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All right. So we're live. Good morning, everyone. Welcome to Schwab's spring 2019 business update. This is Rich Fowler, Head of Investor Relations for Schwab coming to you from a slightly foggy San Francisco.
It is still a top down day, although it is spring. And therefore, allergy season and so I'm getting a full dose of that myself. My for me, it's eyes. So hopefully everyone's having a tolerable pollen season starting out here. Also with me in the studio today are Walt Benjurer, our President and CEO and Peter Crawford, our CFO.
Our agenda today is going to seem pretty familiar given the interim update structure. So we'll spend a focused hour sharing our perspectives on Schwab. Walt will start it off with the strategic picture. Peter will then take a look at our recent financial performance and current outlook. And then we'll go to Q and A until it's time to wrap up.
While we're talking about Q and A, as usual, we're going to ask that we follow the 1 question plus one follow on approach, so we can get through as many questions as possible. We will take questions from both the webcast console and the dial in. So again, as usual, then before we start, the last thing to cover is the wonderful wall of words, forward looking statements, which we always include to remind ourselves that things will change. And therefore, please stay in touch with our disclosures as we go through the year. Keep up with what's going on.
For those of you who are looking for slides, we will post them as usual around the end of the prepared comments, which is usually as you know around the half hour mark. So with that, I think we're ready to begin. Walt, would you please start us off?
Thanks, Rich. Good morning, everyone. Thanks for joining us for our spring update. We're very pleased here as we kick off 2019 with both our client metrics and our financial results. Clients are actively engaged.
They continue to be and we continue to win in the market. I'll reference a bit later highlighted by for example March, which was our 2nd best month in firm history for new to firm retail households. So very strong client engagement for us here in Q1. At the same time, I think we're realistic. We're a bit cautious about the environment for the rest of the year, given where market valuations are and of course what seems to be a likely pause when it comes to interest rates.
So our through client size strategy and virtuous cycle execution remain consistent. You've all seen this chart many, many times before. We strive to operate the company with the based on the golden rule. We have a confidence that by doing right by our clients, they'll choose to do more business with us. They'll choose to refer others that are within their circle of influence to Schwab and so we're committed to that approach.
We're also committed to what we believe is the no trade offs concept that in this era, clients expect effectively everything, great pricing, great service, great advice, multi omni channel service, and we'll continue to invest. We have great optimism about our long term growth as well as our prospects. So Q1 was a bit unique from an investor standpoint. Of course, we came on the heels of a very difficult Q4 for the equity markets. The yield curve briefly inverted in March.
Of course, we lived with predictions from some analysts about a potential recession. We all understand the uncertainty that we've had from a global standpoint. And yet, even with all that going on, equity markets powered forward to near record levels and of course, excuse me, as we moved into April, now we've seen some record levels. At the same time, all this occurred against a backdrop of what we would consider relatively low volatility in the equity markets themselves. From a client standpoint, investors pulled back a bit.
We saw modestly lower trading levels, margin balances, even financial and investment planning conversations were down modestly from a year ago. Certainly, the euphoria of the Q1 of 2018 was not replicated in terms of new brokerage accounts. However, again, still a very strong quarter as you can see in the upper right hand I'm sorry, in the upper left hand side of the chart. And again, as I mentioned, March for us was the 2nd highest month in firm's history for new to firm retail households, I think only exceeded by January of 2018. And while there were some areas, as I mentioned, that showed client hesitation, there are other areas that continue to show high levels of client engagement and interest in our products and services.
Assets in our Schwab managed ETFs, mutual funds, money market funds, fixed income securities, all those showed growth in the 20% or more range. So quite a bit of engagement with many aspects of our firm and the offerings we have for clients. In terms of net new assets, the quarter was within the long term range. What we've come to expect and what we've communicated consistently with you somewhere between 5% 8% depending largely on the environment as well as client sentiment. I think what the quarter does is it again demonstrates our ability to drive strong organic growth even as we serve more and more clients and even of course as we maintain a much larger client asset base.
Taking a look at the retail side, the retail investors remained engaged with our advisory solutions. We have CAGRs of 12% or so in recent years for both accounts and assets that are in our advisory solutions. I think what's notable about this is that the assets in our retail advisory solutions are growing faster than assets at the firm overall. And that continues to demonstrate the significant opportunity before us to continue to serve more clients with our revenue generating advisory programs. So diving a little bit deeper into some of our clients and client acquisition, our success with investors is really across all ages.
You can see that over half of our new to firm retail clients are under the age of 40. And I think what's very important about that is we're acquiring these younger investors with no trade off in the affluence of them. We now serve about 900,000 households in our retail business that we consider affluent. We define that as $250,000 or more invested at Schwab. Really the success across age groups and generations is reflection of our strategic efforts.
We want to continue growing our baby boomer and Generation X clientele. They tend on average to be more affluent, but at the same time, we want to continue winning large volumes of millennial investors, those who really are becoming and will become the mass affluent clientele of the future. Take a look at our advisor business. We continue to capture market share. We had a net transfer ratio in the Q1 that was just shy of 3:one versus our key competitors.
