All right. All right. Let's start off. Good morning, everyone. Welcome.
I'm Rich Fowler, Head of Investor Relations for Schwab. And here we are at the Winter Business Update 2019 edition, I guess. We really appreciate you all being with us here today, both on the webcast and, of course, here in the room. We know it's an extremely busy time. Weather, of course, hasn't helped.
A little Super Bowl action, I'm sure there's some travel stories here in the room to be here. So we very much appreciate that. We hope we have an interesting day lined up for you. So let's talk about a couple of administrative items in the agenda and then I'll get out of the way and we'll get going. So today, we have a lineup that pretty much follows our pattern here.
We'll start us off with a strategic view. Professor Martin Neto, back by popular demand, will walk us through an update on the body of work that we're undertaking across his world to help build scale and efficiency and ensure that we continue to meet client service expectations as we grow into the future. Brief break. Jonathan Craig, our other Senior Executive Vice President, we don't have firsts and seconds, we have our other Senior Executive Vice President, will then lead us on a discussion on the client facing side, his area of responsibility. So he'll start us off with an overview and then bring up Bernie Clark and Terry Carlson, the heads of our largest businesses for a panel discussion that he'll chair.
Break again and then we'll have Peter close us out with a financial overview. One note here with the balance sheet of course being part of the financial story and client cash dynamics being an important part of balance sheet dynamics, we have tasked Peter with updating you on that client cash story since we were last together. So he's very excited to take all your questions on this front. So save them up for Peter. And then we close.
So let's just move on to the main reason I'm up here, I guess, which is to go through the necessary wall of words, the gist of which, of course, is that life moves on, disclosures move on. So please keep in touch with IR. Please keep in touch with our regular disclosures. We'll keep you updated through the course of the year. The last administrative items are pretty straightforward.
Q and A, this time we're sort of going back to our standard approach, no pigeonhole this time around. So we have mic runners, Jeff and Alexandra. Please wait for the mic runners as you ask questions so that everyone can hear you both on the webcast and in the room. We'll ask for the standard sort of question and follow on. Please, when you start off, if you can remember to say your name and firm out loud, it just helps us with the transcript keeping track of how the conversation progressed.
And let's see, Jen. Jen will handle questions on the webcast, to console. So as always, be nice to Jen when you're typing in your questions. She manages that process and she'll be called on through the course of the sessions. With that, again, I just want to thank you on everyone's behalf for making the time to be with us today.
We know it's an important commitment of time. We strive to make these useful and we very much appreciate and value the dialogue that these conversations generate with the investment community. So again, thank you much. With that, I'm going to turn it to Walt and ask him to start us off.
Thanks, Rich. I found out this morning that Rich hit a milestone, his 30th anniversary at Schwab yesterday. Child labor laws didn't apply in California 30 years ago. So we actually hired Richard, I think, 11 or 12, something like that. Anyway, 2 items very quickly.
1st, in addition to welcoming you all, I want to dispel the rumors. The first rumor is that J. J. Watt is not in danger of me replacing him at defensive end for the Houston Texans, nor is Barry Bonds concerned that I will become a right handed version with all my body armor. Instead, 45 years of lifting weights on 58 year old biceps finally decided to tear.
So I'm well on the way to recovery. But that's the honest story behind the contraption on my arm today. So let me lead off by just sharing a little bit of what I hope to cover in our time today. I want to do a little bit of looking back because we're at sort of a 10 year time frame from really the height of the financial crisis. So I want to look back a bit.
I want to look at where we are today, and then I want to spend the balance of our time looking forward into the future. I hope what you'll see is a very consistent theme throughout my comments, though, is the concept of consistency. And not just consistency for consistency's sake, but consistency because consistency in our strategy works. It's led to strong organic growth over the course of the last decade. You haven't seen changes in our approach to things like our through client size strategy or our virtuous cycle.
And we believe that, that consistent approach and execution will drive organic growth off into the future, again, as we sit today with only about a 7% domestic market share. The other thing you'll see is that with that consistency, we're actually entering a new chapter at Schwab, and that chapter is a combination of both organic growth as well as capital return, capital returns of what is in of course, records in almost every area. The virtuous cycle was certainly at work. Price adjustments that we made in the spring of 2017 and then in the fall of 2017 led to just under $400,000,000 of savings for clients. As that cycled through, clients brought us over $225,000,000,000 in net new core assets, again, a record for us.
And I think numbers may be only achieved, well, very rarely by any public organization in our space. Revenue over $10,000,000,000 45 percent pretax margin. ROE climbing dangerously close to the 20% level last year with a strong EPS growth clearly aided by the changes in tax laws, which pushed the EPS up even higher. And then we continued to invest in our clients and starting that virtuous cycle all over again. So looking back a little bit, to give a feel for what we've achieved with this consistent approach to growth and strategy.
Brokerage accounts, you can see with strong progress over the course of the last decade. Daily trades, the same thing. Although you can start to see down in the trades a bit of evolution from DARTs, those which generate revenue per transaction, those that are asset based and then other of which the most significant part of other would be trades that don't have a commission associated with them. And we continued with what is really when you look over the course of the last decade very, very consistent growth in terms of net new assets, particularly through the cycle. So we often talk about that 6% to 7% organic growth rate in net new assets through the cycle.
And what this slide was particularly interesting to me in looking at is seeing that, yes, we understand the years that we tend to dip below the line, what's going on from an environment standpoint, what's going on from a client sentiment standpoint as well as understanding when we go above that line often what seems to be occurring among client sentiment and what's going on in the environment. But very, very consistent organic growth throughout the course of these last 10 years. And of course, from a client standpoint, it then manifests itself in financial results, which I'm sure you're all very familiar with. Revenue approximately doubling pretax margin after bottoming out. 2010 had a significant $320,000,000 item related to the yield plus issue from the financial crisis, but from bottoming out now up to 45% last year, ROE continuing a steady climb upward and of course, our earnings per share increasing significantly over the course of the last decade.
Consistent strategy, consistent organic growth and consistent financial results. And along the way, we've continued to invest in our business, planning for the future. So making sure that whatever results we post in a given year are only the scorecard for that period, and we continue to put our attention into out into the future investing in both people projects. You see some moderation in the growth of marketing. So as we talk about the future, one of our views is that what you say about yourself has never been of lower value relative to what others say about you.
So you see us moderating our marketing spend relative to some of the other areas of growth as we focus more on what others say about us rather than pure advertising. And of course, we've shared with our clients as the revenue per dollar of client assets has declined almost a fourth over the course of that decade. When you really when you put it together, we think there are 6 key competitive advantages that we have that have propelled the business over the course of this past decade and we think will continue to over the course of the next decade. And it's not that any one of these in and of itself sits in such a unique place, but rather it's the interplay of all 6 of them. Of course, size and scale, very familiar with our operating efficiency as a company service culture, well known for at Schwab and recognized by parties, our operating structure, even things like our 2 largest most important businesses operating off the same brokerage platform, leveraging scale, leveraging an efficient operating structure, brand and corporate reputation.
And maybe what ties the 6 together and in some ways maybe most important among all 6 is our willingness to disrupt, willingness to recognize that the puck is always moving and we're willing to move with it even if it means some form of short term setback in our economics because we think it's the right thing to do long term for the positioning of the company and serving clients. And of course, the net result is you can see continuing substantial market share gains relative to our competitors as measured by transfer of asset, transfer of account numbers. So we think we're positioned very, very well for the future. You should expect a consistent approach with our virtuous cycle. What I'd like to do now is transition to a bit of a forward look.
And I've shared these views, these 11 views with you a number of times in recent years. For the most part, they're consistent, but there's minor tweaks. And so we wanted to go ahead and both update these 11 views that shape our strategy and then share with you some of the actions that we have taken and you should expect us to take in the future. If we're doing our job properly and
being transparent with all of
you in communicating, you should be able to tie a take into one of these 11 beliefs because these are the core beliefs that form the strategy and the actions that we take. So I'll just touch on a couple of them briefly before going into some examples. Under client views, the key to long term success at scale in our space is no trade offs. That means great people relationships, technology, service, price. It's not any one of them.
It's all of them put together. The concept of beating the market for many of our retail clients has given way to much more of a planning focus, asset allocation, efficiency and keeping costs low. Digital advice is clearly credible as a solution, but it's not enough. There are there is a small niche of clients who it may be acceptable, but for the scale and the masses that we work with, it is important to combine it with other capabilities. From a growth standpoint, we will continue to invest aggressively in the RIA space.
We believe it's the fastest growing part of our industry overall. We believe that many of the things that RIAs do are exactly what the investors of today and tomorrow are looking for. Active Management will continue to be successful in certain classes, but we believe that market cap and some form of factor or fundamental investing will capture majority of flows. Again, some of these sound obvious. They may not have been as obvious when we first put them out 3, 4, 5 years ago, but you can see our actions as they link.
Long term growth in retail trading volumes will be modest and under price pressure. Again, I'll show a bit more on that in a moment. Fiduciary standard advice, all that's cost of entry within our space. Scale will play an increasingly large role. Brand will matter as I shared earlier, brand loyalty matters, but it's never mattered less because consumers are more and more sophisticated, more and more aware and more and more willing to make a change if they think it will give them better outcomes.
So brand loyalty and what you say about yourself is simply not as important as what others say about you and not as important as it has been in the past. Competition will intensify. And of course, in the 401 space, you see fee consciousness on the part of employers. Clearly, the litigation nature of that industry is having an impact as well as more of a drive for personalized advice going steps beyond target date funds in that industry. So let's take a look at some examples of how we've taken these 11 views of the future and made strategic moves in our company consistent with them.
So here you can see growth in our client facing labor equivalents. Yes, we've grown those about 8% over the course of the last year, but we've grown our digital area at a much, much faster place. Joe will go into many more details about this, but the opportunities for us to bend our cost curve with digital investments are extremely large, extremely large. He'll give, I think, some metrics. One that stands out to me is just over half of the people who call into our retail call centers have attempted to self serve before they called us.
And we're either unable to do so or we're unable to find where to do so. So just something as simple as that, enormous opportunities for us to bend the cost curve when you look at the 1,000,000 and 1,000,000 and 1,000,000 of phone calls we take just in any given year. We've continued to move into the area of planning with our retail clients in a big way, doing over 200,000 plans and at the same time restructured the pricing of our passive Schwab managed investments over the course of the last 5 years bringing down the expense rate in those products by more than half. Digital Advisory, arguably, you could say we have the most successful true digital advisory program in the industry. But at the same time, successful as it is, 300,000 accounts, 25,000,000 live client interactions over the course of a year.
I mean, the idea that the people aspect of our business will go away or is going away, I think, is exceptionally naive. 25,000,000 live interactions in just a 12 month period. Critical area for us continue to invest and continue to make more and more efficient. Talk a little bit about the RIA space. Again, we think the fastest growing segment within our industry, growing at just under 7%.
And of course, our growth rate there has been just under 11% with significant market share. There are some questions I received earlier today interesting about folks moving into this space. This is a complex space to be in. It's a very low revenue per dollar space. The RIAs have high expectations as they should for serving their clients.
Requires enormous scale and efficiency to do in a profitable manner. And we think our positioning sets us up well there to continue to capitalize on the RIA growth. The comment we made about where the flows go, I think the chart is fairly obvious. This is just for Schwab Managed Products. An industry chart would probably look relatively similar, maybe not quite as dramatic.
But you can see our progress there. We're now the 3rd largest capturer of asset flows in the asset management industry, so a result of the changes that we've made. What's interesting is if you look back a handful of years ago, by our calculations, we were either the largest or one of the couple largest providers of flows to actual competitors who were big in the passive space. And of course with the changing in our products and pricing, we now capture more of those passive flows from our platform into Schwab Vantage products. It made no sense for us to be sending off tens of 1,000,000,000 of dollars every year to competing firms for what are in many cases a commodity oriented type of solution.
And from a trade standpoint, as we predicted, very, very modest growth, about a 1% CAGR there over the course of the last decade. And of course, we all recognize that there has been price pressure in that space over the course of the last decade. And I think it would be probably unlikely for us to believe that, that price pressure is over. Although I would say that today, we probably operate to some extent in a zone of indifference relative to transaction pricing. Talking a little bit more about the RIA space.
We think despite the fact that you may get ebbs and flows in the area of particularly brokers going independent, whether it's related to protocol changes or softening in markets where it may be less apt for RIAs or for brokers to want to speak with their clients about going independent, the trend will not reverse. The trend of going independent of professional brokers looking at the idea that they can own their own firm, run the business in the manner they want to and frankly benefit from an economic standpoint is very, very powerful. We estimate that the top end investing professionals and warehouses might capture a 40% payout. As they go independent, that really lifts by about 50%, incredibly compelling for them to become an RIA with what they can generally keep for themselves somewhere around 60%. And then you can see even on the retail side of the firm, significant growth, 2 67% growth in retail advisory assets and the assets under advice overall at our firm growing.
REOCA, which is a strange word, I guess, but our expenses over client assets has continued to fall, although you can see it is relatively stabilized since the end of ZERP. That's intentional because as ZERP has ended and rates had moved back up, even though we know they only moved fairly modestly, we made substantial investments. We have been making substantial investments. They'll moderate here as we move into 2019. We've been taking advantage of that environment to make investments that we think can pull that expense number down over the coming years.
So we capitalized on the environment from a timing standpoint to do so and we would look for that number to continue its progress down here over we go into the next couple of years. And I think the last slide is, again, another very interesting one where we talked about marketing is very, very important, but its relative importance has never been lower. And that graph shows our annualized spend from an advertising standpoint relative to our net new assets. And I think it is a very good illustration of the fact that what you do is so much more important than what you say, at least what you say about yourself as our net new assets continue to grow significantly despite not really increasing our spend from an advertising standpoint. Scale matters.
And scale is going to matter more and more in our space, we believe, over time. You've seen this chart before. It's just a slide of operating efficiency of a number of the publicly traded firms where we can trust the numbers that and their operating efficiency. And then last, we had made some comments about the 401 space. You can see the significant change in active to passive in the in that space over the course of the last handful of years as well as the employers increasing their percentage of employees who are getting professional advice beyond simply single factor advice like a target date fund.
Our 401 business continues to thrive. We are small relative to some of the providers, although you could argue between our bundled and unbundled space, we have multiple millions of participants, but small relative to some of the providers, but from an industry standpoint recognized right near the top of the list in terms of trust and service satisfaction. One of the challenges in this space we all recognize is that employers end up making the decision around how money will be invested, but yet without performance, the benefits accrue to the employee And with possible underperformance or higher fees, the liability risk often falls on the back of the employer. And that has certainly played a trend in that movement to passive investments in the 401 industry. So that's a little bit of a look back on the past and a snapshot for today, a total U.
S. Market, 2017, we're about 7% market share. We think there is great opportunity for us to continue with our existing approach to no trade offs and our strategies through client size to grow that market share beyond that 7% level over the coming years and continue with this consistent organic growth that you've seen from our firm. At the same time, as I mentioned, there's a new chapter in that with our strong revenue and operating margins, we do not have the need for capital consumption in the transfer of sweep money market balances to the bank that we've had in recent years. And so we've entered into a new chapter where at Schwab, you can look at the opportunity for both growth as well as capital return.
And that, of course, began in the Q4 of last year with about $1,000,000,000 of repurchases and dividend increases throughout last year. And of course, last week at our Board meeting, our Board substantially increased our dividend $0.13 to $0.17 and authorized another $4,000,000,000 of potential opportunistic repurchase of our stock. I think when we look at all of our capital opportunities, we'll continue to turn to many of you, our owners. Again, it is your money and get your feedback as to the strategies that make sense. When it comes to repurchases, our plan is to be opportunistic in those and recognize that there are times it may make a lot of sense and times it may not.
