versus floating rate. We're now at about 85% fixed and 15% floating in the investment portfolio, with duration edging into the mid-3s.
We're ending the quarter with a lot less held in Fed excess reserves, our expectation is to reduce that liquidity a bit further during Q3, giving us the opportunity to pick up yield as we invest those $ and offsetting to a certain extent the downward pressure on NIM from investing new cash. While we think paydown activity could continue to be elevated, we wouldn't expect a further increase in that activity. In other words, that shouldn't be a source of incremental drag on NIM. Now, we've been getting a lot of questions about where we expect, quote, "trough NIM to end up." Some look back at ZIRP 1.0 and the lowest reported NIM during that period of 1.50% as a reference point. It's a useful reference, it's not a perfect precedent.
If you think about our lowest incremental NIM during that period, we got down to the mid-120s, even that isn't a perfect benchmark. Longer-term rates are lower this time around, our duration is longer, as we've allocated a lot more of the investment portfolio to fixed rate assets. The composition of our balance sheet is different, with the investment portfolio accounting for a much larger portion of our assets than before, and broker-dealer cash, margin loans, and bank loans accounting for less. The answer to the question around where we expect trough NIM, as unsatisfying as it might be, is it depends. As I mentioned earlier, our reported Tier 1 leverage ratio for Q2 was roughly 6%, or 5.9% to be more precise. Below our operating objective, well above the 4% regulatory minimum.
Our priorities around capital management remain the same, which is first and foremost to support the growth of our balance sheet. We're comfortable maintaining these current capital levels because they are well above the regulatory minimum. Our low-risk balance sheet means our risk-based capital ratios are multiples above the regulatory minimums. We have levers we can deploy if we see another sudden surge in client cash coming out of the balance sheet, like what we saw in March. We intend to maintain the $0.18 quarterly dividend, but it's unlikely that we'll be in the market buying back our stock in the near term. The longer term, capital return via both dividends and share repurchases remains a very important part of our financial formula. It's reasonable to expect that we might supplement our capital base with incremental preferred equity post TD Ameritrade acquisition.
As you'll recall, given the dramatic changes in the environment in the first quarter, we took the opportunity at the spring business update in April to update the scenario we'd shared two months prior. Conditions have changed a lot, even since April. The equity markets have risen much more quickly, trading activity has been even stronger than we'd anticipated, and our balance sheet growth is already approaching the upper end of the range we'd communicated. On the other hand, long-term rates have continued to be a headwind for us. The updated scenario we shared in April didn't specifically communicate an expectation around what we're now defining as adjusted total expenses.
If you apply the definition we're using, that scenario suggested a full-year range for adjusted total expenses in the 3.5%-4.5% range, about 100 basis points lower than total expenses, excluding the TD Ameritrade costs. With a mix of headwinds and tailwinds, it's perhaps not surprising that our financial performance thus far in the year is falling within this range we communicated in April. Moreover, I think the full-year range we communicated in April still provides reasonable bookends. When Walt and I talk about powering through this crisis in a position of strength, I think this pre-tax margin is one example of this strength.
I hope you'll agree that a 39%-plus adjusted pre-tax margin a year after eliminating online equity commissions and in the midst of a very challenging economic environment is a formidable advantage and something we don't take for granted. Limiting adjusted total expense growth to 3.8% year-over-year, even as key drivers of our workload, trades, calls, new accounts, net new assets, continue to be elevated, is also quite respectable. For that, I have to thank my 20,000 colleagues who worked really, really hard, found creative solutions to meet client and business needs, and continue to drive greater efficiency and productivity throughout our business. Now I'm quite confident that the second half of the year will bring more surprises. Here are the sensitivities, as always.
These are pretty similar to the ones we showed at the winter business update, with the notable exception being the sensitivity of the Fed funds, given that our balance sheet has continued to grow, and we're now factoring in the impact of money market fund waivers. Let me close with a few thoughts. This current crisis, and specifically low interest rates across the curve, obviously creates challenges for us. These challenges are near-term challenges we believe have little or no bearing on our longer-term success. In fact, if you look at the predictors of long-term success, those are all pointing in the right direction. net new assets, new-to-firm households, new accounts, advice enrollments, our Client Promoter Score.