I think our net new assets, although strong from a historical standpoint, as you can see on the right side, firms for a period in Q1. But also I think you can't discount the difficult Q4 in the equity markets that often will cause those considering moving to the independent model to maybe pause until they feel on firmer footing with some of their clients who they hope to follow them into the independent space. And as we've been doing for a number of years and sharing with you, we continue to invest for the future. We're making substantial investments. They're designed to both drive long term growth, continue to manage risk in an appropriate manner and really to fundamentally change our cost profile over time via the usage of greater digitalization, automation, scale.
All of those are key parts of the investments that we've been making. And we also continue to invest in our clients. So offering enhancements to our client solutions such as in the Q4, our industry leading ETF OneSource program. We're now over 500 commission free ETFs, including those from all virtually all of the major providers in the ETF space. And we continue to build scale in our low cost internally managed ETFs that really are designed as core building blocks for principally buy and hold investors.
I want to spend a little bit of time this morning in an area that has gotten a fair amount of interest lately. As you all know in the Q1 we introduced what really I suppose you could say is a groundbreaking subscription pricing model designed for financial planning. The way it works is it's really a premium offer that accompanies our Schwab Intelligent Portfolios digital advisory program. The subscription pricing model is a program that offers unlimited access to a certified financial planner for a subscription fee of $30 a month after paying a one time fee of $300 for what is a comprehensive for financial planning. We've really always been committed to simple, transparent and low cost pricing across everything that we do.
And at the same time, we see that consumers are more and more comfortable with and in some cases even asking for subscription pricing models. So we saw that the planning area was really the perfect place to bring together our commitment for this simple and transparent pricing with what consumers are looking for in many areas, again, subscription models. In terms of results, early results have been quite strong. Since the launch, we've seen about a 30% increase in traffic to our digital advisory sites. Our daily account opens are up about 15% for our digital advisory standalone solution again Schwab Intelligent Portfolios and they're up almost 35% for those who are signing up for the subscription model under Schwab Intelligent Portfolios premium.
Now I think the big question, does this mean that we're going to move to subscription pricing for everything we do? And of course, the answer to that is no. We see a role for subscription pricing, but I don't think we see it displacing asset or transaction pricing rather you're probably looking at a mixture of the 3 over a period of time. And again, at the same time, scalable financial planning, which is something that is needed with so many mass affluent investors and we just thought it was the ideal place to launch it. I guess in summary, I just say this is another one of those examples of where at Schwab, we're skating to where the puck is going and leading the industry as opposed to being a follower to others.
So one of our competitive advantages is our efficiency. We talk about it often, our efficient operating focus and scale. At quarter end, our operating expenses as a percentage of client assets were about 16 basis points. That's not a number that we're satisfied with. We're investing in a variety of areas including digital to bring that figure down over time.
And what this slide does is it just illustrates a small number of examples as to some of the early day returns and rewards that we're getting from the investments that we're making in technology and continuing to enhance our omnichannel ability to serve clients. And of course, as we make investments, we make them across the firm. They benefit both our retail clients as well as the end clients of the investment advisors that we serve. But in addition, we make very specific investments just to benefit the independent investment advisors. Some of the more recent ones here are push status updates, digital account open, direct data delivery without having to reconcile or download, all capabilities that we continue to deliver to advisors without any additional fees or costs and I think continue to solidify our industry leading market share in that important and fast growing space.
So just in closing, I often like to say that we're running a marathon here at Schwab. We're not running a sprint. Now that's not saying that we can just jog along the way, but rather it reminds everyone that we're playing a long game here. We recognize that environments change, markets go up, markets go down, interest rates go up, interest rates go down. But we're really focused on the long term.
And I think we're positioned ideally for where the wealth management as well as the RIA space is today as well as where it's going. And so with our tried and true strategy execution model, we're very confident in our long term health and as well as confident in our ability to reward our long term stockholders. So let me go ahead and wrap up Peter and turn it over to you.
All right. Well, thank you very much, Walt. It's great to be with all of you here today and on the webcast and on the phone and really reflect on the quarter we just had and discuss how we see the future. So I'll talk about the strong momentum we have in the marketplace, the success we're having in winning new clients and the innovations we're making in driving growth and also some of the early wins we're seeing with our broad based efforts to drive greater efficiency really throughout our whole business. So my time today, I'll talk about how that business momentum allowed us to produce record financial results in the Q1 of 2019.
Also give you an update on how we're thinking about the rest of the year, recognizing there are a lot of moving pieces and unknowns. And finally, I'll talk about client cash and about capital, 2 topics that I know are on the minds of many of you. And the summary is that we are done with the transfers of sweep money funds over to the balance sheet, which has several implications, including the opportunity to free up capital for buybacks in the quarters ahead. So Walt shared a number of graphs, data points and visuals that speak to our success in winning new clients, our ability to sustain high levels of organic growth even as our client base has grown and the growing interest in our various products and services. Not surprisingly, all that momentum translated into robust growth in our client base with total brokerage accounts, total client assets and advised assets up 7% to 9% year over year.