And so we intend to be opportunistic with respect to possible repurchase of shares. But this new chapter at Schwab of both organic growth as well as capital return, we're very excited about and hope you are also. So we're quite optimistic about the next decade. We think the type of trajectories that you've seen, 7% market share. Our position is strong.
Our opportunity to continue to take share is there, and we believe we'll be able to combine that with both, again, organic growth as well as the return of capital to you during that period. So with that, I don't know how much time I have left, but because I don't think we ran the clock, but I'll open up for questions. Okay. Maybe we can throw $20,000,000 on there. And with that, we'll go to Q and A.
So we have mics. If I can just Rich, I know your name, but state your name and go through questions. Thanks.
Good morning, Walt. Rich Repetto with Sandler O'Neill. So you talked a lot about the RIAs and how it's growing faster than sort of the overall retail segment. And I think we saw in December more of a divergence where the retail the advisors really behaved differently than, say, pure retail. And I guess, after now having a month to look back on the movements, your DARTs outperform Ameritrade and e trade more than any so in a month, any more than in the past 5 years.
So I guess the question is the big movement can you explain the big movement to cash towards year end? And then what you've found out and how it's behaving since year end with the market?
You can't wait for that balance sheet question for Peter,
Just general.
No, no, totally. That's
understandable. So, I think one of the great things about our economic model is that it is both offensive and defensive. So as the markets are strong, our clients, whether they're retail investors or for that matter, RIAs, tend to bring us money, and we tend to see continued growth in markets and revenue tied to the market. Similarly, when the market softens, it only takes very small percentage movements of people into cash to have a substantial impact for us. So you saw the balance sheet grow in December actually as a percentage of our I'm not sure what we began December with, dollars 3,300,000,000 or $3,400,000,000,000 It was actually a very, very small percentage.
But small percentages of a big number still lead to big numbers, right? And so that's the defensive nature of our economic model that when the markets do what they did in December, people tend to move into cash. Bear in mind also in December, you have year end dividend payments, capital gains. You have some other things that are always at play in the month of December that tend to also boost your levels people tend to people tend to move more into the markets. Whether those are the right timing strategies or not, we can debate.
But these are still small percentages off a big base. But I think clients tended to want to move back into the market as we moved into a stronger time in January. And we see actually similar trends in fairness between the RIA and the retail investor. They don't diverge in that to a great extent. Do you want to do a follow-up or no?
Please.
I guess, the follow-up, you mentioned scale a couple of times in your as far as a key principle. So with the industry getting consolidated and smaller, do you think you'd be more active on an M and A standpoint from the scale or do you think that
you just said it's been Rich, I think what we'll do is what we've always done, we'll look really carefully at every opportunity that comes along. And to the extent that they make sense for us, we'll pursue them aggressively. There are certainly some opportunities that have come up in the past that we looked at. We may not have chosen to pursue. Environmental factors may have changed and made those look better than they were at the time, maybe look better after the fact.
But we'll look very carefully at everything that comes along. We do think that the industry probably is one that just looking at its economics, consolidation could be on the horizon in coming years.
Devin Ryan, JMP Securities. So a follow-up on the RIA conversation. So clearly, some of the wirehouses are looking at entering the space. Wells Fargo is entering and there's some chatter that some others might follow. And then we all see the theme of the breakaway and how fast the RIA space is growing, which they are essentially losing out because they don't offer that.
Do you have an expectation that others may follow? And then just given that you are the leader in the space with 30% market share as you showed, is there anything you would maybe look to do competitively to deter others from getting in? Just love to get your bigger picture thoughts because you've been such a leader here, but it does feel like the tides are shifting where the wirehouses don't want to lose those advisors?
Yes, I think it will be very interesting to gauge how successful others are coming into that space. So let me just kind of paint a picture of the RA space from an economic standpoint for custodians like us. It's a very low revenue per dollar business. I mean, the reason the RIA can go from maybe a 40% payout to 60% is that there is very low other revenue available to 3rd parties, including us as custodian. So I look at that business, I recognize that whereas 20 years ago, it might have been a business where you generated 30 basis points.
Today, it's a fraction of that number. So you combine that with our scale, I would argue that we probably operate our RIA custody business more efficiently than anyone else just purely based on scale and our operating model. These firms are going to have to get to enormous levels of RA assets at very low revenue levels to actually compete with us. I'm not sure that the traditional wirehouse firms who are accustomed to operating at a revenue per dollar for them this big are going to be as excited as being in the space for revenue level per dollar that is that big, nor do I necessarily have confidence that their infrastructure even allows that. So they may well choose to come into the space in an effort to retain AUM, but the question is, what are the economics behind that AUM?
And without huge scale and tremendous efficiency, I think it's a real challenge for them. But they may well choose to come in. I mean, keeping a dollar of AUM and watching your ROCA go down 80% or 90% may be better than losing the dollar altogether. But it will require a different operating model, I believe, on their part than what they've been accustomed to.
Great. And then just a quick follow-up. I think you mentioned that you're today operating in a zone of indifference to transaction pricing. So can you just maybe expand on that comment, what you're referring to? Is it just the percentage of revenues that are coming from trading, for example?
And then is there anywhere within transaction pricing that you feel like is potentially you could gain ground from thinking about maybe making a move there?
So I think web equity rates are in generally a zone of indifference. If you look at all the primary providers or primary organizations, they're all with all in a couple of box of each other. I think it's largely a zone of indifference. And we don't really see market share movements based on that. You definitely have some players out there who are saying trades Web Equity trades will a 0 commission in return for something, whether it's deposits or poor quality execution, subpar execution, subpar price improvement.
I mean, there are other ways that people can pay for, in theory, a 0 commission. But I think our view right now is that there would be little to be gained from a price war in the web equity space given that we're in this kind of zone of indifference. I don't know that I agree with that philosophy when it comes to derivative trading. Derivative trading still has different economics, higher transaction pricing and much higher economics related to things like payment for order flow. And that space may be 1 on the horizon.
I'm not saying that we would do that, but that space may be 1 on the horizon that might be subject to more price pressure, more akin to what we've seen in the Web Equity space. Craig
Siegenthaler, Credit Suisse. So, well, how do you look at the addressable market for the RA channel and the direct retail channel? And given your size, when does it actually start to weigh on your organic growth rate?
Yes, that's a great question. I got that a decade ago in 2000 I mean, it's a very legitimate question. But I think that so long as we continue to execute on the strategy that we have been executing on with no trade offs, seen through client size, sharing back with the client. We don't think our size gets in the way of continuing this very consistent, steady I wish I could run that slide back up there, but I probably couldn't back to it fast enough. On the net new assets, can we bring that slide up on am I in control of it only?
I need one of those earpiece things that there. I mean, I don't think it's an issue of size. I think it's an issue of strategy and an issue of meeting clients' needs. With 7% market share, we don't see any reason why these numbers can't continue to go up. I think the percentage that I talked about, the consistent percentage in and around that 6%, 7% long term is relatively likely to continue.
But we think the dollars themselves continue to grow, just as they have as I dealt with those questions a decade ago as a young CEO back in 2,008, 2,009, 2010.
Thank you.
Thanks, Walt. Brennan Hawken, UBS. I'd like to follow-up on one of Devin's questions on the zone of indifference. And if you could please, you made reference to growing out or some of your competitors moving in with deposits. We saw a move by BAML recently.
Chase has come out. I assume you're talking about those depository institutions. Can you talk about the impact you've seen so far from some of those moves, and how you think you might respond if those developments turn into a more real threat?
So we have great respect for all of our competitors. And 2 that you mentioned are outstanding organizations led by very capable people who make decisions that make sense for their objectives. We have not seen any kind of meaningful impact from 0 pricing. We've had 0 pricing in our industry for years. We've had firms that have tried 0 pricing and backed off it.
We've had firms that have offered 0 trade pricing above certain asset levels. It's not something new within our space. And actually, someone who is interested in 0 commissions, there's many ETFs that we offer and mutual funds at 0 trade. So I think we'll watch it very closely and see if that changes. But we haven't seen anything to date to indicate to us that all of a sudden that, that approach of paying for your trades with some other means, whether it be deposits again or subpar execution or subpar price improvement, we haven't seen that catching on in any kind of meaningful way.
Now if the gap was $0 to $100 I think the answer would be different. But when it's $0 to $5 dollars it's kind of that zone of indifference.
Great. And then following up on that, you referenced derivatives as one potential area that you think might be right for competition. Can you talk about how you feel as though Schwab is positioned in that space? When you look at some of the 3rd party rankings, that's one of the spots where Schwab might not necessarily measure up as complementary to some of the competitors. How are you thinking about that?
Is that a place where you want to start moving more aggressively? And how would you look to develop those capabilities? Would it be organic or inorganic?
Yes. So I mean, we're not going to be number 1 in every category. We're grateful for the areas that we are. And IBD, of course, has named us number 1 overall, which is consistent with what we try to do, which is hit the widest possible segment of the market. Firms that are much more focused in niche areas are going to have an advantage in that niche.
But we don't think the gap between where they are and where we are today is so significant that with the investments we're making, that we can't be a viable alternative there. So I would like our position in those spaces to be stronger. I think we are investing to make it so. And when we feel that we are confident enough in our capabilities, we'll look at that point in time from a pricing standpoint, whether we think price is a market mover or not. That will be a very careful and thoughtful approach, not just some just type of willy nilly price reductions or something along those lines.
We're much more thoughtful about it than that.
Back here.
Christian Bolle Bernstein. And this might be better for Peter, I'm not sure. But on capital return, how do you think about returning 100 percent of excess capital via a sort of recurring variable type dividend, just given how stable the business is, how arguably mature the business is versus buybacks?
Yes. So I'll largely leave it to Peter. I think what I would say is that our philosophy on buybacks is to be disciplined and opportunistic, not to follow some set automatic path that no matter what occurs with respect to the price on the stock that we're going to be automatically buying back. And of course, if you take an approach to be opportunistic, there may be periods of time in which you don't do as much in the way of buybacks. And so maybe in those years, you look at things like special dividends or something along those lines that our board would consider.
But we intend to be opportunistic with respect to the buybacks rather than formulaic.
Okay. And then just given the pace of technology disruption out there, what do you worry most about in terms of technologies that could disrupt your business?
Well, I think we worry about everything that can go on around the technology space and to agree pay attention to it. I still believe though that the greatest risk from our trajectory probably revolves around issues with cybersecurity because cybersecurity issues tend to hit right at the heart of trust with your clients. Now we also know that the 2 largest cyber issues that have affected the investment services or financial industry are 2 of the largest competitors that we tend to go against whose names have come up in our session this morning. So it's not that consumers don't have some understanding and forgiveness of cyber issues, but to us, that's not something we're willing to rely on. We view that as probably the greatest fundamental risk to our trajectory as opposed to a competitive technology issue that all of a sudden affects tens of 1,000,000 of people and causes them to move 1,000,000,000,000 of dollars.
Colin had a question here.
Hi, thanks Walt. Colin Ducharme with Sterling Capital. Continuing on that theme with tech disruption, I'm just curious looking at other models from other industries that have opened their model over time and thinking about potential disruption. Is there a way to co opt some of that with white boxing the solution from a security standpoint, from a cost advantage standpoint? You have so many scale benefits.
Is there a way to offer those APIs so that the next Robinhood of the world can plug into a back end Schwab model. So the millennial investor who doesn't want to go see an advisor and doesn't want to log into the Schwab site, but prefers a fantastic UX, which is bright and shiny and new, Schwab can kind of leverage that and co opt it over time? And then I had a quick follow-up. Yes.
Well, I would say our mobile UX is pretty bright and shiny and new and highly rated and utilized by a lot of millennials. Again, if you look at our record new to firm retail households last year, fifty 3% of them were under age 40. So it's not like we're not winning in that space. I would say to you that we are having conversations that you would expect and want us to have with all the right players in and around our industry who potentially either pose disruptive risks or opportunities to be disruptive. Certainly, with our size and our scale, they're not oblivious to that either.
So when they go look to have conversations about who they might want possibly interact, do partnerships or take new strategic directions with, we're in those conversations and having them. I just want to emphasize, though, that money is different. Money is not like how do I get from point A to point B? Do I take a taxi or do I take a ride a car ride sharing service? Money is different.
Money has deeper emotion. People are much more cautious about money decisions. And I think we have to always remind ourselves in this idea of disruption that money people will view and make decisions around money differently than they will around, say, a retail shopping experience or a mobility quick clarification
Just a quick clarification, you're broadening your platform today, right, in terms of third party apps that can plug in?
On the RIA space, yes.
Okay. And a quick follow-up. So the slide you showed us with the 16 bps of EOKA relatively flat with kind of ZIRP rolling off here. What are you looking at to judge success of the tech investments? I mean rolled up, we can see the margins over time, but operational metrics, you cited as an example over 50% of your call ins try to self serve.
What metrics like that are you looking at to see that your investments are well spent here? Thanks.
So I mean, some that we are not willing to share, but we definitely look at things like easy scores that clients may evaluate us on, how simple it was to do something. We look at things like people who contact us and would have preferred not to. So we want that 50 plus percent number going down. There's a series of those types of metrics that we look at, I don't think we want to share a lot of the details around it just from a competitive standpoint. But I think the ultimate measure that you want to look at is where does that 16 basis points go through the cycle.
So I'm out of time. Do I have time for one from the web or no?
Yes, you have a minute. Okay. So this question is from Chris Shutler from William Blair about competition and pricing. In the last 6 months, 2 big banks have brought in commission free trading for clients that have both a bank account and a brokerage account. How seriously have you thought about rolling out your own relationship pricing strategy?
Warrant a specific response on our part. We certainly are looking carefully at those. We all recognize that relationship pricing is code for subsidization. That's what relationship pricing is about. And so we evaluate how comfortable clients are with cross subsidization and whether we believe that cross subsidization is something that is a sustainable business model as we deal with a consumer who's ever more sophisticated and expecting ever higher degrees of transparency.
So we'll continue to look at it. And if something is warranted, we will see us take action and take aggressive action. But to date, we haven't felt that it has been warranted to respond. So I think I'm out of time. Thank you all for being here, for the opportunity to spend time with all of you.
I'll be here throughout the day. So we have breaks and if you have specific questions you want to talk about. And with that, I'm going to turn it over to our Chief Operating Officer, Joe Martoneto.
Thanks. Thank you, Joe. Thanks, Walt. Good morning, everybody. So maybe contrary to the sales pitch from Rich here, I am excited to be here for a number of reasons.
So one is just to get a chance to spend some time with folks that I don't see as much in this role as I did maybe in the past. 2nd, because of some of the reactions, I guess, last year around why is Joe standing up on stage talking about digital, I guess I should be happy that I survived another year in this role. But mostly because I think we've got a really great story to tell. And so I'm excited to tell it. I feel a great sense of responsibility to make sure that we are investing that money well that Walt talked about.
And so we'll spend a little bit of time talking about where it's going, what we're doing, and the results we think we're driving. Really what we're doing in digital is a subset of the virtuous cycle that Walt talks about quite frequently. The goal here is to build those simple, elegant solutions for clients that allow them to continue to want to do business and bring more assets to us. In the process of doing that, we're looking to continue to build scale. So the way we're building those products and services is trying to build scale into them to allow us to continue to bend that cost curve.