If you look at the milestones we've achieved in executing on our strategy. Those too bode well for the future, including successfully closing the three acquisitions, achieving important milestones in the TD Ameritrade acquisition, advancing our digital capabilities, and improving the scalability of our technology platforms. There is no silver bullet here. Progress will come from the cumulative effect of a lot of, quote, "little accomplishments" that collectively will help us continue to gather assets, monetize those assets in a way that benefits our clients, and leverage our scale to continue to drive down costs. Our priorities are the same as they've always been, and we're confident they'll allow us to build a stronger, better diversified, and even more thriving company. Thank you. With that, let me turn it over to Rich for some Q&A.
All right. Thank you, gentlemen. Operator, would you like to run us through the drill on taking questions through the calls?
Surely, sir. Thank you. We will now begin the question and answer session. If you would like to ask a question, you may press star followed by the number one. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. To withdraw your request, you may press star followed by the number two. One moment please for the first question. Our first question is from Ken Worthington. Your line is open.
Hi, good morning, and thank you for taking my questions. Just on yields. Maybe first, can you help us estimate money market fund fee waivers, the outlook here for 3Q and 4Q, given where the short end of the yield curve is? At the longer end, at what yields are you currently investing sort of the fixed investments? What are you seeing for yields on RMBS and the other securities on the fixed book where you tend to traffic? Thank you.
Thank you, Ken. Money fund fee waivers. Let's talk a little bit about the fee waivers. The fee waivers, we're going to feel those, or we are feeling those first in the Treasury and government money funds, and less so on the muni money funds and prime money funds. We have seen the gross yield on the muni and prime funds come down over the last quarter, and our expectation is that assuming flat rates, that those gross yields should come down somewhat further in Q3. I think it's reasonable to expect that the overall money fund fee waivers will go up from Q2 to Q3, potentially by a factor of three to four times. Should hopefully stabilize between Q3 and Q4.
I think it's important, though, to remember that our expectation is that these money fund fee waivers will come nowhere near approaching the level they got to at the height of ZIRP 1.0. The reason for that is because a couple things. One, we reduced our pricing in late 2017 such that our pricing overall is lower, and so we can absorb lower yields before we have to start waiving fees. The second is that the mix of assets. Back in ZIRP 1.0, the bulk of those assets were in sweep money funds that have higher expense ratios. Now the vast majority is in purchase money funds that have lower expense ratios. Again, our expectation is that those money fund fee waivers won't get anywhere close to where they got to in 2008 through 2015, 2014, somewhere in there.
On your second question about reinvestment rates. Let me just take a step back and talk about some of the factors that go into that. As I mentioned in my opening comments, we're investing a substantial majority of new investments in fixed rate assets. That was previously 60/40 in the investment portfolio. It's now 85/15 fixed to floating, and it could frankly head a little bit north of that. We're not seeing as many opportunities on the credit side of the equation right now for a variety of reasons, not the least of which is that a lot of the credit investments are floating rate, and by seeking to buy more fixed rate assets that there aren't as many opportunities in credit there. We're really leaning heavily on the agency MBS, CMBS, and so forth in terms of our investments.
The reinvestment rates there are right now are in kind of the 90 to 105 basis point range. That's a relatively wide range, but it moves around a fair amount. We have seen spread tightening, as I mentioned, given the Fed activity, as well as given demand both domestically and from overseas for anything that offers a higher yield these days.
Okay, wonderful. Thank you very much.
Thank you. Our next question is from Devin Ryan. Your line is open.
Hey, thanks. Good morning. Peter, Walt, and Rich. I guess first question here, appreciate the comfort on the Tier 1 leverage ratio today. Peter, you mentioned there's levers to the extent we have another spike in cash if there's maybe some more volatility, and I think we generally know what those are, but maybe if you can just give us a quick reminder of kind of the levers that exist and also just the priority rank of how you would look to execute on those.
Sure. Thanks, Devin. Let me just set some context for, I know you're familiar with this, but maybe for others who may be on the phone. Our operating objective for Tier 1 leverage, which of course is our binding constraint in "normal times" is 6.75%-7%. That is well above the regulatory minimum at 4%. When we seek to keep those higher capital ratios in normal times, so that we are prepared for more stressful times. Frankly, this is one of the more stressful times. It's also really important to recognize what has driven the capital ratios lower than that historical level. It's not a write-down in the mortgage portfolio or taking any losses or any credit concerns.
It's fundamentally and strictly a function of client cash coming onto our balance sheet, and that's really important, and you see that reflected in our risk-based capital ratios, which are three, four times the regulatory minimum. That's why when I say we're comfortable with these ratios, that's a big reason why we are comfortable with these ratios. Our expectation would be to continue to build up those capital ratios via the organic capital formation that we have in our earnings. To supplement that, there are a couple of levers. One is issuing more preferred equity. As you know, we did a $2.5 billion issuance in the second quarter. We're right now on the upper end of our range in terms of preferred to Tier 1 capital. Post TD Ameritrade acquisition, that has the potential to create additional capacity.