Now the February business update, we shared our thoughts on some of the factors that would influence our financial performance for the year and describe the range of possible financial outcomes given a specific macroeconomic scenario. It's early in the year, of course, but I think it's safe to say the conditions, as Walt mentioned, in 2019 on the whole have started off a little bit behind that baseline set of assumptions. The equity markets have clearly been a big positive with the S and P 500 continuing the strong start that we witnessed in January, But interest rates haven't been as helpful. With the Fed now universally expected to pause for a while, we've seen a drop in short term rates and a more dramatic flattening and even for a moment inversion of the yield curve. And as Walt noted, somewhat softer client trading activity than last year's record Q1 though it was still high by historical levels.
Our financial results for the quarter are quite strong considering the somewhat mixed conditions I just described and in part reflect the environment we experienced in 2018 and the actions we took last year. Our revenue was up 14% year over year driven by 30 plus percent growth in net interest revenue due to higher rates and higher balances. Asset management and admin fees were down year over year, mostly due to balances moving out of sweep money funds that we either transferred to bank sweep or clients reallocated into purchase money funds and other products. And other revenue that's not on this page here was up mostly due to a one time gain related to the reassignment of our lease at 215 Fremont in San Francisco, which we received an upfront payment. Expenses were up just 5%, which was generally consistent with our expectations.
The biggest driver of the increase was increased staffing as we have been ramping up our digital and technology areas to drive greater efficiency over the next several years as Walt discussed. And offsetting that has been the elimination of the FDIC surcharge in the end of Q3 last year. With 900 basis points of operating leverage in the quarter, we increased our pre tax margin by 4.5 points from Q1 of 2018 to over 46 percent and we delivered our 3rd consecutive quarter with an ROE of 20%. Turning our attention to the balance sheet. We executed over $11,000,000,000 of transfers in the Q1, essentially completing that process except for a few $100,000,000 of transfers we did in April, which as I said finished up our transfers.
The size of our balance sheet decreased by a bit under 5% from the high water market we saw at the end of 2018, which resulted from a surge in deposits in December given the equity market weakness and typical seasonal flows. Now this decrease in deposits was consistent with our expectations as clients deployed that December cash into the markets and continued with the sorting process we've discussed at great length. In terms of capital, as you no doubt saw, the Board authorized a 31% or $0.04 increase in our quarterly dividend and a new $4,000,000,000 buyback authorization. And we didn't however purchase any stock in the quarter and you may ask why. You remember that our Tier 1 leverage ratio is based off of average assets.
And while we ended Q4 at a ratio of 7.1%, given the surge in balances at the end of December, our sort of spot ratio, if you will, entering Q1 was somewhat lower than our operating objective. Want to ensure our capital ratio finished the quarter on the upper end of our operating objective of 6.75% to 7%. There was a lot of interest in this page when it made its debut at the winter business update. For those of you who weren't there, it describes the behavior of our clients with regard to their cash, both their Suite Money Funds and Bank Suite. If you start on the left, you can see that at the end of 2018, there was roughly 30,000,000,000 dollars remaining in sweep money market funds.
About $6,000,000,000 of that amount or 20% moved on its own either in accounts impacted by the transfer, but ahead of us actually moving the money or an accounts completely separate from that process. And then we moved about $12,000,000,000 leaving us with about $14,000,000,000 remaining in sweep money funds as of the end of the quarter. What was the impact on bank sweep? If you look at the graph on the right, you can see that we ended the year with $212,000,000,000 in Bank Sweep. Some of the $52,000,000,000 in NNA in the first quarter came in the form of cash.
Now we continue to see sorting as we expected and then we saw the benefit of the transfer, some flows into those accounts and then some sorting. Difference between the $10,000,000,000 on the right and the $12,000,000,000 on the left is the money we've transferred from Suite Money Funds over to brokerage Suite sweep versus the bank sweep. Now a couple of points I'd make. First is that the ratio of what got sorted is pretty similar for the clients using sweep money funds versus those already in bank sweep, which supports our what we've talked about is this is fundamentally a decision about transactional cash versus an investment cash. 2nd is that the clients whose accounts were actually switched moved a lower percent of their cash post transfer into other solutions in the overall population.
Now this may mean that there's a little bit of sorting left for that group, but it's also a function of the fact that some of cash actually moved ahead of the transfer as I talked about on the left. And third and finally, that sorting process that we saw in the Q1 was not evenly spread throughout the quarter. The net outflows were highest in January as we saw clients reengage in the markets. The outflows were less in February than in January and then less in March than they were in February. So now let's shift from the past to the future.
As I noted earlier, there are a lot of moving pieces which makes developing expectations for financial results this year even more challenging than usual. In addition to the usual dependencies on interest rates, Fed policy, equity values and trading, we have this additional dependency around how long the sorting process will take to complete. Now the year is starting off to be a bit more challenging than those baseline assumptions we communicated nearly 3 months ago. Client cash allocation activity, however, has generally been consistent with what we expected to start the year. But to reiterate what I said back then, back in February, our balance sheet growth and the resulting revenue growth depends on how long this process plays out.
Short rates down a bit, 1 month LIBOR is down a basis point or 2 to start the year and 3 month LIBOR is down a little over 20 basis points. Our expectations for NIM, for full year NIM are now somewhere in the mid-240s plus or minus a couple of basis points, assuming this is really important, assuming the Fed doesn't move and rates stay where they are. So what are we thinking in terms of revenue growth for 2019? It's early in the year. You've heard me say that a few times before.