And then the third part is the platforms that we're using to build these products and services on, trying to make sure that we are tackling some of the challenges of the legacy technology stack as we move our way through this, both as we're developing new products and services, but also in a more holistic way to make sure that we're coming out the back end of this work with a more modern stack. So let's dig into some of the details around all of that. I'll remind you last year when I stood up here we had just gone through a bit of a reorganization and the goal was to bring the operations, technology and digital platform services all together onto a common team to make sure that we could align on business practices and goals. And so we are a year further into that part of the transformation. We organized the work really across 3 main bodies of programs that we talked about last year.
Application modernization is really the piece that's talking about those legacy platforms and the initiatives to modernize those. Business Process Transformation is a combination of bringing both tools and process reengineering to those workflows that we deploy across the organization to make sure that we're driving scale. The 3rd piece is the digital accelerator, which was a newer piece and I think we made some pretty good progress where we can share a little bit more of the results there. But clearly, the goal here is to make sure that we are building these products and services in a way that allows us to build scale across them. Now a little bit of my self defense, because Peter likes to give me a little bit of grief about how much money I'm spending in this role versus what I used to do in my prior role.
These are important initiatives, but these initiatives together represent about a quarter of our project portfolio. So pretty material increase in spending, but there's a lot of other things that are also being invested in across the organization. You'll hear more about that from other business leaders later in the day. So we're not the 1st group to try to affect the digital transformation. So the good news is there are some tools and processes that people have developed that we're able to deploy to try to expedite some of our own work.
What you see here is a picture of a journey mapping session. So journey mapping is an attempt to try to look across the entire cycle of what a client is trying to do. To give you an example, so instead of looking at account open to try to look at the discrete process around how an account gets open, to think about that account opening and the process of new client trying to come to Schwab and engage in a relationship. So it's a very different way of looking at the entirety of the life cycle of what a client is trying to do in any individual experience. So that's what we're trying to do with the journey mapping pieces.
Now what you see here is actually a picture of a journey mapping session. What's really important to take away here is the people that are in the room are a much broader group than you would have normally expected and just a product design kind of session. So we are bringing into the front end of this work people from operations, people from technology, even some of the partner organizations like risk and compliance to make sure that we are designing for scale efficiency along with that client efficiency as we are laying out the objectives of the program. These teams come together and form a virtual team that lasts for the duration of the work effort. And they actually stay together through the deployment of whatever it is that they're working on to make sure that the goals that they were set setting upfront for delivery, both for what that client experience is supposed to be as well as for whatever scale efficiency we're programming in from the company side are actually delivered as part of that effort.
So it's a pretty different way of doing work that we've been deploying now for
a little over a year.
Journeys aren't the only things that we've changed in terms of how we're thinking about doing work. So some of the other ideas that we've started to operationalize, we build digital centers in both San Francisco and Austin as a way of bringing some focus to things like recruiting and talent deployment. So to the extent that co location is important for these kinds of teams to get people together in one place, we've established a couple of centers where we're trying to build the majority of these types of journeys out. We're adopting agile practices both in product management as well as in the development piece. So making sure that we're bringing a common language to the people that are responsible for the client experience part as well as the people that are building and delivering on these products.
Most importantly, probably is we've made a shift to what we're calling utilities. You can think of utilities as being common building blocks that we can deploy across a number of different initiatives that will really help us accelerate the delivery in the market. So an example of that would be a common authentication mechanism. In the old days, when we built systems, we would have built authentication in as a part of the tool that we were building at the point in time we were building it. What we've done now is we've stripped that out and built a single mechanism that is used for all authentication calls.
So regardless of which product or service you're using, if we have a need to authenticate the client, it's going into that common authentication tool. So it becomes a building block that anybody else who needs that capability can refer to. And to the extent that we start to build more and more of these utilities, we should be able to get products into market much more quickly. And the degree of centralization that we brought to our organization is sort of a precursor to this transformation is really helping us accelerate some of that delivery. Moving a little deeper into application modernization.
So again, this is the part of the trying to tackle the legacy stack that today is at least centrally built on a mainframe application core, which has a lot of batch processes attached to it. The goals here are looking at hosting platforms, so trying to make sure that we're getting ready to move to the cloud, trying to reduce the complexity of that core code base and then untethering us to the extent possible from that mainframe environment. So the goal here is at the end of it making sure that we have a system that is at least as resilient as what we have today, is least as scalable and at least as secure, but also allows us to deliver at a pace that's faster than we can do given the way our systems are built today. Moving into some of the details of the work that we're doing around application modernization. So it would probably surprise you.
It actually surprised me. 1 of the first things that we're actually doing as part of the program is building a new data center. So fair to ask why if you're doing all this work to try to become cloud ready, are you building a new data center? I did. The answer here is the technology around data centers has evolved pretty dramatically since we built the current data centers that we're operating in.
And so as we did the work to try to understand, should we make the investments in the existing data centers to bring them up to the standards that we would like to see them operating at? Or is it more cost effective to build a new data center? The choice became clear that it was actually better to build that new data center. And so that's what we're doing. We are actually underway on construction.
We expect to begin to occupy the data center later this year. It's probably going to take us 2 to 3 years to fully get converted into the new data center. So 2 to 3 years may sound like a long time, but moving to a new data center is a lot more complicated than picking up your PC and moving it to a new desk. There's architectural decisions, engineering decisions. There's some cost decisions that have to be considered.
So if you've got an application or a technology stack that is only partially the way through its current amortization period, you got to make decisions around whether you're going to try to move that technology, whether you're going to go buy new and retire it and take the write off, right? There's choices that you have to make and we're going to try to engineer this to be as efficient as possible while still making that migration. So data center becomes a core component. We do think that we're going to be operating some component of our core applications in an owned data center for the foreseeable future, while we're taking advantage of cloud for things that are more like, additional capacity and backup capabilities. So that's the current model that we're operating in.
Moving on to hosting platforms. So we've made some really good progress on trying to get ourselves prepared for moving to the cloud. We've stood up a private cloud environment and we now have, I guess, about 90 applications and about 500 services running in that private cloud environment. So that's giving us good confidence that the code that we're building will actually be able to be deployed in a public cloud when we're ready to do that. There's some work that we have to do to make sure that we are really ready before we start to go there, but we're building towards those capabilities.
We've got contracts with a couple of the major public cloud providers. We're running some proofs of concept to make sure that we really understand how this stuff works. Obviously, in a company like ours that's essentially a dial tone type business, we've got to make sure that we really understand what's the reliability of these service providers, what's the scalability of these service providers and what's the security around these service providers. Because obviously, we're not going to take our valuable client assets and put them out into an environment until we're 100 percent sure that it's safe for our client data to be there. Moving on to application construction.
So we've been ramping our ability to build those applications to deploy into that private cloud. We've been pretty successful at scaling to the extent that we've been anticipating scaling to. So that's pretty much ramped as of the end of last year. We've actually got some good recognition around the work that was kind of early in the process. So one of the early pieces of work that we undertook as a result of the OptionsXpress integration was the trading platform.
We completely rebuilt the trading platform onto a modern technology stack. Walt made reference to the, IBD online broker where we came out number 1. If you look at the subcomponents, trade reliability, we were also number 1. So great validation of the quality of the work that we've been doing. Moving on to business process transformation.
So this is more of that workflow enhancement and automation capability. When you step back and look at where we've been, again, I think over time we have built a variety of different tools and different practices for how we manage workflow that goes through the system. Moving to a common tool and automating as we go through that process is starting to provide some pretty significant benefits. So one example here that I would reference is the transfer of accounts process. So looking at incoming transfer of accounts, many of you, if you work in the brokerage space, you know that there's a utility that's actually available to the industry that lets you move a certain type of account types through that utility.
But there's a lot of products that actually can't be moved through that common utility in the industry. And so as the industry, which is really good at building up complex and discrete products, has continued to do that over the years, we have built up a bunch of different processes to be able to bring those types of assets across from other firms. And so by the time we got to automating this, we had a pretty hodgepodge set of different processes and services that our reps had to use to be able to get client accounts moved over. Through the course of automation, we've been able to absorb about a 40% increase in the volume of incoming transfer of accounts over the last couple of years, while actually reducing the staff by about 3%. So pretty material impact in terms of our ability to drive scale into what was a really complex process by looking at automation and bringing some workflow tools to bear on that process.
That's just a single example. We actually spent most of last year working on converting off of some old workflow tools onto a common workflow tool. So there's some real benefits to doing that in and of itself. 1, we eliminated the system and get rid of all the payments and support for that system. 2, we get some benefits around things like training that it's easier to bring new people on and train them on a single workflow tool than to try to teach them all the discrete processes.
3, it makes the resources more transferable. So as we continue to become more and more leveraged around the people dynamic, having people that can do multiple different things becomes more and more important for us to be able to maintain service levels. So all of that is part of the thinking of why we wanted to move to that common tool. In the process of moving to that common tool though, we admittedly paid some card pads. So there's some ample opportunity out there for us to go back and redeploy some process reengineering to those functions and continue to drive some additional benefits.
So over the course of the next couple of years, this year and next year, we believe we're going to be able to hold the cost of our operational services group about flat. So and we definitely think in that area, we're building scale and bending the cost curve. I don't think that we're going to be out of opportunities to continue to drive efficiencies beyond the end of next year, but we haven't done the budgeting process to be able to make a commitment to exactly what we're going to be able to do going forward. But through the end of next year, we're pretty confident with the volumes that we anticipate. We should be able to hold expenses and operations about flat.
So moving on to the digital accelerator piece. This is where, we have been organizing and how we're organizing some of that new work that I was talking about around Journeys. So a piece of this is that Journeys Accelerator. So the Journeys Accelerator is where we're doing both that sort of end to end and front to back work, looking all the way across the client experience and through our processes to ensure that we are building great experiences and delivering scale. One of the pieces we haven't spent as much time talking about with this group is the innovation accelerator.
So this is where we're standing up Innovation Labs. Think of this as more like focused R and D, where we'll take a team of 8 to 12 people, we'll put them together for up to 3 months. We'll give them a specific business problem or a piece of technology that's new and to ask them to evaluate it and make a decision around whether there's something here that we should be looking to bring to market or not and to specify the problem and reach a conclusion pretty quickly. And the goal is to ultimately be able to identify more rapidly what it is we need to bring to market, so we can get it into production more quickly. Across both of these efforts, I would say that we've got a number of things that we are looking to bring to market relatively quickly.
If I could cut off the competitors that are sitting on the phone call today listening, I'd be happy to share some more detail with all of you. We may have to engage in some private conversations to go there. We're not going to go into those details. I would say that you should definitely be watching over the course of the next few months. There are things that are coming live into production as a result of some of these efforts.
We have not abandoned the existing platforms as a retail service centers for people that are trying to do things themselves and haven't been able to figure out how to do it in our platforms or it's just not there in the existing platform. So one of the things we focused on last year in our existing websites and applications was trying to enable more self-service. And again, this is not about trying to force people to do things in a channel that they don't want to interact with. It really is about meeting them in the channel of their choice. So there's a great opportunity here to give the client better experience as well as to drive additional efficiency into the business.
By the end of last year, based on the focus that we employed, we think we'd impacted somewhere between 10% to 15% of incoming phone calls. So a pretty material impact on the number of calls coming in, which is clearly a big driver of expense into the retail part of the business. You might have actually seen if you're following along on the SmartReport, where we report those incoming phone calls. We think that part of the reason we saw that decline was the impact we were having as a result of some of the work we were doing here. So where are we going from here?
Many of you probably still remember me as somebody who used to like to talk about numbers. I still have an affinity for numbers. One of the reasons we brought these orgs together was to try to focus on some common goals. And we had a question over here about what are some of the goals we're adopting. Across all of the digital efforts, we're really focused on 3 main goals.
There are goals that are specific to the various initiatives based on what it is we're trying to drive, but all of the digital initiatives have 3 main objectives attached to them. One of them is net new assets, so making sure that we're having a positive impact on our ability for clients to come to the firm. 2nd one is client easy score. So in a very tactical way for the things that we're deploying, making sure that the services and products we're putting into market are truly those elegant simple solutions that we're trying to deliver from the client perspective. The third one is minutes saved.
So what exactly is minutes saved? We never really talked about that with this group before. Well, first, it's an internal measure. So it's looking at our minutes saved, not client minutes saved. You could, I guess, measure the client piece.
Right now, minutes saved is really focused on an internal measure. We've adopted it because it is surprisingly universal. It is something that when you think about all of these various efforts, they impact our degree of scalability in different ways, but whether it's cost avoidance or cost reduction, it almost always comes down to some person doing some process that allows us to start to measure are we driving efficiency into the system via this effort. So that's really why we adopted Minute Saved. And if you look at the 3 of them, it's looking at acquisition, looking at client experience and looking at scalability on a common basis across the platform of work.
Some early results on Minute Save. So some cautions here. These are not annualized numbers. These are the numbers that we measure from the time that we implement some of the new technologies into the marketplace last year through the end of the year. So they're not annualized.
The other piece I would say is they just kind of are what they are based on the state of when we put certain product or solution in the market and whatever we think we manage to measure through the end of the year. So let's focus on the one on the bottom left, which is status reporting and advisor services. We think we saved about 70,000 minutes, last year with this initiative. A person, if you account for things like vacation and sick time, works about 85,000 minutes a year. So you can think about one person is about 85,000 minutes.
We turned status on in December, so we've got about a month at 70,000 minutes. So that translates into about a 10% impact. What did we do with status? It was a relatively small launch. So we turned on some really basic reporting capabilities.
We didn't notify the RIAs that we were making this change. They found it on their own. They began to adopt it. It was pretty limited in terms of the scale of functionality that it's reporting on as well as the depth of information that we're providing. So for example, you might get a report or you might get a status that says, that account open you're trying to do, the paperwork was not in good order.
In that case, you're still calling us to find out why was it not in good order. Over time, what we'd like to be able to do is be able to tell you, you were missing a signature on this form. So you don't have to call us and ask anymore. You can figure out exactly what it was that wasn't in good order. You can get it corrected.
You can get us the form. We can get the account open. So that's an example of where we're trying to go with some of this stuff. But in a really limited release for a limited period of time, for something that we didn't really advertise to have already had an impact of about 10 LEs and calls. And it gives you a sense of the opportunity here.
So we see great opportunity ahead of us to continue to impact the ability to drive scale into the business. And that really brings me to the conclusion. I've covered a lot of territory, but I hope you walk away with a few key points. So one is, we do see great opportunity ahead of us to continue to have a meaningful impact on driving that cost curve going forward with these initiatives. Some of that's already starting to show up.
So in places like operations where we're holding the line on expenses, those scale benefits are already starting to demonstrate themselves through the financials. Other things like some of the technology work is going to require a longer period of investment to be able to get to that more efficient state at the end of the investment period. But across the range, we think we're starting to deliver now. We expect that we're going to be able to deliver even more meaningful benefits as we continue to make these investments going forward. And with that, I'd like to open it up to questions.
Rich got his hand up first.
I have fast hands. So I guess the first question is from Walt's talk when he talked about the net new assets not being like the marketing spend has been pretty flat, but you're seeing net new assets grow dramatically. And you said one of your goals in the digital program is to assist with net new assets. So I guess, can you sort of outline how you improve the asset gathering? And then is there a metric if we shouldn't be looking at marketing dollars, is there another metric and I was going to ask Walt this too, Are there metrics we can use to gauge better what's driving this dramatic growth in net new assets?
Sure. So I'd say a piece of what we're trying to do is in essence help to fight the war of the law of large numbers, right? So you've raised the question, Walt answered about every year we get the question around, can you keep up this pace of growth? I think if we weren't making these kinds of investments, it would be harder and harder for us to maintain a growth rate. So some of this is investment that's necessary to hang on to that growth rate, push those dollars up every year, while we're maintaining that pace of growth.