That's why I said in my opening comments that you could see us issue a little bit more preferred. If we get another surge in client cash, there are a couple of other levers that we could deploy. One would, we have that $5.6 billion mark-to-market gain in the available-for-sale portfolio. We could monetize some of that gain and make those mark-to-market gains actual real gains, and that would, of course, increase regulatory capital. Now, that's not something we would do lightly because there would be execution costs there, and it would come at the expense of a longer-term NIM. If we were in a position where we had no other alternative, that would be something we would want to take a look at. The second is to deploy our sweep tower.
Our sweep tower is the mechanism by which we allocate our client cash across the three bank charters. We can deploy that in such a way today where the highest rung of that ladder would go to a government sweep money fund. By managing that highest rung and where that kicks in, we could move some balances off our balance sheet into that government money fund, and think of that as sort of a release valve for our capital ratios. Again, not something we would do easily, I guess. I shouldn't say, not something we would do blithely because there would be an impact on the clients as we do that. We would have the opportunity eventually to move that client cash back onto the balance sheet if we so choose.
It is certainly a lever and allows us to feel more comfortable managing at these lower capital ratios.
Okay. I appreciate it. Just a quick follow-up here. Thanks for the update on expenses. I know this isn't a 2020 question, just given what we're learning about the business and really the ability for your business to perform through a shutdown and remote work environment, how is that impacting views around branches or the real estate footprint of the firm? Just trying to think about that, including with Ameritrade is set to close as well.
Walt, do you want to start us off on that one?
Sure. Thanks. I guess our view is that it is early to draw long-term conclusions. Until we have a better handle on issues like therapeutic treatments that could come out around the COVID-19 or even the possibility of vaccines, it's difficult for us to say long term. I do believe that there's a couple things you can assume, and that is that the combination of Schwab and Ameritrade from a branch standpoint, there's a lot of overlap. Of course, we expect to address that as part of our integration. In terms of general corporate real estate, that's one of those things that I think we have to wait a bit to understand the points that I mentioned earlier.
It does seem clear to me that there will be a degree of increased work location flexibility for a number of our employees, particularly those in positions that can perform their roles remotely. Even that, in terms of details, is very difficult to project, other than that there will likely be an increase in that. As soon as we have information about what might be the expense implications, because my suspicion is that's really what you're driving at, we'll share that just as quickly as we can.
Terrific. Thank you.
All right. Next call.
Thank you. Our next question is from Richard Repetto. Your line is open.
Yes. Good morning, Walt, and good morning, Peter. First, back to the balance sheet and NIM. Peter, you noted that you had $27 billion of excess reserves and that you don't really see people moving their cash until there's a rise in rates. I guess first, is it safe to assume that you'll invest that probably the $9 billion or a third of it that's above your target range pretty quickly. The second part of this is, you gave us some good guidelines on where the NIM goes towards year-end. What about overall balance sheet growth? Because we're at, I think, the top end. What's that range of balance sheet growth that you'd expect the company to be at with the new revised NIM range?
Thank you, Rich. The reason we ended the second quarter with a little bit more Our overall liquidity guideline, we try to maintain roughly 5%-7% of our Bank deposits in liquidity. At the end of the second quarter, as you point out, we're more like 10%. The reason for that is we weren't sure what to expect with the July tax season. I think it's safe to say that we've seen less in the way of movement off the balance sheet, in July than we've probably been prepared for. In fact, thus far, month to date, we've actually seen inflows onto the balance sheet in July.
I think it is reasonable to expect that we'll deploy a fair amount of that excess liquidity above that 5%-7% range over the coming months, and put that to work in the investment portfolio and the available-for-sale portfolio and get much closer to that 5%-7% range. I think that's a reasonable expectation. In terms of the balance sheet growth, it's a little bit tough to say, is the short answer. Our expectation and that's built into that NIM scenario that we pointed out presumes that the balance sheet grows relatively consistent with the growth in total client accounts.
To the extent that the balance sheet grows more quickly than that would, on the margin, bring down net interest margin but increase net interest revenue because we'd be putting more cash to work at those reinvestment rates that I mentioned in response to Ken's question. Again, that might be a negative for NIM, but a positive for NIR. Really, the future growth of the balance sheet is a function, as I mentioned, of investor sentiment as well as interest rates. It's a little bit tough to say exactly where we're going to end up on that front.