And there are too many uncertainties to give you clear direction on that. I'd remind you instead of the sensitivities we shared previously. And note that we think these are still valid as adjustments to the range of outcomes we shared back in February, which means we could still be in the range we communicated previously adjusted for these sensitivities. Let me just repeat that. I'm saying is if you take that original range of revenue that we talked about back in February and make adjustments based on how the year has started and how all of you expect the year to unfold, that should still be a reasonable range revenue for the full year.
So turning to expenses. There hasn't been a major change in how we're thinking about our spending levels and about our spending priorities. A large portion of this year's growth in expenses is going to efficiency and scale initiatives that will help us drive down EOCA or expense on client assets that really, really important competitive advantage that we have, enable us to limit expense growth through the cycle to the low to mid single digit range. Our current expectations around full year expense growth is it will probably be on the low end of the 6% to 7% range year over year that we communicated earlier. Now at last year's winter business update, so back in 2018, we said we're entering a couple of years stretch during which our CapEx will be higher than it traditionally has been due to build out our facilities in Denver, Austin and Dallas.
We have found these to be great markets to attract talent at a reasonable cost. And while building these company owned facilities requires more cash upfront, the lifetime cost is lower than when we lease space. The key point is that we expect to have another step up in CapEx in 2019, but then for it to return to the more normalized levels in 2020 sorry, 2020 2021. So we have to be that rare company that is both growing top line revenue and returning capital to stockholders. With the transfers now behind us, we should be in a position to build excess capital over the next several quarters, barring of course the surge in deposits.
You should expect our dividend to increase as our earnings increase. While it's been in lower part of our 20% to 30% range over the last several years as we conserve our capital more transfers, I think it's likely we'll look to keep it more in the mid to upper part of that range in the near future. The extent we have capital in excess of our 6.75% to 7% operating objective for Tier 1 leverage, our focus will be on utilizing our $4,000,000,000 buyback authorization opportunistically. I'm often asked how close to that operating objective can we run given the potential for an unexpected surge in deposits like what we saw in December? And Serge, we have several tools at our disposal to handle short term inflows, giving us the confidence to stay pretty close to that line.
And we'll aim any repurchase activity move us towards, but not through our operating objective. That does not mean, however, that you should expect our level of capital return to be the same every month, more than our reported Tier 1 leverage ratio will be exactly 7% or exactly 6.75% every single quarter, there will be some lumpiness to all this for a variety of reasons. So let me close by reinforcing a few things that hopefully came through today. First is our strategy is working, producing strong business momentum and record financial results. 2nd, with the completion of transfers from money funds to bank Sweep, we should have the opportunity to reserve more robust levels of capital return.
There are a number of uncertainties in the market, but we're controlling the things that we can control. Doing right by clients, which has allowed us to be the premier asset gatherer in our industry, figuring out ways to monetize those assets and operating with discipline in how we manage our expenses and capital. It's a similar frame to what you've heard from us before, but it's worked through multiple cycles and we're confident it's the right approach in the years ahead. That, let me turn it over to Rich for some Q and A. All
right. Let's plunge right in. I'm going to ask the operator to start us off and maybe we'll take a first call and then we'll see what we've got on the web.
Thank you. We'll now open up the queue for the question and answer session over the phone. Our first question comes from Richard Petal of Sandler O'Neill. Your line is open.
Yes. Good morning, Walt. Good morning, Peter. I guess the first just a little bit more color on the favorite topic here, the client sorting. Thanks for the metrics, the inter quarter metrics, Peter.
I guess the general question is, you issued some pretty wide guidance in February in regards to client sorting. So given what you're seeing intra month and other metrics probably that you didn't mention, can you just speak to at least subjectively, are we towards the end or where in the range you think we might come out in this client sorting that's been a hot topic?
So thanks, Rich. So to refresh everyone's memory, the range of outcomes that I talked about back in February on client sorting varied. We talked about a range of balance sheet growth of minus 8% or 9% to plus 3% or 4%. And that range depended on when the sorting we expect the sorting to stop. The lower end of that range assumed that the sorting continued through basically 2019 and the upper end of that range in terms of balance sheet growth assume the soaring stopped at the end of Q1.
So thus far, I would say nothing we have seen suggest that we're falling outside of that range in terms of the balance sheet growth. But it's a little bit hard to say exactly what the next couple of quarters are going to look like because we're not in those quarters yet. We're obviously a month into the Q2, but of course April is an unusual month given tax related payments and flows and such. What I'd say on the sorting though is our expectation is that the sorting will go down over time that the most yield sensitive cash sorts first, if you will, and then over time it should decrease. And if the Fed is on pause, one would think that that sorting should end sooner than it would otherwise.
The exact pace at which that happens, a little bit hard to say right now sitting here towards the end of April, but it's something we'll be monitoring in the clearly and I know you all be monitoring in the months ahead.
Got it. That's helpful, Peter. And I guess my one follow-up would be for Walt and thanks on the color on the folk how you've done with retail house new retail households etcetera. I guess one of the things I was looking at was advisor assets. If you looked at back quarterly, just on advisor net new assets, it seemed like they peaked around 4Q of 2017, 1Q or 2018 ran up to that point.