So a piece of what we're trying to do is just we stay in that range of growth driven by these kinds of investments. So an example of the ways that we think this could work, just moving outside of the range of new products or services, but even just looking at an existing process. So if you start to tear down what happens inside of our new account opening process, You get various points in that cycle where you start to see fallout from where people will initially engage with the website to try to figure out what types of services and products we offer, what types of accounts might be best for them going into the application process, finishing the application process, getting through the verification, actually getting an account open and funded. And every one of those steps, there are things that are challenging for clients to work their way through that we think we can start to make impacts. And it starts to become sort of a multiplicative impact that if you can take a little bit of benefit at every one of those steps, you end up with a lot more accounts opened at the bottom of the funnel.
So it's that type of work that is just kind of pervasive to the journey experience work. So trying to figure out all the way through the cycle what a client is trying to do. How do we meet them where they are at that step in the process rather than basically forcing them back into things that look maybe more regulatory or required based on how we might have done business in the past. But and that's really the thinking is making sure that we're having a positive impact with every one of these initiatives on things like net new assets.
And just the one follow-up would be, you talked in the beginning a lot about mainframe versus the cloud and talked about it still would be take some time. Could you give a better sort of range and how long that takes? And then really the question is, I think we've all started to experience cloud services, but what does it do for like the retail investor? And what are the cost savings ultimately this end game that you're trying to get to?
Yes. So I think it'll play out a couple of different ways. So you will start to see some of the benefits probably in a 3 to 4 year time frame as we get moved over into the new data center and have more on the more modernized technology stack. We probably aren't going to be finished with application modernization for another 5 or 6 years. And there's a body of work here that's pretty material.
I think the way it plays through is going to be, we would expect to see based on what we can understand of cloud costs today that we would have on average a lower, but a more consistent level of spending than maybe what we've experienced in our history. So what happens with cloud is, we will likely lose some flexibility that we're not going to be able to make decisions around currency of platforms to say, that platform, we can probably run it for another 2 or 3 years without doing the enhancements. We can keep those boxes working. We're going to invest somewhere else. In a cloud environment, we're going to be basically takers of the technology structure and we're going to have to make sure that we're able to continue to operate in a more sort of current version on those technology platforms.
So that means that there will probably be a more consistent level of ongoing spending that's required. But the benefits that will come from having less direct infrastructure spending should more than offset that incremental spend on maintenance. So I think, we'll probably give up a little bit of flexibility to gain a lower average cost run rate over time. Scott?
Right here, yes, sorry. Just wanted to follow-up on that last question. So are we because I've viewed tech migrations from other industries where they have experienced a dramatic cost step down from an OpEx standpoint even with a hybrid model. In some cases on the order of 60% to 80%, that does not sound like kind of the range you're talking about, perhaps a more modest benefit as you move to the hybrid future?
So I'd say that there's a variety of things that run through the considerations for again, it depends on where you are in your life cycle of the technology and how long it's going to take you to work through some of this stuff. I was literally just having a conversation with our CTO yesterday that if you were starting out as a new company, you would go directly to private cloud or public cloud and take advantage of all the abilities there. And we have obligations to continue to maintain our platforms and run them at the degree of reliability that our clients expect from us. So there's a transition window that we have to get through here. It's a bit of a step function in terms of our ability to really get those benefits.
And until we can really get to that tipping point where we're starting to retire a material amount of the code base and taking advantage of a material lower infrastructure cost, it's hard to see how for the next 2 or 3 years we're going to be able to really deliver those kinds of benefits. Over time, I do think, the savings could be meaningful, but I think they're far enough out that it's probably not in most people's immediate models for us.
Okay, thanks. And then just as a quick follow-up, continuing on that public cloud theme. As you talk about focusing on metrics like minutes saved, operational milestones as the platform becomes more efficient over time And you're embracing the public cloud environment moving to the hybrid model of the future. Embracing the infrastructure as a service, how much of the platform as a service are you all willing to embrace? So I'm thinking of things like tools, natural language processing, AI from a customer service standpoint.
I've seen other customer service intensive models embracing that, to fairly dramatic effect from an efficiency standpoint. I just was curious how what's the house view internal versus external for what's swap?
Yes. And again, that kind of gets into the transition model that if you're coming from a legacy platform, you're probably going to make a step through infrastructure as a service on your way to platform as a service as opposed to starting from platform as a service as sort of a taker of the experience. So I think we are eager to take advantage of some of those capabilities. We are actually running proof of concept on some of those very things today. But we absolutely have to get comfortable that we have a complete understanding of the security of those environments before we're going to be willing to move deployment into that public cloud.
Deb Moriah, JMP Securities. Just I'm getting a couple of questions on the comment on just maintaining the flat operational services. Can you just expand on exactly expense through 2020? So what exactly are you referring to in that comment? And then I have a follow-up.
Yes. So I am talking specifically about our operational services enterprise. So our operations division, which is outside of technology, essentially the middle and back office fulfillment functions for the firm. It's the vast majority of those capabilities run through that organization. I think it's important though, as you think about the impact of that statement, we are constantly making those decisions in the context of the financial flexibility and the trade offs that we might want to invest in certain places versus the flexibility we're building in other places.
So rather than putting that specific piece into your financial projections, I'd really encourage you to wait for Peter to hear about how it all fits together into the scenario outlook. It's a component of what drives our ability to deliver those scenarios. But we've made various trade offs in the larger corporate picture to be able to make the financial picture all work.
Okay. Thanks. And then just a follow-up, when you look at I'm sure you're looking at what some of your competitors are doing as well in terms of spending on technology and a lot of initiatives you spoke about. What would you highlight as kind of some of the biggest points of differentiation, because it's just it's this big theme. I think everybody is investing a ton of money right now.
So in terms of what you're specifically doing, where do you feel like you're creating more separation or differentiation versus the competitors? And then to the extent the revenue environment allows or Peter gives you a kind of free rein here, where would you like to maybe accelerate some of that spending because you see the payoff being most material?
Sure. So I think a piece of it, I'd step back to the EOKA comments, right? The goal here is really through these efforts to be able to help push that EOKA down so that we've got the flexibility to continue to make the investments, whether it's in additional products and services, whether it's in pricing, whatever, to be able to pay for those differentiated products and services and be able to continue to drive the profitability that we're looking for over the long run. So I think you will see over the course of the next few quarters some of the capabilities that we're going to be bringing to market whether they're differentiators or additive to the existing experience And that would be up for everyone to debate. I think we bring a degree of integration and ease across the operations of the banking and brokerage platforms.
It is pretty much unrivaled in the industry at this point. So being able to continue to be a leader in that perspective is important for us. Where would we go with some of the additional investments? I'd say we're pretty well invested at this point. We could always spend a little bit more.
I think if we had some additional flexibility, it might be around trying to go a little faster on some of the modernization pieces around the technology stack. That said, there is a limit about how much change you can drive into an environment in a period of time and feel like you're doing it safely and constructively. So I don't think we've completely bumped up against our resource limitations yet, but we can probably see them from here.
Thank you.
Back to Christian.
I'll ask the question I asked Walt in a little more detail. So what technologies do you see as most disruptive, right? I think about some of the account aggregation apps out there that like have vast amounts of data on folks. They likely could give far more holistic advice to on the direct side or I think about some of the facial recognition technology that's used to know George clients' risk tolerance and could help build more better and more credible financial plans for financial advisors. But it's difficult for me to kind of figure out which of these technologies are really disruptive.
So from your seat, given how close you are, you look at the kind of vast array of new technologies out there, which do you see as most disruptive?
Yes, I'd say in many respects we're trying them all, right? That's a piece of what that innovation lab is construct is about. We also have an R and D team in technology, which is constantly evaluating these new technologies. Fundamentally, real transformation, those real innovations that drive meaningful differences in share and results, they don't happen real often. So a lot of what you're talking about are great new technologies that I think are readily available to most of us.
We'll make decisions about when and where we want to slot them in to try to drive maximum benefit. But I would say you really didn't name anything that wasn't an available technology that we couldn't deploy into our platform today if we thought it was going to be meaningful to be able to do that. Many of those things we're already looking at. And I think some of those you will see in market in the not too distant future.
Okay. Just follow-up. Just on investment spend in a big fixed asset like a data center, I kind of appreciate near term cost effectiveness as you mentioned. But isn't the whole point of kind of what you're doing to make your technology stack much more nimble? And to that extent, how do you know your current data center is not going to be obsolete in 10 years?
So why not just go to full hog and go to much more flexible technology stacks?
Yes. Well, I think we are going to the more flexible technology stacks. The challenge is really in the existing data centers. They are not built to house the kinds of technology that is getting deployed into data centers today. So they're really pretty inefficient.
They don't have the degree of power capabilities, cooling capabilities to really be able to get the density of what a modern data center looks like and to try to retrofit. If you've ever done a remodel on an old house versus knocking it down and building a new one, you might end up with a really great old house that's remodeled, but it's still going to have some of the flaws of being an old house. And so when you look at the data centers, the changes that have evolved since the old ones were built to try to retrofit them would be pretty expensive and still imply a degree of compromise that we just looked at and said, there's not a financial reason that we would do that. So I think we are deploying into most modern technology stacks, but we need a data center that's capable of allowing us to hold on to that to the extent that we think that we're going to still operate in some degree of own data center. Now that said, we have used some of the best designers in the industry for the data center.
We fully expect we will be able, should we not need all of the footage that we're building, to be able to convert that into a multi use data center and be able to share some of those costs over a broader of users. If we get to the point where we're actually shrinking our footprint and that makes sense for us to do. So we didn't build a Schwab specific platform. We built a very generic state of the art kind of platform that we think we're going to be able to leverage pretty efficiently going forward for a reasonable period of time.
The web will be here.
Just a
follow-up on the data center from Akhil Batya from 0.72. I'm trying to get a sense of costs associated with building this data center. Will you have duplicate expenses during the 2 to 3 year phase in?
We will definitely have some duplicate expenses over the 2 to 3 year phase in. So that's inevitable, but you have to consider those duplicate costs in the context of the cost we would have borne had we done the upgrades. We were going to have a step up in cost of data center regardless which path we chose. So really it was a matter of trying to choose the best path forward, rather than just it wasn't going to be possible for the length of time that we think we need a data center to avoid making some investment in data center platform. Rick in the back.
Rick, Robert Spoken. Can you talk at all about the benefits you expect to get out of the cloud based platform with having access to data across multiple channels across the platform?
Sure. But I don't think you necessarily have to go to cloud to be to take advantage of that. The bigger challenge with data is being able to specify your use cases and getting your data into a place where you're able to deploy essentially integrated data for analytical purposes. I don't think we look that different than what a lot of firms of our vintage look like. We have a lot of data, but the data was built for very specific use cases and is stored essence sort of in siloed storage mechanisms today.
A chunk of what we're trying to do with some of our data capabilities is bring more of that data into a common data architecture. So we're able to deploy analytical work against that much more rapidly. So, there's a lot of that work going on today and those capabilities are available even on premise type solutions rather than having to go to the cloud to get them.
One more here, Rob Gephardt from HS Management Partners. It sounds like you will maintain some workflows on premise for some time. How do you think about the security risks of this approach given that it seems many of the recent breaches have been of on premise data? Does this factor into the speed of this project?
So I'd say there are security concerns regardless of whether you're on premise or you're in the cloud that, they're just a little bit different. It's on premise. We're obviously responsible for maintaining all that perimeter security as well as the security of the data that's sitting inside of our various applications. Cloud, you're essentially taking advantage of infrastructure that was built to provide that security, but you have to be absolutely certain that what is being provided to you is at least as good as what you were able to build on premise. It's a different set of considerations in terms of on prem and off prem, but it's the same concern, right?
I mean, whether you end up with some degree of attack that hits you from inside or hits you from outside, if you get a breach, you've got a breach. And I don't think your clients necessarily care, where you got breached. It's that you got breached. All right. Well, I think I'm pretty close to time unless there's we're good.
All right. So it's my pleasure to take you all to break and Mike Walt will
be sticking around for the
rest of the day. So
thank you all. All right. Just grabbing your seats. So welcome back, everyone. I think as you heard this morning, we really had a remarkable 2018.
And what was really remarkable is we delivered not only record results firm wide, but also within the Retail and Advisor Services businesses. So what I'd like to do is share some of the detail of those business results and then bring up the enterprise heads, Terry Carlson and Bernie Clark, to do some Q and A. Before I do that, though, I wanted to share some firm wide results that I think are particularly important. We share lots of results with you every year at these meetings and throughout the year, net new assets, new accounts, revenue margin, all critical, critical results. But I think it's also important for a firm like ours to share.
A firm like ours that's so heavily relying on referral to share how are we doing adding brand new Schwab client relationships. And I'm happy to say we continue to show some really strong growth there as well. In fact, our 3 year compounded annual growth rate for new to retail households is 24%. For new advisor relationships, it's 11% and for new employer relationships, it's 13%. So what that means is not only our clients bringing us new assets every year, but increasingly prospects when they're shopping for a new relationship, whether they're a retail client, an advisor or an employer, those prospects are increasingly choosing Charles Schwab.
And it's really important. It's really important because it's only indicative of the strength of our offer among prospects who may not know the brand, but it's really important given the power and the importance of referral in our business. Remember, assets don't refer, people refer. We need both, and we are winning with both. So with that, let me transition to some of the Investor Services results.
Some of this stuff will be a little bit repetitive because Walt touched on it this morning. But the Investor Services business continues to really be an asset gathering machine. In 2018, we saw net new asset growth of 37%. That's off of a really strong growth 2016 to 2017, so growth on top of growth. Those net new assets come from both existing as well as new clients.
On the topic of new clients, the profile of new clients that we are bringing into retail is really, really attractive. They tend to be younger. I think Walt referenced this this morning, but 53% of our new retail clients joined the firm in 2018 or less than 40%. We're often asked the question about millennials and what are we doing to serve millennials, and we could talk more about that in the Q and A. But I think this data point substantiates the power of this brand even among the millennial population.
The new to firm clients are also increasingly affluent. We define affluent here as having $250,000 or more in investable assets. So 34% of the clients who joined retail last year brand new to Schwab were defined as affluent. That number is higher a higher proportion than it was a year prior. So not only we're adding more affluent, but the proportion of folks who are joining the firm who are affluent is increasing.
And then this last stat is particularly energizing for all of us to see, I think. New clients are adopting advice at 1.2x the rate that the average client adopts advice, and that's within the 1st 6 months of them joining the firm. So that profile of new clients is really attractive, not just from the assets we're bringing today, but when you look at their age and their affluence, the potential for future affluence or future assets down the line. And when you look at their propensity for advice, there's real opportunity for us to enroll them in our advice offers, get better outcomes for them and ultimately further monetize those assets down the line. So very attractive profile.
We're pleased with the results that we've been getting and we've talked about and we'll continue to talk about, but we're also pleased with the fact that the value proposition that we are bringing to the market to serve retail investors is being increasingly recognized by 3rd parties. In 2018, Schwab won J. D. Power Full Service, number 1 for full service investing 3 years in a row. Now for any sports fans out there, you know how hard a 3 peat is.
I'm a hockey fan, so I'll use a hockey analogy. Does anybody know when the last 3 peat was in the NHL? Does anybody know what the NHL is? Woah, wait a minute. Didn't hear that.
Bernie Clark got it right. I should not sound so surprised. Who is in that? This is not a setup, by the way. Billy Smith, highest score, right?
I'll go on. The worst arena since Bernie likes it, the worst arena in hockey history, I think, the Nassau County Coliseum. But anyway, I digress. The New York Islanders in the 1980s actually won 4. But the idea of winning J.