Understood. One quick follow-up and this is on the TD Ameritrade acquisition. With these recent first quarter new Rule 606 disclosures, we could actually see what people are getting paid a little bit more clearly. I think your guidance is for payment for order flow to be a dis-synergy with TD Ameritrade. I looked at the rates. If you applied TD Ameritrade rates to Schwab, you'd have a significant increase, almost 50% in payment for order flow. I guess my question is, after looking at this, have you been able to sort of get a better feel for whether that dis-synergy might not be a dis-synergy? Any other insights into the updates on the integration synergies?
Yeah, sure. I'll take that one. Walt, feel free to jump on if I miss anything here. In terms of the payment for order flow, you're right, it could be a synergy, it could be a dis-synergy, it could be neither. The short answer is we don't know yet. That's one of the areas where despite the DOJ review, that we have to continue to operate as two separate companies. That's pricing information, which is very closely guarded. We haven't been able to delve more into there and reach any conclusions. More broadly, I'd say we feel good about the cost synergy guidance that we had provided back in November and are working really hard to put in plans to achieve those numbers that we put out there.
The only thing I would add is that, as Peter said, we're not privy to that information at a detailed level at this point. Our focus on trade execution is always what's going to get the best execution for our clients. That will be the driver of the decisions that we'll make as part of the integration process.
Thank you.
Okay.
Thank you. Our next question is from Craig Siegenthaler. Your line is now open.
Good morning, Walt, Peter. Hope you're both doing well. We wanted to get your thoughts on the timing behind the potential direct index investing product launch?
Yeah. Thanks, Craig. I'll take that, Peter. I think at this point, we're not making any public statement for competitive reasons around the timing. We do remain optimistic about the implications of direct indexing delivered at an attractive price point and to a very large client base who has an affinity to indexing. I think our view also is that the customization capabilities that we will be able to deliver, not just those that we had in flight, but also given the unique technology capabilities of Motif is going to result in a direct indexing offer that we think will have an impact in the marketplace. Craig, unfortunately at this point in time, we're not going to put a time frame on it for the reasons I mentioned.
No worries. Just as my follow-up, do you expect to see stronger demand for DII in the retail channel, or do you also think there could be strong demand too from your RIA clients?
I think the opportunity is significant in both. Many of our RIA clients that we serve do have an index orientation with their clients, but with a degree of customization. We think direct indexing is a perfect fit for their ability to deliver that customization while still keeping transaction and advisory costs as low as possible to minimize drag on client performance. We're quite optimistic about both, Craig.
Thank you very much.
Thank you. Our next question is from Bill Katz. Your line is open.
Okay. Thank you very much for taking the questions this morning as well. Just coming back to transaction with Ameritrade. Obviously, we'll get their results post-close this evening. Pete, you had mentioned that you're sort of on track with the synergies. Any sense on timing sort of second half of the year? We're sort of running out of time. How do we think about those synergies from both a timing perspective and maybe dollars? Are there any sort of change of assumptions that we should be anticipating?
Yeah. In terms of timing, Walt mentioned second half of the year. Unfortunately, I don't think we're in a position to be any more precise than that. In terms of the timing on the synergies, yeah, nothing new. No new guidance to suggest there. We're working hard to achieve the expectations that we had communicated earlier, but nothing new to share on that front either.
Okay. Just going back to, as a follow-up just, Walt, your commentary about just the strong momentum as you sort of get a lot of new to retail in terms, of course, the age cohort, how do the economics of the incremental account today compare to where you were a decade ago?
Yeah. Good question, Bill. The new-to-retail households that are coming to Schwab mirror the existing client base. I know that there is some significant growth going on in the industry at a relatively low end of investable assets. That is not necessarily something that we're experiencing. We're experiencing, for the most part, acquisition that is consistent with our existing client base, and I think you see that reflected in the strong net new asset numbers that we continue to post on the retail side.
Okay. Thank you very much for taking the questions.
Thank you. Our next question is from Steven Chubak. Your line is open.
Hi, good morning. Peter, I wanted to just start with a question on capital. We've had a lot of inbound as it relates to your capital targets and just balance sheet flexibility. I was hoping you could update us on what the Tier 1 leverage exit rate was in 2Q. Just given some of the pressure on leverage ratios that you cited from higher cash growth, how does that impact your ability to execute any planned onboarding of Ameritrade BDA balances? How much additional preferred capacity or issuance are you contemplating once you onboard or at least complete and consummate the Ameritrade deal?