And then from that point on, it seems like we've come down generally. And I'm trying to understand, Walt, am I missing a trend? Or is this just market related? Or what's behind the numbers, I guess, on the net new assets on the adviser space?
Yes. Thanks, Rich. I think you have cyclicality in there for one that we have to be careful with and not to extrapolate cyclicality into a trend line. But there's no doubt that Q1 was softer on the RAA side. And we really do we believe particularly when we look at the pipelines, which are quite robust, we really do believe that the two factors I mentioned were the principal drivers behind the softer relative Q1 assets.
When the SEC was closed, of course, we know that those folks looking to start new RIAs were unable to get their paperwork through and processed. And then I just would not discount the difficult Q4. I mean, if you're looking to break away and of course you're making a bet on 9 out of 10 of your clients following you into a new model and those clients may have just experienced quite a bit of volatility or even paper losses in their account, that's a difficult time to have the confidence that they will follow. So I think the combination of those two factors played a role. But when I look again at pipeline, I don't see anything that tells me there's a structural issue or a competitive issue or anything in the RAA business that causes me longer term concerns.
Got it. Thanks, Walt. Makes sense. Thank you.
Okay. Operator, we're going to take one of the webcast questions before going back to the calls. We've had a couple of versions of this come in. And so to paraphrase a question from Bill Katz, can we talk a little bit about the RAA reaction to subscription pricing and the impact on their businesses, any other feedback we're getting? Sure.
Yes. So I've heard from and spoken with a fair number of RIAs. I think the vast majority of them understand that this is a program for financial planning that's combined with a digital advisory capability. So that is a model that is vastly different than almost all the RIAs that we work with. It's vastly different than what they do for their clients.
So they're not really seeing that as some form of competitive threat. Now obviously when you serve 7000 to 8000 RIAs, if a blogger wants to go out and find an RIA who wants to express concern with it, that's not too hard to do given that volume. Then again, those same folks probably express concerns of virtually everything that we do. I also want to make sure I emphasize the other side of the coin though. I've also spoken with RIAs who have been almost congratulatory in what we've done because their view is what we're doing here is we're making access for financial planning more affordable and more accessible to more people.
And that's a good thing they say. They're not worried about the competitive issue. They're focused on more citizens getting the kind of financial planning help that they should. And if this helps more of them do so, that's a good thing.
Okay, let's go back to the calls.
Thank you. Our next question comes from Ken Worthington of JPMorgan. Your line is open.
Hi, good morning and thank you for taking my questions. Maybe first, I appreciate the comments on NIM. I wanted to dig maybe a touch deeper. When you look at the fixed and variable rate investments, how do the yields on maturing, say, mortgages and securities compared to the yields on the new mortgages and new securities in which you're investing? Like what is that yield differential?
Is it flat, positive, negative? Where does it stand right now?
Thanks, Ken. So without getting to the sort of security by security mechanics or details, what I'd say is in aggregate, the reinvestment rates today are higher than our overall portfolio yield, with the benefit really happening on the fixed side of the portfolio with those longer term rates. Now, some of you may say, well, why is that? Longer term rates have been down a little bit. But of course, even where they are today, the longer term rates and the rates on the new fixed rate investments we're making are still higher than they've been for much of the last 5, 7 years.
So we're able to reinvest at higher rates. There has been a little bit of a tightening of credit spreads that affects the reinvestment rates on some of the floating rate securities. But on the whole, the reinvestment rates overall are a bit higher than the overall portfolio yield.
Awesome. Thank you. And then to follow-up on Rich's question on cash sorting. I was hoping to maybe get a better sense of the outlook here, and see if I'm interpreting your comments correctly. So I think what you were saying is we saw a slowing from January to February February to March, and our data might suggest that you saw further slowing in April.
I guess maybe one, do you think there's any reason for sorting to pick up after tax season is kind of complete? And I felt that your comments suggested that the cash sorting seems to be winding down. Is that a fair interpretation of your comments?
Yes. It's hard to say. I mean, the short answer is hard to say. We don't know. I think May will be an interesting month to see what happens.
April is an unusual month. So I don't want to I wouldn't characterize it as less sorting or more sorting. At this point, I think it's too early to say. We haven't even finished the month yet. I wish I could say, yes, call the end and ring the bell for the end of sorting.
I just don't think that's I don't think we know quite yet. We do know that at some point, we'll get back to normalized levels and then cash balances will grow consistent with the growth in total client assets and the growth in accounts. The other dynamic we have, of course, is now at the end of the Suite transfers to extent that the suite transfers were a catalyst for some portion of that, that being more in the rearview mirror, perhaps that helps a bit as well. But we'll have to see and something we'll have to monitor in the next several months.
Awesome. Thank you so much.
Okay. Next question.
Thank you. Our next question comes from Chris Harris of Wells Fargo. Your line is open.
Great, thanks. Well, the goal of stock buybacks and other capital actions you guys might decide to take, will it be to keep that Tier 1 leverage ratio near the target? Or is there a scenario where we can see that leverage ratio build quite a bit above the target? And the reason I ask the question is if the balance sheet ends up shrinking close to 10%, that's going to free up quite a lot of capital?