D. Power full service 3 years in a row is a really, really strong indication of the strength of our offer. I think Walt may have referenced this earlier also, but Investors Business Daily just last week or 2 weeks ago came out with their rankings, and we were number 1 in online brokerage. So really, really fantastic validation. And internally, we celebrate this recognition.
We celebrate it for two reasons. Number 1, it's a great validation of, again, the value proposition that we're bringing to clients and the strength of that value proposition. But maybe equally as important, it is a big driver in the prospect shopping process. Increasingly, when prospects are looking to establish a new relationship with the firm, even outside of Financial Services, they're looking to 3rd parties to find out what those parties are saying about your company. I have no doubt that this recognition is helping us drive some of the results that I talked about earlier.
So with that, let me transition to the Advisor Services business, which is doing incredibly well also. Starting on the left with the net new assets, if you recall, we drove very significant asset growth net new asset growth 2016 to 2017. In 2018, we were able to not only sustain those numbers, but build upon those numbers to generate a 2 year compounded annual growth rate of NNA in AS of 31%, really, really strong numbers. Again, that's coming from both new and existing clients. With respect to the new clients, a big source of that is the middle column, advisors in transition.
What you see in that column is the number of teams that have joined Schwab over the last 5 years and the average size of those teams. So a steady increase in the number of teams year over year and a good increase in the average size. You'll note that in 2018, there was a bit of a dip in the average size. There are really two reasons for that. Number 1, in 2017, we had a major, major team convert that did not replicate in 2018.
So that drove the average down. The other reason that drove the average down was in the latter half of the year, some of the market volatility really caused some of the bigger teams to decide not to go through this transition in the midst of that volatility. But I think what's most important to us about that slide is more and more teams are coming to Schwab, assets continue to grow, the size of those assets continue to grow on a 5 year basis. And based on the market share work that we do, we believe we are continuing to win not just our share, but a disproportionate share of AITs or advisors in transition. On the topic of share, the last column will give you a sense of how we're doing across the industry spectrum.
We continue to dominate the industry really and be the dominant share player at every asset tier. Interestingly enough, a lot of our competitors, probably for good reason, try to focus maybe on the low end or on the high end. We believe that with our scale and the appropriate segmentation, of course, we can serve the entire spectrum well. And we need to do that. This is an industry that rewards scale.
We are a scale player. We are going to add to our scale advantage and fully expect to add to our scale advantage and be successful doing so. So both the Investor Services and Advisor Services businesses are doing very well. You can see in the numbers. I think as we look to the future, we believe and certainly I believe that there are 3 trends.
It's not going to surprise you based on what you heard this morning, but there are 3 trends that we need to stay in front of to continue to both maintain and accelerate the momentum that we have. Very specifically, we as a firm need as a firm need to continue to make meaningful progress on my three favorite words, service, simplicity and scale. Everyone at Schwab knows these are my three favorite words. You may be tired of them by the end this presentation. But I fundamentally believe the companies that win in 2019 and beyond do 3 things very well.
Number 1, they deliver great service every time, all the time. Number 2, and critically important, they are remarkably easy to do business with. They emphasize simplicity at every step. And number 3, they add to their scale advantage every day. And that doesn't mean just bringing on more business.
It means truly designing for scale. It means all the stuff Joe just talked about. It allows you to truly bring down your marginal costs in a very predictable and sustainable way over time as you grow. Companies that win are doing all three of these things well and need to continue to do them well. They're probably fairly noncontroversial, but if there's any debate, I'll just share a couple of facts.
Based on the research we see, the majority of consumers tell us majority of affluent consumers tell us that they will never do business with the company again after one bad experience. And they will tell 15 people. And that's what Walt meant before, I think, or what we mean when we talk about brand loyalty not mattering as much. People may love your brand until they have one bad experience, then they don't. And they don't so much love your brand that they don't go off and tell 15 people about that bad experience.
Their service matters. Conversely, consumers affluent consumers also tell us that the number one driver of client loyalty is reducing the time and effort it takes to interact with your firm. Service simplicity and scale matter. I believe that we're entering the service and simplicity and scale arms race where companies are going to be constantly changing, chasing rapidly rising customer expectations. And the companies that win are going to be the companies that reach and exceed those expectations.
We believe we are and will be and continue to need to be one of those firms. Now whenever I talk about this, I need to say, and I say it internally as well, to be clear, these are not new ideas for us. These are in so many ways core to who we are. You look at our through client size strategy, when you look at our industry leading CPS or net promoter scores, when you look at the expense on client assets that Walt shared earlier, these are not new ideas. But at the same time, we can make meaningful progress on all three.
And when we do, clients will benefit, employees will benefit and shareholders will benefit. So to make it more tangible, I could talk about a bunch of areas where we could make meaningful progress against all three, but the largest area is probably within our client service or client contact centers. To give you a sense of the magnitude, we have 7 service channels. Those 7 service channels take about 25,000,000 annual assisted interactions. Think about those as really any interaction that's not pure digital end to end that involves a live person at some stage.
We have 4,000 employees taking those and our expenses are rising about 15% a year. So within that domain or within that domain of interactions, there's real opportunity to enhance the rep experience, the client experience, in so doing, create greater simplicity for our clients, better service and greater scale for the franchise. To make it tangible, some of these numbers you heard this morning, but I'll hit on them quickly. But 27% of our calls, these are calls that come into our contact centers, are highly serviceable. These are calls that people don't want to make.
They love to talk to us. We love to talk to them, but they don't want to make these calls. Their password reset calls, their basic new account open, Clients want to self serve in those environments, in those situations. The second stat, about a quarter of our calls result in almost immediately in a transfer. That means we don't have the right technology deployed in the right places yet to get this client to the right place at the right time to get to first call resolution almost every time.
That has to be a priority. And then this last stat you heard, but I have to say it again because it is I think it's impactful. Over 55% of the time, when a client calls us or in any assisted interaction with us, they tell us that they tried to do it digitally first. So what that means is either we didn't offer the ability to do it digitally, they couldn't find it, or they started it and couldn't complete it. Now to be fair, within those 55%, there are many interactions that we may not be able to do end to end digitally for a while or ever, be it for regulatory reasons or just the complexity of it or some interactions, people really do want to interact with people.
But even if you take that 55% and you haircut it a meaningful amount and you multiply it by 25,000,000 interactions, you can get to some real, real benefits as it relates to service simplicity and scale for our clients. So we're going to go after this opportunity. The way we're going to do it is we're going to launch we have launched a firm wide multiyear effort that is going to span really all the businesses that touch end clients, Investor Services, Advisor Services, Digital Services and Operations. We're going to take a very comprehensive view that looks at what is the current end to end client experience? What is it today?
What should it be? What are the supporting operating models? Do we need to get to where it should be? Think about things like what are the workflows? What sort of segmentation do we need to deploy?
Critically important, what's the technology and infrastructure that we need to support this end to end experience? What analytics reporting and metrics do we need to ensure that we stay on track? And do we ensure that we deliver the impact that I firmly believe we can deliver? And then lastly, talent. Talent is a huge part of this.
Talent acquisition, talent retention, training. This may not surprise you, but the highest attrition rates of our employees is in our client contact centers. And they're high. These are really hard jobs for people to do. They're hard because of the complexity of the interactions, the complexity of all the different client types you need to talk to.
We need to make these jobs easier. And when we do it, we'll improve the rep experience and we'll improve the client experience. And ultimately, that will drive benefit to shareholders. So some multiyear effort. We expect returns.
We're already seeing returns, but we expect returns to materialize as early as 2019, but it is a multiyear effort. The returns will continue over time and this may scare Peter and others, but I'm not sure this project is going to end because chasing service, simplicity and scale, there's no destination. It is an arms race. And the companies that win are the companies that are going to stay ahead. Service has always been core to our culture.
We remained committed to staying ahead. Scale has been core to our culture. We remain committed to designing for scale, and simplicity is really how you get both. So I will close by saying that we continue to see really, really strong momentum in both the Investor Services and Advisor Services businesses. I think it's indicative or the evidence of that is not just the 2018 results, but I think the multiyear momentum behind those results.
To continue to drive the results within those businesses, we need to execute on our strategies, but also double down on service simplicity and scale. And finally, we're committed to making the investments it's going to take to do that and also put the right measurement in place to ensure that we get the outsized returns that we fully expect we'll get. So with that, I think I'm going to bring up Terry and Bernie for some Q and A. I think the way we're going to do this, I think I will ask a few questions to get going, and then we'll open it up to the audience. I guess, first, I mean, Enviro positioned to share results that both you and your teams are delivering.
So thank you. It was amazing 2018 and even momentum behind it, as I said. So maybe starting, Terry, with the 2018 growth in retail. What do you think is driving all that growth? And what's going to drive in the future?
Well, 2018 really was a fantastic year. And when you look at our client promoter scores over 60, you really understand that our current client base, they are extremely happy with our value proposition of trust, of value, of simplicity. And what happens is we're continuing to see asset consolidation from our current client base, which has been really, really positive. But also, with the client promoter score, which you all know maybe as the net promoter score, you see referrals go up dramatically. And our referrals are up 9% year over year.
So very positive story with our current client base. And then when you add over 400 and 70,000 new households to retail, you really get the asset consolidation in that way as well. And our clients are coming to us and asking for more advice and more planning and really deepening that relationship with us. The third way is around our digital. And Joe talked already about digital and easier to open accounts, easier to do business with us.
So that really drives simplicity for them. And the 4th way is our B2B business, our stock plan solutions, compliance solutions, all growing rapidly. As a matter of fact, our B2B net new assets is up 22% year over year. So it's really those four things and the focus on the relationship, on the high touch, but also the high-tech as well as the high value that's driving a lot of the net new assets to the firm, and we're retaining them.
Yes. There's so many facets. I'm glad you brought up referrals. It's my favorite topic. In this industry, there's nothing more important than a referral.
And in my old marketing capacity, people would always say, How can we generate more referrals? And the answer there's no marketing answer to that. The answer is, deliver great experience, and they will come.
That's right. And we've talked a lot about financial consultants in the past. Because of those referrals, we're seeing a 3 year growth rate in our financial consultants of net new assets of over 25%. So those referrals and the relationships, they're working year over year.
Bernie, I forgot. You're from New York. Were you at the Stanley any of those Stanley Cups?
Actually, I need to apologize right up front because Rich's wall of words said employees and family can't play. I screamed out the answer, but
Well, there's no award. What about the RA industry continues to grow at accelerated rate and outpace the industry year after year? What's driving that? Is that sustainable?
And the
risk I'll grab on to something you just mentioned. Referrals, advisors thrive on referrals from their client base, and they're very their retention level is high 90s. So they have a built in sales force, I always like to say that. But the growth that we've seen in 'eighteen really is a continuation of 'seventeen, which is a continuation of 'sixteen. And so on back almost for the last decade, right, almost a 10% CAGR over that period of time, I still remember seeing the outsized growth of 'seventeen and saying, let's not judge this now.
Let's take a look and see how 'eighteen plays out and if we can continue it. And sure enough, we have. And something that you all asked before and something that I think is extremely relevant, why would that growth continue? Well, you know, there's that sort of little chart that was up there that talked about purpose built providers and percentage really of share within that. We're at 30% share, which is twice the size of the next closest competitor.
And there are multiples of the next and so on down the track. But there was a little sliver of it, and it was 40% is still fragmented within the independent space. And that continues to be a source of opportunity really for us in the future. That was 50% not that long ago. And so we're sort of chipping away at that.
The other thing I would highlight to you, which I think is really important to remember, you know, why can't the wires, as an example, the more traditional models, why can't they get ahead of this curve? Well, we do a sophomore study each year and that's everybody who came out as an independent and now they're in business for 2 years
And we ask them lots
of questions about their experience, about how they feel about life, their businesses. And 55% of them report that they came into Independence simply because they needed more control. They wanted more control. That was the most important thing they could think of. And an additional 35% of them then said it was better for their clients.
A fraction, at 10% to 15% said the economics are better. So they're leaving a model. They're getting better economics, which certainly is a driver. But that's why you see that 230 number consistently growing. There wasn't that long ago, I was up here talking about 170 firms or 175 firms that came out.
Now it's 230 firms, and they're telling their friends and they're continuing to create sort of that momentum on referral within those more traditional models.
So I guess, we can't talk about growth, I suppose, without mentioning competitors, at least at some level. What on the RIA side, we continue to win share. What is why are RIA's choosing us disproportionately?
Yes. Well, it's I think you talked about the service. We've always led with our people. We think that's incredibly important. And we've learned that complementing with technology gives us greater and greater advantage.
Lots of our competitors sort of come at that in a different way. A lot of our competitors also, I think it was mentioned early on, they're starting to pick slices of the market that they want to participate in, not necessarily the broad market as we like to do in looking at that. This year, we've created a couple of models within our model, sub models, if you will, to make sure that we're looking at those smaller firms, which are incredibly important to us. 3,000 of our 7,500 firms are under $50,000,000 And that group in the last 5 years has actually doubled in their size. So that's an incredibly important group for us to stay focused on.
And for that group, we have to create different experiences. We need one to many experiences for that group. We need to be able to reach them in different ways. They have less specialization within their own firms. So that's important.
And in a barbell type approach, and these aren't the only two areas of focus, but we also like to look towards the higher end, the family office side, a $10,000,000,000,000 opportunity that we've talked about. And we're really tapping into the capability needs that it's going to take to serve that market and making sure we're looking at it. In addition, I can't not talk about this movement of teams, but in every deal that gets done on the street, 40% of them we're involved in, of teams coming out into the independent space. That's significant when you think about the fact we're a 30% share in the marketplace that gives us That gives us advantage.
Just a follow-up. Has the broker protocol made a difference?
We have not seen it make a difference. It is over 60% of advisers are still under the protocol that exist on the street. So I wouldn't say that it's been of any material import or that's been brought up to us really in the equation at all.
So Terry, we heard a lot some questions this morning about competitors. But I guess I'd just summarize by saying retail wealth management is a pretty attractive space, and there's lots of folks across the spectrum trying to innovate and capture share. To what extent are we seeing that impacting us or worried about it?
Well, we always look at our competitors. We observe them. We watch them. They really keep us on our toes, which is a good thing. And we're really starting to see some competitors really move in the digital space, do more online work that typically really were more branch related.
We also see other discount brokers moving a little bit more in the high net worth or the wealth management space. But it's that convergence that really makes an impact and distinguishes Schwab because of our tradition of channel of choice for our clients, because of our tradition of high value, high transparency, high trust and the capability to innovate on behalf of our clients. And I think that's what's most important for us, is that we listen and we watch our competitors. But most important, we listen to our clients. What are our clients' wants and needs?
Where are they going? How can we be proactive in solving their financial challenges and helping them achieve their goals? It's really through that, seen through the eyes of the client, that distinguishes Schwab from our competitors. And we know that by the numbers we see, Our TOA ratio that we shared earlier, our transfer of account ratio, is up 20% year over year. And we watch every single competitor in how we're doing.
And we continue to win in the marketplace.
Just maybe a follow on. I shared a stat about what new clients adopting advice at 1.2x rate of existing. But it's also true that existing clients are adopting advice at an accelerating rate. What is driving that increased interest in advice and planning from Schwab? And what's going to sustain it?
Well, I mean, when you look at our demographics of the clients we have and the clients we're attracting, with 53% of new clients coming on board being under 40, you can imagine the life events that they're going through, right? Graduating from college, buying homes, selling homes, changing jobs, planning for retirement. And what we find is that millennials are actually asking for more help and guidance. They're asking for planning. And you know what?