Okay. Let me see if I can get all three of those parts.
Multi-part.
Our number one priority from a capital standpoint is to support the growth of our balance sheet, by far. That's our priority, and then when we think about capital and capital ratios and so forth, that's really what we want to make sure we do. We wouldn't want to do anything that would in any way jeopardize that. As I mentioned, as you know, Tier 1 leverage is based off of average assets. Given the fact that we ended the second quarter at higher balances on the balance sheet on a spot basis than the average was, then the Tier 1 leverage ratio on a spot basis in the end of the second quarter would've been a little bit lower than that 5.9%, so assume somewhere in the upper fives. In terms of the onboarding balances via the IDA, now remember, that doesn't start until July of 2021.
Of course, that is our option, not an obligation, and our option. That's a year from now. That's a long time from now. Our full expectation would be to begin onboarding those balances in that timeframe, consistent with that agreement. In terms of the preferred capacity, we target our preferred to Tier 1 capital at that 15%-25% range. I think as of the end of the second quarter, we're probably around 24%. If you look at the TD Ameritrade equity base, they don't have any preferred outstanding, kind of assume that it creates incremental capacity of up to 25% of the increase in equity that we would get as part of that deal. Whether we go into the market for that full amount, TBD, but that at least creates the capacity for us.
Thanks for that color, Peter. Maybe just a quick follow-up for Walt. Ameritrade and some of the more active trader peers have certainly benefited from really strong net new asset and account growth during this period of stay-at-home and post-COVID. I was hoping you could speak to at least some of the trends you're seeing across the industry. What are your views on the sustainability of some of this trading strength? Just in terms of the demographics, how do you think about the stickiness of some of those clients that are relatively new to trading?
Well, it's difficult for me to comment on the client acquisition metrics of other organizations because the degree of detail and transparency isn't there. Some of the public companies haven't reported, and the private companies choose not to share the degree of detail that would be ideal for us to comment. No, I think that we all know that the business of trading at the retail side is hard. Therefore, individuals who trade tend to have great success when the market goes up, and of course, tend to have challenges when the market goes down. We've been in a period since spring in which the market has, for the most part, with a couple of brief periods, has been going up, and that makes trading seem like something that people can do with a fairly high degree of success.
I think over time, that's proven to be much more difficult. I think the best thing for all of us to do is to watch it evolve over a longer period of time than just maybe the four months that this phenomenon has really been at work. We know that trading for profit at the retail side with relatively small accounts is quite difficult to do successfully.
Great. Thanks for taking my questions.
Okay, thank you. Our next question is from Will Nance. Your line is open.
Hey, guys. Good morning. Maybe if I can go back to some of the strategic comments that Walt made and marrying it with maybe the comments that Peter just made on the reinvestment yield. I guess just given the refinance volumes that we're seeing in the industry, what kind of opportunity is there to kind of accelerate that? Then maybe, Peter, can you comment on what the yield uplift you might see versus the incremental security? That'd be interesting, too.
Walt, you'll start us off on that?
Sure. Just very briefly. We have a strong pipeline, and the pipeline has been strong for the last couple of months. We have offered very competitive pricing on lending to borrowers who we have a high degree of confidence will pay us back. I think it's reflected in the financial information that we released to you last week. You can see our results that we tend to execute on that strategy, and we'll continue to focus on those borrowers who have a very high probability of repaying us. Peter, I'll turn it over to you for any comment in terms of spreads.
Yeah. The nice thing about expanding the lending business and the very aggressive pricing that we have is even with that very aggressive pricing, not only is that great for us strategically in terms of cementing relationship with our clients and creating another touch point and keeping some of our competitors at bay. It's also good for us financially in that the spread to securities, and that would be the alternative use of that cash, is still quite attractive even at these lower price points. It's really certainly a win-win for us and something we're excited about seeing the growth there. We certainly see a lot more opportunity to do even more of that consistent with our relatively little tolerance for taking on credit risk.
Got it. That's helpful. Maybe just more of a detailed question on one of the margin dynamics this quarter. It seems like margin loans are on track to trough something like 100 basis points lower than they did in the last kind of zero rate environment. Can you just talk to how much of that is structural and kind of mix driven versus something that's been more as a result of the negotiated pricing we've seen over time?