So, yes, I mean, I guess what I'd say is a couple things on that. I mean, our objective is to use that available capital to enable the buybacks and to keep that leverage ratio relatively close to that 6.75% to 7% objective. Is there a scenario where it could go well above that? Perhaps, I don't know. I mean, there's a lot of potential scenarios, but our objective is really to it at that level.
And I think that the way that the balance sheet evolves typically tends to be a little bit slower. So it's not like it suddenly leaps in 1 month from 7.2% to 9%. So it gives us a little bit of time to continue those buybacks over a period of time. Okay. Got you.
Thank you.
Okay. Let's keep going.
Thank you. Our next question comes from Craig Siegenthaler of Credit Suisse. Your line is open.
Thanks. Good morning, Walt, Peter. Just a follow-up to the last one, but given that your Tier one ratio kept you from repurchasing stock in the Q1, can you talk about your ability to buy back stock over the next year just given that positive deposit growth and a cheaper share price tend to occur at this in the same quarter?
So we have this $4,000,000,000 authorization for buybacks. Our plan is to begin to utilize that in the coming monthsquarters. In terms of the actual amount of that that we're able to use, it really depends on what we see from balance sheet growth. So it's hard for me to say it's going to be X or Y because it depends on in the scenario where the balance sheet shrinks by that 8% or 9% that I the lower end of that range that obviously would free up a lot more capital to enable buybacks to the extent the balance sheet grows by 3% or 4% or we see an equity market downturn, a flood into cash, the balance sheet potentially grows even higher than that. That obviously absorbs more capital and you'd see less on the buyback front in that scenario.
So go ahead, Craig. Sorry.
No, I'm
sorry, you go well.
No, this is Rich. I just was going to just try to maybe hammer on this a little bit more for folks. So Peter, is it fair for folks to assume that allowing for some chunkiness in terms of how this activity might unfold that literally our intent is to the extent the balance sheet does in fact shrink to use that room during the course of the year to go on the buybacks appropriately from a valuation perspective.
I mean that is certainly in the scenario where the balance sheet is shrinking, but I think you threw out the number 10%, in a scenario where the balance sheet is shrinking 10%, you're right, that does free up a fair amount of excess capital and that would enable us to do more of these buybacks. And we don't have a lot of interest in necessarily hoarding excess capital. It's not really our capital, it's our stockholders' capital. And if we don't need it for balance sheet growth or to support some of CapEx, things like that, then we would look to return it to the stockholders.
Got it. Very clear, Peter. So, I wanted to get your thoughts on a question you get from time to time. But looking at what you do in the U. S.
And then looking what you do outside the U. S, why not replicate your model more aggressively in Europe and Asia really outside your small focus because I know you have operations in like Hong Kong, Singapore. And if you eventually do, do that, isn't it better to kind of do this sooner rather than later as there's more kind of as the competitors can build up moats and the markets mature?
Yes, Craig. Thanks. So I think there is some opportunity outside the U. S. One thing that exists though, as you all know, is the economics of our traditional business on the retail side is fairly dependent on bank and balance sheet.
And so an aggressive expansion on the retail side of our business would necessitate us likely acquiring charters and dealing with the regulatory issues inherent in potentially having charters in a variety of different regulatory schemes. What might be more appealing in the near term at least would be the possible expansion of our RIA business internationally to the extent other parts of the globe are headed more and more toward a fee or a transparent model around investment advisory. But that's probably the principal barrier to a much more aggressive expansion. There are also opportunities for us particularly in the Far East around people that want to leverage some of our capabilities in the digital advisory space. So you could see some non traditional steps that we could take internationally.
But that's some of the thinking around opportunities for us outside the domestic environment.
Thank you.
Okay.
Thanks. Next.
Thank you. Our next question comes from Devin Ryan of JMP Securities. Your line is open.
Hey, great. Good morning. Welcome morning, Peter. Just a follow-up here on the sorting, because you guys have a lot more data internally than we can see from the outside. And been
moving
been moving out there, for example, purchase money market funds. Are there any consistent themes of kind of what's left in terms of the types of accounts or size or anything else that just gives you maybe some comfort that there's a certain type of account that's remaining and so therefore that may also give evidence that we're kind of late in the sorting cycle?
Yes. So, yes, it's a great question. So I guess what I'd say is a couple of things. I mean, what we've typically seen is that activity is highest with our most engaged clients, which who are often our most affluent clients. And so as we have been so you do see a higher level of that activity happen with the more affluent households.
It also tends to be correlated with, not surprisingly, with accounts that have higher portions of cash in the account that you tend to see more engagement there as well. I'd say those are probably the 2 general themes that we've seen. And of course, with some of the transfers, we moved some of those more affluent clients more recently. And so again, now that we're done with that, hopefully that starts to normalize and we expect it will start to normalize.
Just to weigh in real quickly, Devin, thanks for your question. It's important to walk through the process of how these transfers occur. So the client is notified substantially in advance of any transfer date. At that point, for example, on the retail side, our financial consultants are contacting those clients proactively and having conversations about their cash, explaining to them what's going to happen, educating the client as to how do you view your cash? How much of your cash is investment cash?