They actually want to talk to someone about it. And so we have to be there in the channel of their choice. But we also have the other spectrum of our clients, which we value greatly, who have been at the firm for 10, 20, 30 years. And now they're thinking about retirement or living in retirement. So they're coming to us for retirement income advice, for wealth transfer advice.
And we have to be there in both ends of the spectrum. And so from a quantitative standpoint, we know financial plans have gone up 10% year over year. And when a client does a financial plan, they are 8 times more likely to go into one of our financial advisory solutions. So things like Schwab Private Client, which combines the financial plan plus portfolio management for a fee, that's up 18% year over year. And Schwab Advisor Network, which is our partnership with Advisor Services, is up over 30% year over year.
So when they do a financial plan, when they get to talk to someone, they actually go into advice. And we know CPS goes up, and we also know lifelong loyalty goes up. And we also know lifelong loyalty goes up.
-Sounds good.
-Yeah. It works.
Bernie, we talked about the advisers in transition, but maybe transition to the established RIAs. What's on their minds these days? And how has that changed? And what are we doing to help?
Yes. Well, advisors have always been about growth. And I used to find out the most ridiculous question we would ask, and they would say, Yes, we all want to grow a lot, right? Of course, they want to grow a lot, and they have. They've had great success.
My question was the most ridiculous.
No, no, no. We always surveyed in that kind of way. I always found that one interesting. But the reality is, they are growing. Succession is a word that means many things.
And so succession to the next generation with assets is certainly important. But succession of ownership to the next generation within their own firms and how they're going to run it, incredibly important. In fact, one of the things that when we look at it and we see what's happening with the existing advisers, they now have something like 27 different specialized roles within their firm. That's a really big difference from where we came. I can remember preaching the idea if you need designated roles in your firm back in the mid-2000s, right before we had the downturn.
And they learned when the sort of the founder was everything, business stopped for a while in 2,008, 2009, 2010, and they emerged with Chief Compliance Officers and Chief Operating Officers in order to help to facilitate the growth within their firms. They need more help, I think, in some of the intellectual capital spaces, which is why we've started a very deep consultative engagement with firms. In fact, we've engaged almost 1900 individuals and 900 firms in specific consulting arrangements to help them think about their businesses and to help them grow what will be into the future of their models in succession. Certainly in strategic planning, incredibly important. The other thing that they're trying to do is ready their next generation or executive leadership program that we've talked about a lot in the past.
It has touched almost $300,000,000,000 in assets. I had dinner with the current class, which is going into this year, 43 people representing $160,000,000,000 in assets with us, and they're going to go through a program with us. They're probably starting to get to the point where they're the next generation leader or even slightly the generation after that generation, which opportunistically is fabulous for us. So they're planning in a legacy kind of ways. I'd put a slight spin to the other side of that because they think it deserves to get mentioned.
For those who aren't planning, there's a little uptick in M and A within the marketplace. And it's coming in a way that we may not have suspected. It's not the small firms, it's the large firms coming together, dollars 1,000,000,000 firms joining $1,000,000,000 firms on equity arrangements without premiums coming in as partners and growing a stronger presence. And there's obviously with the success of the industry, there's more private equity coming in and there are consolidators who are in the marketplace buying some.
Some of
the cash flows of some of these businesses, usually not whole ownerships, but at least partial ownerships, which is also another interesting alternative. Most advisory firms, even with a legacy bend, will still talk to these providers to understand their value, their economic value in the marketplace.
Great. So we're going to open up. Before we do, maybe just one last question, just maybe a bit of a catchall. But Terri, as you look to 2019 and beyond, what are the key Investor Services priorities that you want to touch on?
Sure. We'll talk about this from the client the value of a financial plan and advice. How do we make their financial planning offer? How do we make their financial planning offer? How do we make their financial planning offer?
How do we make their financial planning offer? How do we make their financial planning offer?
How do we make their financial planning offer?
How do we make the value of a financial plan and advice how do we make their financial plans available 20 fourseven in the channel of their choice. Equally as important is how do we make sure that the rep desktop is as simple as possible? Again, talking about long term retention of our employees, simplifying their work, so ultimately, it's simple for our clients. And that means leveraging improved digital processes. The other areas around continuing around innovative solutions.
There are real needs out there among our clients to simplify retirement income, both from a platform standpoint and a paycheck standpoint. So we're working on that, making sure that our banking solutions are simple and reliable, especially around our pledged asset lines, which are coming out later this year. There's many areas where we can continue to innovate in our B2B space. And this is so important because we have so many clients here from the Silicon Valley that have needs around equity compensation and how do we simplify that for our clients. Then as we go scale and simplicity in our service model, this is all about first call resolution and leveraging artificial intelligence to get clients to the right person at the right time in the right channel of their choice and then simplifying and offering alternative client relationships.
Client relationships drive better CPS as well as improved share of wallet. So how do we continue to leverage virtual and AI capabilities so that our clients have a relationship in the channel of their choice.
Remind me, we get so many questions about Millennials, and they get another one. But what we see is Millennials want the best of people in technology just like the rest of us. They just want it faster, quicker. And so relationships matter.
It comes down to high touch, high-tech but also high value.
Yes, for sure. Bernie,
I guess, same question around priorities. I've touched on a few of these, but I want to spend a bit more time on box number 1 here, where we really talk about efficiencies in the marketplace. And so digital account open, something Joe had been talking about, incredibly important, incredibly important for ease of doing business. When you think about our mission of scaling, that's the same mission advisors really have as well. They've been pretty much fixed at their pricing level for quite some time, Arguably, I think a sweet spot.
If you think about the proverbial 100 basis points, we can see for a $5,000,000 account, the average is about 75, 76 basis points for that account. So it has stayed there, but they have added many, many capabilities over the year, so over the years. So in effect, they have lowered their pricing without changing their pricing. That trend is about to, I think, cease. They put a lot of capability into the model.
There may not be that much more. So there could be some pricing pressure that could come as you sit think about them sitting between maybe 250 or 300 basis points in a traditional model and 30 for a very low touch model. That could be an important place for them to be going. Status, another one of those, I think really important areas where we don't need to use our people's our valuable people's time, talking about things that are quite simple. We need to make sure that they can access that information on quick order, so they can get what they want.
And then when we talk to them, we want to have a deeper conversation, perhaps a more strategic conversation. As you kind of go across the spectrum, we talk about consulting and helping our clients to do things in a different kind of way. It's been hugely important for us to be engaged in their businesses in this type of way and helping them to think through these types of things. I'm really excited about something we're planning for this year. It's more of a human capital initiative.
We've learned that firms really don't have what they need or they really don't have what they need since they've become enterprise type firms as they've grown larger. And so they ask us questions. They want to take advantage of our resources. They want to think more corporately without having the internal resources to do so. And we think we can help them here.
And that sort of leads into another area of interest for them and that's talent. As we talked about succession of their firms, attracting that talent and trying to create interest in the industry to find it. We work with over a dozen universities throughout the country on CFP programs in making sure we're introducing it. Many of you may have come to our impact events. We bring students to those events.
We introduce them. We have an internship program that we work with where we tell the students, We're not hiring you. We want advisors to hire you. And we hire people in their junior years specifically because we want going back to campus and being evangelists about this independent space and how it's different. We think that's important.
And of course, I mentioned the executive leadership program. As you move to the far right, you really stood to get into the advocacy, which is still incredibly important. It's a $5,000,000,000,000 industry. And yet at the same time, it's still relatively small and not as well represented. In Washington, around regulation, around legislation, We have to continue to advocate in those kinds of ways.
And I will tell you, our team does a fabulous job. Christopher Gilkerson, our Chief Legal Counsel on this and others engaged in this. We author a lot for the industry here, and we get our competitors to come in with us in these cases because we think it's good for the growth overall of the industry.
We're also trying to advertise the model too and just support the model with a fair bit of paid advertising that reinforces what they're doing in the fiduciary model. So I think we're going to open it up right now to questions from the audience. In the back.
Thanks. Dan Fannon from Jefferies. I guess, Bernie, each year you sit here and seems like the outlook is great. I guess, if you look at today versus a year ago and the backlog and what you're onboarding, what's different, if at all? And then what disrupts that trend in terms of growth?
It seems like there was a bit of a pause in the Q4 because of market volatility. Is that just a timing thing? I guess, just thinking about competitively, how you might what you lose share, why you lose it, if
there's any feedback on that?
Well, you should know when the outlook is not great, then I'm not sitting here. It has been a continuing trend. But I think the thing that we're starting to see increasingly is the willingness of teams to come together. So if I think about this trend as it started in early days, fiercely independent individuals who really didn't want partners. They might have even wanted vendors a decade plus ago.
And now they're starting to embrace more what's possible within the industry. I think this idea of integration, incredibly important. When I talked about something like Digital Account Open, we'll be integrating with Tamarac and Orion, 2 portfolio management systems in the marketplace we had. One of them actually had impact with us displaying how we were doing this, but using more third party capability. The idea of differentiating on technology is something that advisors are beginning to leave behind and leave that to us.
So they're assigning more of these responsibilities, I think, to their providers and our capabilities to stay up with them is going to reward us well. And I think it's going to disadvantage those who can't. Getting into this space incredibly hard, when I see you all mentioned Wells Fargo as an example. When I see what they're trying to do, they're already limited. They're already putting restrictions on what that model can look like because of internal relationships like finite and making sure they're not stepping on any toes.
We see similar challenges with the Pershing model. But with that said, nothing is trees don't go to the sky. There's a lot of work to be done to make sure that the interest stays in this model. There's a fair amount of worry that I have on a day to day basis, and I think our industry has really on making sure that there's not a different disruptor model that will come into place. The depth of the relationship has to be sustainable in order for this model to thrive.
And to do so, more of those, if you will, operational things have to become high scale opportunities. And if they can if advisers can stay focused as they continue to migrate towards simply the relationship, and then we can help to own that scale that comes along with it, This model still has some legs, and I think it's going to continue to be successful into the future.
There you go. Maybe over here. Jeremy?
Hey, Jeremy Campbell from Barclays. Just wondering across the two channels, we saw kind of choppy markets in Q4. I guess, volatility could be looking at it as a catalyst for change, but also as a headwind as people try to batten down the hatches. Maybe can you talk a little bit about your the opportunity or the challenges you might see in a continued volatile market in gathering assets from clients that may be new to Schwab?
Sure. I'll start out. I mean, volatility markets provide an opportunity for clients to be engaged, to really ask more questions and to really understand how their financial plan is really going to help them achieve their goals. So we actually really enjoy those times. In just this past Q4, what we did with a partnership among our data analytics group is we identified clients within our entire 3.3 segment and said which ones are at the greatest risk of just purely getting out of the market.
And how do we identify those? And how do we contact them to make sure they have a long term strategy? We did that. We contacted them through our FCs, through our branches, through our client service professionals. And they were delighted to revisit their plan and make sure they get on track, which drives CPS up ultimately, drives referrals up and really helps the organization grow.
So that's just one area we're using intelligence to be able to make sure we're pinpointing the right group to then ultimately drive that organic growth.
And
just to add to what Terry said, I mean, I completely agree. And one of the biggest challenges that we face in this industry for the majority of our clients, not the active traders, is inertia. And how do you get clients to overcome that inertia to reengage with their money if they're not at Schwab to reengage with their current provider and make sure it's the right provider? And volatility often creates that catalyst for engagement. And engagement, at least in our experience, whether it's with Schwab, usually turns out to be a good thing.
And if it's with a competitor that's not doing great work, that turns out to be a good thing for Schwab too. So I think in general, volatility has been good. Now having said that, if volatility means a sustained downward move in the market, that certainly does cause clients to retrench a little bit.
Yes. And actually, you had brought up the same point, and I didn't address it. We did see in the 3rd Q4 that there was a slowing really in the asset flow as it was coming in. And it's not unusual for us to see within the adviser space business be a little bit chunky, largely, I think, because about 70% to 75% of the growth is organic growth from our existing advisors as they grow. And then about 25%, maybe a little more than 25% now comes from teams coming out into the space.
And we saw a few less teams during that period of time come out. Now volatility is something, as you would suspect, that advisors are reticent to put their client assets in transfer and have those conversations during those volatile times. What we learned both back in the early 2000s and then we learned in a big way in 'nine, 'ten and into 'eleven was that they tend to excel as they start to come out of these models into better models and partially because they think their clients are looking for more solutions. The organic growth also rises a bit during those periods of time. So it could be a little bit of a timing thing.
I also think as you think about other headwinds, and there will be many, I'm certain, over time, we had a small headwind come at us with the government shutdown. The agency that approves ADVs was shut down. And so for a brief period of time, they were not issuing any ADVs for new teams wanting to come out. As soon as the government reopened, if you will, and that agency reopened, we saw our first two teams join us within 3 days of that period of time. So the approval process is not a painstakingly long one.
But there is a backlog, which we expect will start to catch up with and pending a resolution on February 15th, the government stays open. We suspect that there'll be a continuous flow beginning again from that.
In the front, I think we have a few.
Greg Siegenthaler, Credit Suisse. Jonathan, can we turn back to Slide 43 for just one second? I have two questions
there. I'm not sure if I know which one it was.
It was RA custody market share.
Oh my god, there's only 2 ways to go. Okay. We'll have been better at this.
And this might be more of a question for Bernie, but if you look on the chart on the right, and I'm looking $1,000,000,000 plus, your market share is low 25%. First, maybe explain why it's slow and I think I have an idea why it's slow. And then also, one of your larger public competitors, as you can see is very stronger in the smaller segments, but not in the larger segments. What do they have special down there that drives up their share?
So on the $1,000,000,000 plus side, that large, I feel like I'm color blind today, but that large wider area at the top, I guess it's a light rose, is that 40% fragmented group of U. S. Trusts, Northern trusts, non purpose built providers in that space. We also see in the $1,000,000,000 plus space, you get more esoteric assets that begin to fall into that space. So you see market share get a little bit tighter in that.
So that's the answer there. On the other end of the spectrum, where the other public purpose built provider is out there, quite honestly, that's where TD specializes in the under 50 space. That's their market. They compete with LPL as much as anybody in that space. They're kind of coming in from the IBD perspective.
And so and interestingly enough in that market, I don't think it will be disruptive by any means for this brief period of time. But IBDs often have their own ADVs already. So as they move out, they move without competition for those assets in that space. We still own the market share in that space. We compete aggressively in that space.
Our 3,000 clients, they mentioned that were under 50,000,000,000 dollars That's $165,000,000,000 opportunity by comparison to the high end. And so we plan on being there and being super competitive in that space, even with the one to many consulting initiatives that we're talking about bringing in as well. But that's what's on the lower end of the spectrum. If I had to classify them all, if I on the purpose built providers, we have one purpose built provider who focuses in that space. We have one who focuses more in the by their own admission in public records, but at the $150,000,000 plus space and another who's a boutique, who just periodically takes on teams.
So that's sort of the 3. And you know the 3 providers. I mean, we've had them listed on other slides, it's Pershing, it's Fidelity and it's TD.
We included it partly to reinforce, as you said, that we can win across the spectrum with our scale and the right segmentation. And this is a business that rewards scale based on the ROCAs we talked about.
I never wanted to meet another client. I've been doing this for quite some time. I never wanted to meet another client that would say to me, you didn't want me when I was small. That's a hard one to answer.
Thank you.
So, Brendan Haughton, UBS. Just keeping with Switzerland here. So one for Bernie, actually both of you, we saw cash increase at year end pretty meaningfully and there is some curiosity around whether or not there was some differences in between the different businesses, whether or not some of the customers reacted in a different way, whether or not whether there was an advisor on the other side of the phone to answer concerned questions might have driven some more of the cash build. Could you maybe break that down in how that worked out in a period of volatility to help us think about how the model reacts in a more granular level? And to Walt's comment before that some of it started to move back in the market, likewise, the other side of the coin, the reflexivity and putting money to work, is there a difference in between the different customer bases?