Yeah. Well, there's really three factors there. One is we have reduced our rack rate pricing on the top end gradually over the last. Gosh. As interest rates were increasing, we took that opportunity to reduce those higher tiers in terms of our rack rate pricing to be closer or on top of some of the competition that we see there. Of course, certainly the vast majority of balances aren't based off of that rack rate. The majority of it is discounted. What we're seeing is a certain increase in the degree of discounting, and that discounting is at a deeper level than we may have seen 10 years ago. That's really a function of what we're seeing in the market around us.
Got it. Thank you for taking my questions.
Okay. Operator, let's take, I think, one last question, and then Peter will close us out. Thank you.
Okay, thank you. Our next question is from Brian Bedell. Your line is open.
Great. Thanks. Good morning, folks. Thanks for squeezing me in here. Maybe just a quick one for Peter. We've talked a lot about the balance sheet dynamics. Maybe just quickly on the 120 NIM that you mentioned for incremental NIM during ZIRP 1.0. I know you said reinvestment rates right now are sitting in that 90 to 105 basis point range. Maybe if you could just comment if we do stay in that range and premium amortization stays constant with second quarter, maybe just thinking about turnover rates of that portfolio in terms of maturities and potential securities sales, how that securities yield might grind down over the next couple quarters at least.
Yeah. Over the next couple of quarters, the securities yield, so the majority of our investments are in fixed rate. The duration on those fixed rate investments is four to five years. It takes a while for that portfolio to turn over. As I mentioned earlier, to the degree to which the balances grow more quickly, that means we're putting more cash to work at those lower reinvestment yields. That ends up being a negative for NIM, but that's certainly a positive for net interest revenue. It really depends. That's probably the bigger factor that would impact that. I think the answer to your question there.
Longer term, from monetizing the securities portfolio gains, that is not a decision you would make until after you close Ameritrade. If you would do that, obviously that would reduce the yields on the portfolio. Is that fair to say at this stage?
Yeah, I think it's fair to say that that's not a decision we would make until we are really in a position where we are getting much closer to the regulatory minimums than where we are today. Certainly, I wouldn't see us doing it at a 5.5% or 6% Tier 1 leverage. We'd have to be much lower than where we are and also feel that there was no end in sight, if you will, of the growth in the balance sheet either because we saw a sudden surge or because we had visibility into the future growth that if we thought that the balance sheet was going to stop growing, then on the margin, we'd probably hold off on trying to do something like that.
Right. That makes sense. Walt, just to follow on the direct indexing question. I know obviously you're in the development of the strategy still, but maybe just broadly as you think about the composition of Schwab's revenue mix longer term and potentially reducing reliance on interest rates, is direct indexing a major part of that strategy to raise your fee-based advisory assets or are you thinking that can be lumped into an advisory strategy that would be a material growth angle for fees that would help potentially reduce that reliance on that interest revenue longer term?
Well, I think direct indexing is one of a series of strategies that we expect to diversify our revenue mix and potentially reduce the weighting from net interest income. Direct indexing has appeal to a broad range of our clients, both on the retail side and again, the advisor side. I don't want to do a walkthrough of DII because I'm sure you understand it well yourself, but the opportunity to not only get tax harvesting, the opportunity to incorporate unique customization, but in an incredibly scalable way and at a low cost. All those things make the potential. Let me mention also for very self-directed investors, we intend to offer direct indexing for people that simply want to be self-directed but yet leverage technology to efficiently manage their own portfolio in a customized manner.
You put all that together, it is a broad swath of our clients who we believe will benefit from direct indexing, and so therefore, we do expect it to play an important role among a broad range of approaches that will help us diversify.
Okay. It's too early to talk about pricing on that, I assume, at this stage, right?
Correct. We're not ready to talk about timing or pricing yet.
Yep. Fair enough. No, thank you so much.
Let me just close and thank you all for your questions and your time. As I said before, we're certainly not blind to the pressures that we face, but nor are we fazed by them. As Walt mentioned, we know that interest rates move in cycles, and this low rate environment will inevitably give way at some point to more normalized rates. We're also not just waiting around for that to happen. We're planting a lot of seeds, and these seeds will take time to bear fruit, in some cases, months, in other cases, years. We're very confident that they will bear fruit, and they'll help create a company that is better positioned in the market, that offers an even better value proposition to clients, and that has an even more resilient and all-weather business model and a lower cost business model.
A company which will reward both stockholders, clients, and our employees who put their faith in it. With that, thank you. We look forward to talking to you again in October.
Thank you. That concludes today's conference. Thank you all for participating. You may now disconnect.