How much of it is really transaction cash that you intend to use to be buying and selling securities or doing bill pay or all the variety of things people do with their transactional cash. So that's all going on before there's even transfers. And I think the chart that Peter shared illustrated how you get significant movement long before the transfers even occur. Then those conversations continue because of course not every client takes action or not every client may be reached. And so those conversations continue for some period of time after that money has moved.
But from my time in the field and talking with financial consultants, those conversations are concentrated in the couple of months before and a couple of months after the actual movement occurs. Now that's not me trying to jump in and say, therefore, I have some special insight that tells you that we're late in the sorting process, but that's the practical sequence of what goes on here. And of course, on the RIA side, those conversations go on earlier and largely the RIAs make their decisions very, very quickly because they're dealing with large numbers and a bulk decision around all of their clients as opposed to retail where you've got to talk with the clients 1 by 1. So I think the process is important to understand. It adds color and helps maybe enlighten a bit, Devin, in terms of what we're actually doing with clients and what's going on behind the sorting process.
And let me just add one further point to what Walt said is, I think we've said this before, but the majority, the vast majority of the sorting that's happening is not actually clients who are going through the who have been impacted by the transfers. It's actually it's all the other clients because it is fundamentally this decision about transactional cash versus investment cash. I mean, certainly the money the process of the transfer, as Walt mentioned, is a catalyst, is a moment of engagement and people do engage on it. Is is other clients that are making the same decisions as well.
Okay, terrific. Thanks for all the context there. Just to follow-up here, there's obviously quite a bit of pricing pressure, I think competition across the business. But we've been in a pretty aggressive fee war on index mutual funds and ETFs, maybe some of the more commoditized types of products. And I'm just curious whether you see this trend kind of maybe broadening out within some of the other areas within proprietary products, maybe some of the less commoditized areas and just what you're expecting there?
Yes. I think our view is that asset management in all areas is likely to continue to receive pricing pressure. I'm differentiating asset management from investment advisory. But asset management, we see it of course in the active side where there are challenges around consistent alpha creation. I think in the factor or fundamental investing area, you see pricing pressure.
I just expect it to continue across the board. I do have some questions around the prudence of what's going on with some of the 0 expense ratio moves, particularly to the extent it's talked about in the ETF space as opposed to the mutual fund space. Because as we know in the ETF space, you can't really control the distribution and or volume that you receive since their exchange traded. But I think at the global level, we expect to see continuing pricing pressure across all areas of Investment Management, again differentiated from Investment Advisory.
Got it. Okay. Thanks very much.
Okay. Next.
Thank you. Our next question comes from Brian Bedell of Deutsche Bank. Your line is open.
Great. Thanks very much. Walt, staying on the ETF theme, maybe what are your initial views on the approval of the active non transparent ETF at the SEC? And do you think you will see good demand for that if asset managers actually launch those products, both from retail investors at Schwab and as well as the RIAs?
Well, yes, it's a really good question, Brian. I mean, the interesting thing we all recognize by the ETFs is they've been given a wrapper advantage, right, from a product standpoint relative to mutual funds, particularly from a tax perspective primarily. And so when you're talking after tax investing, there would be certain benefits. Now the dilemma is people that have meaningful after tax dollars that might be invested in mutual funds may also have meaningful built in taxable gains. And so we have to see whether there is an opportunity for them to make adjustments without the possible taxation of gains outweighing the benefit of the more efficient wrapper that the ETF holds.
The other thing is often with consumers anytime you get something new and unique it takes time. I mean people don't just flood to new things even if they are potentially advantageous. There's an education process. There's a comfort process. And so it may well create a movement over time, but I think often people maybe over anticipate the pace at which those things will occur.
And then the last thing I'd share is that I think arguably a significant percentage of flows today that still go into mutual funds are going in through the tax qualified plan area, specifically the 401 area. And with the exception of us and I'm not really sure anyone else of size, no one has a record keeping system that truly does intraday processing and trading of ETFs for 401. So the entrenched providers there have a significant motivation from an investment in their technology standpoint to continue to downplay the potential of ETFs in the 401 world as they have been doing for quite a number of years and I would say relatively successfully doing. So I don't see the non transparent ETFs causing one space as long as the entrenched providers are telling employers that it's not something that creates benefit. So interesting, some opportunity probably will take longer than many people think and the real flows in mutual funds I think today of consequence are occurring in the tax qualified area.
I don't see that those people switching to ETFs in the near term.
Right, right. And then this would also be a long term question then. As you think about your development of ETF OneSource versus Mutual Fund OneSource, and again realizing this will take a long time, but how do you think about potentially the pricing of actively non transparent ETF? Given that the select list is typically a high area of inflows, a lot of people rely on that. Could you replicate that with actively managed ETF?
And then maybe just one question on with the expansion of the commission free ETFs, any thoughts on how that's impacting DARTs?
Yes. So let me do the second one first. I mean, I think the more solutions that we offer for clients that are commission free, DARTs are going down. That's why DATs are important to look at too. But we're really making a trade off there between 4.95 on a periodic basis versus X basis points that is more stable and grows as asset valuations grow.