Well, I know Peter is going to really dive into this. I will tell you advisors, we survey frequently and they will tell you that their clients are somewhat more anxious than they are, but they're not overly anxious. And they're having those conversations with them as we hit those periods of volatility. And we have measurements from years back where we can see where anxiety sort of spiked, if you will, in risk. Typically, December is simply a time of during the year where advisers are always taking action.
They are trying to sort of complete their portfolios, tax loss harvesting, big dividend months, all of those things play out into that period of time. But they're not there is no indication from advisers right now that their clients are having an extreme rise in anxiety over the volatility of the market. I think advisors feel like they're needing to work a little harder, quite honestly, now on making sure that they're managing the portfolio in the way that is making sure their clients are feeling like they're participating and yet not at
risk. Thanks. Deb Morin, JMP Securities. So question for Bernie. Just as teams come together, as you mentioned in the space, are you seeing them flex their muscles more in terms of their scale advantage in terms of relationship with Schwab or maybe they're looking for better economics in the relationship, whether it be on customer cash or some of that return or something else?
And how could that affect the Roca trajectory, if at all? And then just the tied to that, the big 4 are clearly taking more market share and Schwab's kind of leading that charge. But all of you, as you mentioned at the beginning, have kind of different positions on technology. Some are building their own technology stack, some are open architecture. So how important is being open architecture to your advisor groups that are coming in and how is that helping you win?
Well, aside from the idea that they want more control when they come out and that's why they're coming out, I think open architecture is at the key. I mean, Walt said it in a different way. He talked about the economics. And the economics in the more captive models are in the products. And so advisors want to make sure that they have that capability to access all products and certainly our platform is very, very mature.
It's also another impediment to entry into this space as you think about it. Secondarily, on the technology front, really what we are doing, Joe talked about this in greater detail, but what we are doing is trying to make sure that we have available to advisers all the technology that they can either internally through API, if that's the way it makes most sense and in an integrated way. The integration really is the key here. They can't they don't have technology stacks themselves. They don't have technologists often within their firms.
They need us to play that role. And it's another one of those areas where advisors quite honestly have changed, because they used to think there was competitive advantage in technology and reporting and those types of things. They've come to recognize that there isn't. They actually ask us to be a little more prescriptive with them in what a stack good stack could look like. And we're more than willing, as I mentioned, with Orion and with Tamarac, 2 portfolio management providers that are very significant in the industry by making sure that our new technologies like Digital Account Open can be accessed through those portals.
And we will continue to accelerate those paces. Buying power, I think, is what you were describing in the larger teams. It's a 3rd party payer model, right? And so we continue to talk with advisors about that. Our value in the market given our suite of custodial services, our consultative services, our open architecture of products, these things are all highly valued.
And so we always have pricing conversations with our clients that run the spectrum across our product offerings, transactional pricing, spread pricing. And so we continue to that dialogue and we have a tremendous amount of customization within our pricing. And so the competition sometimes does put us in competition around price, But capability usually wins in that case and where it's price, we have great scale in being able to match the concepts of these advisors.
Great.
And just a quick follow-up for Terry, kind of high level question, but on the self directed side, you've had nice growth. A lot of your competitors have had nice growth. You have some startups in the industry that are having nice growth. So just trying to get some perspective of how much you would attribute to kind of cyclicality of the business and the markets being at healthy levels and just that's driving engagement versus something that's more secular, whether it be access to advice and access to new services that historically weren't available, pricing or something else that's more of a secular demographics that's driving kind of secular growth in the industry?
Sure. I mean, it's hard to know exactly what's driving that, but there are foundational things that Schwab has always had for the last 45 years. And the first one is trust, Our brand of trust in the marketplace, combined with the very best pricing, is very attractive to self directed. Our platform reliability that Joe talked about earlier is very important. And then the our trading platform has really improved significantly as well as our people.
And self directed clients still want to talk to people. That's the thing. We think that they just want to go it alone, but they want people to be able to bounce ideas off of. They want to ask questions in the channel of their choice. And when you look at what Schwab is able to offer, from very self directed to advice and planning, we are able to offer the full spectrum.
And that's very attractive for clients to go through the various changes in the marketplace.
We also, I think, learned was self directed that a lot of them were truly fee adverse. And they were self directed because they didn't want to really pay an explicit fee. And I think with Schwab Intelligent Portfolios, as one example of people we previously would have called self directed, now sitting in managed offerings because there's no advisory fee.
So this follows a conversation we had just prior to getting up. But you've mentioned, Bernie, that 70 about 75% net new assets comes from existing clients through the adviser space. So first question is whether that mix is similar in retail? And then what are the drivers? Are the drivers that drive existing net new assets, the exact same ones as net new assets to the firm?
As we go into a different market environment, it was more volatile, like who would be more impacted given what drives existing net new assets and what drives net new assets to the firm and how the mix is the same?
Well, I think what you're asking is the driver of net new assets coming from current clients. And we're continuing to see that grow year over year over year. In terms of it exactly as Boerne's mix, no, it's not. But it's continuing to grow year over year. And again, we get that from referrals as well as from our relationships through our branches.
So that's been very positive. Now what was your second question?
The question is, are they the same drivers? Like more driven by the market or volatility? Or is net new assets from organically more negatively impacted by volatility than, say, existing clients? That's what it
Well, no, I mean, if you look at December alone, from a net new asset standpoint, in IS, we had a very, very strong December based on as well as with the volatility. So it's relationship, it's trust, it's access. And it's based on the client wanting to consolidate more assets with the firm.
We had a bit of a conversation earlier, so jump in. And I think if you're asking the difference between assets coming from existing clients versus new clients and how that's different between IS and AS, within IS, I think what we see is about looking at 2018, about quarter were from new clients. Net new assets from new clients represent about a quarter of those total net new assets. And as I shared last year, a lot of that comes from many factors, the market, investor sentiment, the economy and also marketing and the role marketing plays and the brand affinity. For existing clients, I think as Terry said, a lot of those assets come from the quality of the service, quality of the product, the relationship, the referral.
So they are different drivers. They're definitely different drivers.
And I would expect on the adviser front that organic growth of existing clients will grow during more rapidly during volatility as people need more help. And then as you begin to exit that volatility or you get to a point where you can more see what the markets could potentially be looking at, you'll start to see teams and more of the breakaways start to enter into the growth cycle at that point.
I think, Jan, how to
Yes, I got a stack here.
So, my follow-up would be net interest at Schwab is going to make up I think most of us have over 60% of revenue. A few years back, it was only 40%. So I guess the question, how is your the way you attack your job, the strategies you use, has it changed the incentives, given that now where Schwab's making money is much different than it was 3 years ago?
I think the focus on seeing the business through clients' eyes, being an asset gathering machine, doing what's right for clients and then monetizing those assets in a way that makes sense for them is the core strategy. I don't think that's changed based on the mix. Jen wants to jump in.
Okay. I just feel bad we got to stack here. So, Christopher Harris from Wells Fargo. Is growing outside the U. S.
A potential opportunity for either of your businesses? Who wants to go first?
Advisors like to talk about it. In reality, they dabble a bit domestically dealing in some foreign countries on behalf of their clients. But nothing we haven't seen anything sustainable and we still represent the opportunity in this country is still so large that I think they would that's they're comfortable in that space.
We have multiple branches internationally, and we continue to see the growth in net new assets there. But I mean, in terms of all the regulations, I don't see future growth that dominant internationally. Domestically, yes.
With 7% share here, the opportunity is here with opportunistic growth where it makes sense. I think we're out one more or one more in the back and then I think we're out.
Thank you. Terry, this one for you. On derivatives, curious your thoughts on the importance of platform versus price, given Walt's talking about price and pressures on derivatives. Is that something that's an issue or impediment when you speak to clients about growing the derivatives business? And then can you remind us your penetration today on derivatives today relative to before OptionsXpress got fully integrated in 2017?
Sure. So derivatives is a very important market for us. And since we've integrated Options Express, we've seen that grow dramatically and also taking market share. But it's not just Options Xpress, it's the pricing that we've done, the platform reliability that we talked about and the people. And I want to emphasize, it's those 3 Ps that drive the success in our trading function.
We rolled out Schwab Live a couple of years ago, and now we've had over 500,000 individuals tune in to Schwab Live to learn more about trading, but also more about pricing, more about advice and more about Schwab as a whole, which has really increased our trading overall. And the last question is, what are derivatives? So options and futures make up about 25% of our trades, those 2 together. And we have seen growth since Options Express.
Okay.
And then quick one for Bernie, just to reiterate the point someone else made. Every year, you're growing and you're taking market share. So who's actually losing market share because Fidelis says the same thing, so does Ameritrade. Is it that other bucket, which is 1? And then second part of the question is that slide, I think Craig referenced, I gave the buckets of advisers by AUM.
Can you just talk about which of those buckets are growing fastest?
So a couple of things in there. You may have to catch me up on these questions. But the fragmented piece is shrinking. That's down about 10%. So more market share getting picked up from that case.
But you have more you have market growth that's coming in. And I talked about us being involved in 40% of the deals that are new to market. So as the size of the market grows, so does our share in that market. And the third thing I would highlight is, on the smaller adviser side, we have 80% share of wallet of those clients. On the $1,000,000,000 advisor, we have 50% share of wallet on the $1,000,000,000 advisor side.
Now the advisors in the lower segment have doubled in their size. But as you can imagine, that's from an average size in the last 5 years of something like $19,000,000 to $38,000,000 But we've seen internally a doubling of our $1,000,000,000 plus clients to where we have almost $300,000,000,000 plus clients now. And so you can see that there's probably fastest growing as the 1,000,000,000 dollars segment.
$1,000,000,000 segment is growing faster on an asset basis relative to the smaller segments, is that?
Well, just size wise would dictate that, right? And obviously, the preponderance of advisers are always going to be on the entry side of things.
This red light is blinking loud. So I know it's lunchtime, so we're going to go open up to lunch, but we're around for questions. So thank you. Thanks.
We're about ready to get started here. Hope you guys all have a chance to grab some lunch, some of our fine cuisine here at 211 Main Street. I promise I will not be offended if you choose to eat while I'm talking. I promise I will not eat while I'm talking. But I will say it is much more engaging and energizing to see all of you guys here in person.
So thank you for making the effort to be here in person. It's a lot more energizing than staring into the lifeless Polycom on our quarterly calls. So you've heard from my colleagues earlier this morning. You've heard from them about the record breaking momentum that we had in 2018. You heard from them about the strong enviable position that we're in, given our strong competitive position and the secular trends that are shaping our industry and how those are benefiting us.
And you also heard from them about the incredible opportunities we have before us, the opportunities to continue driving strong organic growth and to continue driving greater efficiency across our entire business. So my time today, I'm going to talk about how that record business momentum in 2018, combined with a generally helpful macro environment and the successful execution of our cash strategy, led to record financial results as well. I'll also talk about our perspective on 2019, our outlook on 2019, which I know is something you all are waiting for. There's certainly a lot of moving pieces, but the overall summary is that we see the opportunity for strong both business growth and financial growth without a lot of help from the Fed and without a lot of help from the market and even without a dramatic change in our clients' behavior towards their cash. And 3rd, we'll revisit our longer term financial formula, something we've talked about over the years, something we think is still very much relevant as we enter this new chapter, is one of the reasons we're really excited about the years ahead.
So let's drill into 2018 and talk about what made it such a noteworthy year. So a year ago with this business update, it seems like ages ago, we outlined not 1 but 2 different macro scenarios given the range of expectations around the future path of interest rates and Fed policy. And one of those scenarios contemplated a single rate increase, and the other scenario contemplated 3 rate increases. As we look back on the year, I think it's safe to say that the year on the whole, even though it was up and down, turned out a bit better than that 3 rate hike scenario. The equity markets were clearly the one disappointment on this page, finishing down for the year, thanks to the late in the year sell off that we saw.
We got 4 rate increases rather than 3. Long term rates spent most of the year above the assumptions that we had in this scenario. And the real surprise, if you will, to the upside was trading activity. With the return of volatility, we saw strong growth year over year in our clients' trading activity or DARTs. So given that generally helpful macro backdrop and given our successfully moving over $70,000,000,000 of balances from sweep money funds over to the balance sheet and the record core net new assets of almost $230,000,000,000 that we brought in last year, shouldn't be at all surprising that we outperformed the baseline financial expectations that we've set and in some cases by a wide margin.
With 18% revenue growth year over year, 300 to 500 basis points better than even that 3 rate hike scenario had contemplated. And by keeping the level of spending growth relatively consistent with what we'd anticipated at the beginning of the year, most of that revenue upside flow to the bottom line, allowing us to deliver a higher degree of operating leverage and achieve pretax margins on the upper end of the range that we had shared with all of you. So that's the P and L. Let's talk about the balance sheet. So at that same meeting, we shared our view that we anticipate our balance sheet grow would grow by at least 15% over the course of the year.
As we expected, the $70 plus 1,000,000,000 of sweep transfers out of money funds over the balance sheet would more than offset what we anticipated would be a continued migration of some client cash off the balance sheet as our clients continue the sorting process between their transactional cash and their investment cash. Now for most of the year, we are tracking pretty close to that expectation until, as you guys have talked about, as your questions have indicated, until December, when the equity market weakness late in the year caused a lot of our clients to retreat from the markets and to move more heavily into cash. And that, combined with the typical seasonal inflows that we get into cash in December, caused our balance sheet to grow by $18,000,000,000 from the end of November to the end of December. Now as you'll see in our next week's Smart Report, that surge in client cash has largely reversed itself thus far in January as our clients have been drawn back into the market by the strong start that we've seen to this year. And as this sorting process that we've been seeing over the last several quarters has resumed.
So that growth in assets, combined with the execution of the $1,000,000,000 in buybacks that the board authorized back in October, brought our Tier 1 leverage ratio down to 7.1%. That's a little bit above our operating objective of 6.75% to 7%. But I'll remind you that Tier 1 leverage is based off of average assets. So the December surge in balances was only partially reflected in that ratio. Now we have about $30,000,000,000 remaining, a little under $30,000,000,000 remaining in sweep money funds, and we'd expect to move about half of that over to the balance sheet in the first half of twenty nineteen, with the remainder being ineligible for bank and brokerage sweep and therefore unable to be moved.
So I want to talk a little bit about this sorting process that we've talked about over the previous quarters, previous months. It's certainly been the subject to of questions, a lot of conversation, even some debate. So to take a step back, our clients have historically had 2 buckets of cash, the transactional cash and investment cash. The transactional cash, we sometimes refer to it as the cash awaiting investments, the cash that comes in and out of their account, typically for short periods of time. And the investment cash is the opposite.
It's the cash that they're holding on for a longer period of time. They're saving perhaps earmarking for specific events like college or buying a house or maybe as part of the strategic asset allocation. And historically, what we've seen is the investment cash ends up finding its way into higher yielding products like purchase money funds, CDs, fixed income and so forth. And that transactional, everyday, cash weighting investment ends up being more staying on the balance sheet a bit more, more valuing the liquidity and the convenience of our balance sheet suite products. But during the 9 years or so of ZURP, the 0 interest rate policy, when the yield on all the products was basically pretty close to 0, our clients essentially commingled those 2 buckets of cash and kept vast majority of it on the balance sheet.