And of course, because it's not coming from the pocket of the client, the client is benefiting, which is most important in all of that when we think about ETF, we think about ETF OneSource. With respect to your first question, I think it remains to be seen how the pricing is done on semi or non transparent active ETFs. We don't know how the pricing, if they're going to end up priced as per say a true clean share, then there's going to be a difference in the way we try to recoup our cost of serving clients and handling the servicing side that we do. But I think it just remains to be seen how those products end up being priced as well as remains to be seen whether there really is momentum that gets behind these or whether it's just more the industry hoping and the consumer choosing maybe not to follow. Thanks, Walt.
Thanks, Brian.
Thank you. Let's go on to the next call. We've got a little bit more time here.
Thank you. Your next question comes from Will Nance of Goldman Sachs. Your line is open.
Hey guys, good afternoon. Maybe if I
could just ask one
on expenses. If I think about the 6% to 7% expense growth you're seeing this year and I think about some of the tailwinds from last year such as the FDIC, some of the one off spending you had late in the year, I think core expense growth is probably still closer to the double digits. And so looking out into next year, if we continue to see the sort of top line headwinds that we've been experiencing, can you talk about some of the levers that you can pull to get the expense growth down closer to the longer term expense guidance and continue to make some of the investments in the business that you outlined at the business update?
Yes. So as we think about expense growth, I mean, certainly something we're very focused on. And as I mentioned and as Walt mentioned that expense on client assets is a key metric, a key advantage for us, and something we're very, very focused on. The key thing on managing expenses is doing so in a way that doesn't come at the expense of the client experience or doesn't come at the expense of our ability to grow. And so that's why these investments that we're making in app modernization and business process transformation and digital work are so important is because they do give us the opportunity to bring down that rate of expense growth, but do so in a way that is worse neutral and in many cases a real positive for clients and for the client experience.
In terms of expense growth for next year, I would say it's too early to say exactly what that's going to be, but our expectation is to continue to bring our rate of expense growth down to that longer term average that we talked about in that low to mid single digit level, whether that happens in 2020 or not, again, too early to say. But I think it's reasonable to expect that we'll be continuing to bring that rate of expense growth down.
Will, let me just add that what you described at the outset of your question is something that we understand fully, have understood and have planned for. So when we talk about bringing our expense growth rate down, it is cognizant of the one time issues that you mentioned that were more helpful in lowering it this year and therefore recognition of the discipline that it will require to have that number trend toward the range that Peter mentioned in 2020 and on into 20 21.
Got it. I appreciate that. Thanks for the context. And maybe a follow-up on the margin. If reinvestment rates are still kind of in the money, so to speak, on securities portfolio, are you seeing something on the liability side that would prevent the margin from kind of grinding higher from here, given we're kind of already at the full year guidance?
Yes. So great question. So reinvestment rates are really only one part of the story around what drives NIM. There's really 4 if you think about it, there's really 4 levers. There's reinvestment rates, there's interest rates and interest rates I'd probably put in credit spreads, there's the deposit rates and then there's how we manage the portfolio.
I talked about reinvestment rates and those are providing a little bit of a tailwind for us or even more than a little bit of a tailwind for us and should hopefully do so, continue to do so over time. On the liability side, that's not there's no change there. We have moved deposit rates as the Fed has moved their rates. And if the Fed is on pause, I think it's reasonable to expect that we'd keep our deposit rates steady as well. Interest rates, as I mentioned, interest rates are entering or entered Q2 a little bit lower on the short end than they did on the entering Q1.
And so on the floating rate portfolio that creates a little bit of headwind. Again, it's just a basis point or 2 in 1 month LIBOR, a little bit more on 3 month LIBOR. I think you guys probably know we're probably 5 to 1 levered more towards 1 month LIBOR than 3 month LIBOR. But that creates a little bit of downward pressure, if you will. And then in terms of the portfolio management, we're still managing within the same duration target, but we did build up some liquidity at the end of the first quarter to handle what we expected would be some tax related outflows from the balance sheet in April and potentially the continuation of some of the sorting.
And so that comes at the expense of a little bit of investment yield as well.
Got it. Thank you for taking my questions.
Okay. All right. I think we're going to hold there on questions. And I think we're going to move to closing out. Peter, you have some final thoughts for us?
Yes. Well, thank you all very, very much for your questions and your attention on the call today. And I know we spent a lot of time talking about sorting and cash dynamics and those are clearly very important and things that we as a management team are very, very focused on. But we're even more focused on the things that we believe are the key drivers of our long term success, long term growth and long term performance of the business. And those are our ability to delight clients, our track record in attracting assets.
The opportunities we have to both continue growing and the opportunities to continue driving greater efficiency throughout our business. How we balance the delivery of the near term performance with the investments in the longer term growth of the business and the discipline with which we manage expenses and we manage capital. No matter the environment, no matter where we are in the cycle, that's what you have come to expect from this management team and what we continue to be keenly focused on, what you can continue to expect from us in the quarters and years ahead. We look forward to seeing many of you hopefully at our stockholder meeting and then in the next business update in July. Thank you.
Thanks. Have a good day. We'll see you in 3 months.
Thank you. And that concludes today's conference. Thank you all for joining. You may now disconnect.