There's no reason for them to necessarily separate it. And then what we've seen over the last 2 or 3 years is our clients going through a sorting process where they are resorting that transactional cash versus the investment cash and moving some of that investment cash off the balance sheet into these other products. So I want to emphasize, we view this as a very good thing. Money is staying at Schwab. We actually encourage our clients to go through this process.
This may not be this may have an adverse impact to us financially in the near term, but it's the right thing for clients. And if it's the right thing for clients, if the client is going to be a more engaged client, a client that's more likely to meet their needs, meet their goals, achieve their goals, that's a client we're going to keep for their lifetime. We're much more likely to keep them for their lifetime. And so we do a lot to encourage our clients to help make sure they are making smart decisions with regards to their cash, both proactively and reactively. Now over the last year, you've seen when we've reported to you the amount of money that we've transferred from Sweet Money Funds over to the balance sheet.
And you've seen in our disclosures the net impact of that activity and all the sorting process on the growth of the balance sheet as well. What you haven't been able to see is the look under the hood. What are the dynamics between the clients who are being transferred versus those who are not being transferred and what's happening under the hood? We've got a lot of questions about this. We've said it's hard to parse that out.
And it's true. It is hard to parse that out. We know this is a topic of a lot of conversation, and so we engaged some of our very smart PhD folks. And their analysis, combined with the PowerPoint wizardry of our Investor Relations team, we present to you that last year, we had a waterfall chart on taxes. This year, we got a waterfall chart on cash.
So there's a lot going on on this page, and I want to walk through it slowly to make sure I capture it all. And don't worry, this will be in the materials that we hand out, so you don't need to pull out your iPhone and try to take a picture of this or anything like that. So there's 2 charts here. On the left, you can see the dynamics for and the flows for Suite Money Funds. And on the right, you can see the same thing for Bank Suite.
So three points I'd make here. So first is about a year ago, we said we have about $120,000,000,000 left in sweep money funds. We expect to move the vast majority of that over to the balance sheet over time. And of what we moved, we expect that roughly $60,000,000,000 to $80,000,000,000 would stick on the balance sheet with the remainder being more yield sensitive, more of that investment cash and to find its way into other products. Now you can since we've been doing that, you can see we're actually not going to end up moving the $420,000,000,000 In other words, if you add up the actual flows, the actual the money movement that we're actually doing that we're reporting on a regular basis, it's not going to add up to $120,000,000,000 And the reason for that is because some of the money is moving actually ahead of the actual transfer.
In fact, in many cases, having ahead of the communication about the transfer. In other words, clients are going through the sorting process between this transactional cash and the investment cash even if they're in Suite Money Funds. This is not something that's just unique to clients in Bank Suite or using a balance sheet product. The same sorting process is having with clients who are in Suite Money Funds. And so you can see some of that money is moving ahead of time.
And so with $72,000,000,000 having moved, and we said about half of this one that probably end up moving, you can see that overall number that we move will be less than $120,000,000,000 But the second point I would make is we still think that $60,000,000,000 $80,000,000,000 net figure is a good number. And the reason for that, you can see on the right here, is because of what we moved to that $72,000,000,000 a lot of it is sticking. So we moved $72,000,000,000 they brought in 3, they took out 8, so what is that, that $67,000,000,000 So $67,000,000 of the $72,000,000,000 is still on the balance sheet as of twelvethirty one. And with a little bit more to move in the first half of this year, that number will go a little north. Even there's a little bit more sorting, we're still within that $60,000,000,000 to $80,000,000,000 range.
Now it's the cash that ends up moving because some of the most yield sensitive cash moves ahead of the transfer, the cash that ends up moving ends up being a little less yield sensitive, a little bit more sticky. The third point I'd make on this chart is the vast majority of the migration activity that's happening is not happening from clients who are being part of the sweep transfer process. It's happening from the clients who are not impacted by the transfer process. And that's this $94,000,000,000 here. These are the clients who are in Bank Sweep or in Schwab 1, totally unaffected by the money fund transfers, making these migration decisions, making these sorting decisions.
And there are activities that basically almost exactly offset the new cash that we brought into the firm with new and existing households through our net new assets. And to the extent that continues, of course, that will influence our balance sheet growth and influence our financials in 2019. So where does that leave us in terms of our cash allocations? So as of the end of twelvethirty one, we're about 12.8% of our total client assets in cash. We've talked historically about 12% being a reasonable equilibrium, although there's a lot of bouncing around above and below that 12% level.
And you can see that about 70% of that cash is in these suite vehicles. And if you look historically, pre financial crisis, saw that was the range was probably a little bit below 2 thirds. So it wouldn't surprise us over the next year or so to see both those numbers trend down if we have an environment that is higher equity markets, low volatility, stable or higher interest rates. Now of course, as the reverse is true, we can see both those numbers go up, as we saw in the month of December. When volatility returned, our clients moved into cash.
So we can certainly if volatility returns and the equity markets soften, if interest rates go down, can certainly see a reversal of this and we can see both of those 1 or both of those numbers trend up again. So that's a lot about cash. I'm sure there'll be some more questions in the Q and A, and I'll be happy to take those. But I want to shift our attention and talk about 2019. Our success in 2018 paves the way what we think will be a very strong 2019 as well.
There are a lot of uncertainties. There are a lot of dependencies. We have the usual dependencies that we have every year around interest rates, Fed policy, the equity markets, volatility and trading activity. But in addition to that, we have this additional sensitivity, additional dependency, if you will, on how long this sorting process will continue. Now we can't necessarily control the macro environment.
What we can control is our approach to spending and our planning around expenses. And what we're contemplating right now is approach to spending that growing our expenses year over year by between 6% 7%, down from the levels that we've seen over the last several years, still above our what we think is the long term growth rate and the kind of the low to mid single digit level. And a big portion of that incremental spending going towards these efficiency initiatives that my colleagues talked about, not just the things that Joe talked about. He wanted to make sure he wanted to do it was only 25% of the project portfolio, but there's efficiency initiatives outside of those 3 big projects that we talked about as well. It's a big area of focus for us.
It's a big area of focus for us because we see it as a really important way for us to continue to drive down that expense on client assets that a couple of folks have already talked about. At EOKA, we see that as a really important competitive advantage for us. And part of the way you drive down EOKA is operating with discipline, prioritizing ruthlessly. And the part of the way you drive down EOKA part of the way you drive down EOKA, of course, is growing. And the part of the way you drive down EOKA is making smart investments that drive greater efficiency over time.
The important thing about these efficiency initiatives that I one of the reasons makes me so excited about them is this isn't driving efficiency on the backs of clients. This is driving efficiency in a way that's actually good for clients. So I think that's really the opportunity here. And doing making those investments allows us not only drive that EOCA down but also allows us to limit that expense growth over time into that low to mid single digit level. So now the page you've all been waiting for.
The financial outlook for 2019. So I know this page looks a little different than what you for those of you who come to this webcast or this meeting for a number of years, this page looks a little different than what we've shown before. There's a few more boxes on the page than what you're used to seeing. And that's intentional. That's because we're taking a little bit of different approach to sharing our outlook and our views on 2019 than we have in the past.
So unlike in the past, when we've talked about a single scenario or last year, we talked about 2 scenarios, we're talking about in terms of a range of outcomes. Let me share with you what I mean by that. So there's a handful of assumptions that are consistent across these range of outcomes. So first is the equity market assumption. We're assuming basically the same 6.5%, but screwed up for the strong start that we had in the first half of January.
So it works out to about 11% growth for the full year. 2nd is Fed policy. We're assuming a single Fed increase in this outlook in the middle part of the year, which is about the midpoint between what market expectations are right now and the dot plots would suggest. We're not trying to make a call on interest rates here, but just trying to pick that midpoint. 3rd is long term rates, a little bit above where they are today, but of course, they've been bouncing around a fair amount.
And then finally is trading activity, which in this outlook and this view is we're assuming they're up basically consistent, maybe a little bit lower than the growth in total accounts. So that's the part that's consistent. The part that varies is how long this sorting process continues. So in the situation where the sorting process essentially continues through 2019, we can see our balance sheet contract from the high watermark that we saw at twelvethirty one last year, to go down by 8% or 9% potentially. And if that sorting process stops at the end of the Q1, as I mentioned, we've seen it continuing into January, stopping in the Q1, our balance sheet might grow by 3% or 4% over the course of the year.
So think of those as kind of the bookends in terms of those that set of assumptions for 2019. And given where we fall within those bookends, we'd expect that revenue growth would be somewhere in the 7% to 11% range year over year. Now our thinking is to hold our level of spending relatively consistent regardless of where we fall within that range of revenue. Meaning, if we're on the lower end of the revenue, our margins might be similar to what they were last year. If we're on the upper end of that range, we could see our margins expand versus where they were last year.
So that's kind of the base set of assumptions and the base outlook. I know each of you have your own assumptions around what's going to happen in the environment. And so we want to share also the sensitivities. And the biggest sensitivity continues to be the sensitivity around Fed policy. So 25 basis point increase or decrease in the Fed funds rate equates to about $200,000,000 to $300,000,000 a year in revenue, with that difference being whether the yield curve shifts in parallel or whether it's entirely on the short end that we see that.
A 10 basis point change in the long end of the curve is about $25,000,000 Again, this is in the 1st year after that move. So of course, the fixed rate portfolio re prices over time and that tends to build over time. Bank sweep balances, that's clearly from the previous slide. You can see the sensitivity there, dollars 20,000,000 And you can see the assumptions for S and P 500, DARTs and deposit betas. And what's interesting about this is we've talked about how we're we have this kind of offensive and defensive positioning here.
You can see that between the interplay between bank sweep balances and the S and P 500. If we're in a scenario where an environment where the S and P 500 drops, let's say, 10% to $150,000,000 all you need is $7,500,000,000 increase in bank sweep balances, and that offsets the impact of that. So that's what we mean. We say we have this internal hedge within our business that cushions some of that those potential variables, if you will. So that's the operating financials.
Let's talk about the capital portion of the equation, if you will. And Walt talked a lot about this. But we see the opportunity in the years ahead and the decade ahead to both grow top line revenue as well as deliver meaningful capital return. We got started on this in the Q4 with a $1,000,000,000 buyback that we executed that retired over 20,000,000 shares. And we last yes, last week, the Board authorized a $0.04 increase in our dividend, which brings our dividend payout ratio more in the middle of that 20% to 30% payout range that we target.
In previous years, we've been on the lower end of that range. And now we're as we enter this new chapter, we're more in the middle part of that range. And we also got authorization, as you saw, for a new $4,000,000,000 buyback. Now I know the question that I'm sure I'm going to get is how long will it take you to execute on that buyback. And the short answer is, of course, it depends.
It depends on the pace of capital formation, but also depends on the pace, of course, of what happens with the balance sheet. In the environment where if the balance sheet contracts by 8% or 9%, that frees up a lot of capital for buybacks. If the balance sheet is growing over the course of the next year, then obviously absorbs more capital and would slow the pace of buybacks. In addition to the usual consideration around, as Walt mentioned, the timing of those buybacks and making sure we're being thoughtful about that as well. We manage Tier 1 leverage ratio down to that 6.75% to 7% range.
So that's those are all the considerations that we think about as we think about the pace of executing on these buybacks. So I want to pull up for a minute and we've been talking about 2019. I want to pull up for a minute and talk a little bit longer term and talk about really the next several years, the next decade, if you will, and revisit. We talked in the past about our financial formula. And a couple of weeks ago, my daughter was to help my daughter with trigonometry homework.
If you ever want to be humbled or maybe even humiliated, try to help your daughter, your 14 year old daughter with what their trig homework, it's a very humbling experience. And thank goodness for Google. But our financial formula is both more complex than some of those trigonometry formulas and more simple. It's more complex because there's a lot that goes into it. There's a lot of day to day activities, day to day actions that go into executing on the strategy that makes this all possible.
But it's more simple in that if we do that, if we execute on our strategy, the actual formula is pretty straightforward. And it starts at the upper left with this focus on this through client size strategy delivering consistent 5% to 7% organic growth that we've been able to achieve over the last 10%, 11% or more years. Combine that 5% to 7% organic growth with, generally speaking, average market appreciation 6.5%, and that should produce growth in total client assets of a high single digit, low double digit level. Now through our business model, it combines banking, brokerage and asset management. We're able to offset revenue pressures in one part of our business, for example, in the area of equity commissions or ETF pricing, with incremental monetization opportunities elsewhere.
For example, the advice opportunity in our retail business, a huge, huge opportunity. And therefore convert that business growth, that high single digit, low double digit asset growth into an equivalent amount of revenue growth. By keeping expenses, keeping limiting expense growth to be lower than that revenue growth, that gives us the opportunity to grow pretax income at a higher level in the revenue growth, expand margins over time and then with efficient use of capital and returning capital to stockholders, achieving even a higher level of EPS growth, at least in the low double digit level. And we're not saying we can execute on this formula in every year necessarily, but we believe this formula is very much relevant over the course of a cycle. And if you look over the last 9 years, you can see it's played out quite well over the previous 9 years.
Now the point is my point is, I don't want to go ahead into every single number here and so forth. But the point is, we have a number of different ways to get to the same place. This as we look forward, as we look over the next 5 to 10 years, we think this financial formula will continue to be very, very relevant and will continue be something that allows us to invest in the business and allows us to reward our stockholders, our employees and our clients. So let me close with just a couple of thoughts. First, our strategy is working exactly as intended, driving record business momentum, record business results and record financial results.
2nd is, as we look at 2019, it may be that our the sorting process continues for a bit longer. But even if it does and even if we don't get a lot of help from the Fed or a lot of help from the equity markets, we have the capacity to grow our business and our financials at a robust level year over year. And third is, we're incredibly excited about the opportunity before us. My colleagues have all talked about this. We have 7% share of the $45 plus 1,000,000,000,000 wealth management opportunity in the United States, with a leading position in the 2 fastest growing segments, the online channel and the RIA channel.
We've got a really strong competitive position. We're continuing to try to build this mode around our business. And that competitive position both allows us to take share from a wide range of competitors and makes it hard for new competitors, new entrants to enter our business and quickly gain traction. We're benefiting from some of the major secular trends that are shaping our industry, trends towards lower pricing, towards greater transparency, towards more of a fiduciary model of delivering advice, the blending of people and technology. And we have a lot of opportunities to drive greater efficiency around our business, but do so in a way that's actually good for clients, not bad for clients.
So what can you expect from us? I think Walt hit on it in his opening comments, consistency. It's a consistency of executions, doing what honoring what we've following through on our commitments. 1st and foremost, that means continue to see the business through clients' eyes. That also means managing the risk, acting with discipline and balancing that short term and the long term.
That's what's made us successful in the last couple of decades, and that's, I think, what's going to make us successful in the next decade. So with that, I'd be happy to take some questions. Thank you. Yes, my eyes are really bad, so I can't call names.
Devin Ryan, JMP Securities. I guess just a question on the scenarios, appreciate the outlook as you always give. But the I guess 8% to 9% decline in balance sheet, but that scenario, is that essentially just looking at how low cash could go, assuming that everything that you think potentially could be sorted, if you will, is sorted over the course of this year? Because I'm trying to think of it kind of a longer term. I know you're trying to give just 2019, but is that really essentially kind of we should think about that's the low end of the balance sheet based on client assets today, not an exact number, but kind of the framework of that?
And then on the other side of it, it does feel like the balance sheet growth you gave in the kind of the other end of the scenario still seems a little bit low relative to history and behavior. So love to try to get a perspective around outside of the market volatility, is that maybe conservative?
Yes. So I want to say these are a range of possible outcomes, not 2 individual scenarios. But what I would say on that is, so what our assumptions are in that 2019 balance sheet outlook is that as if that sorting process continues at a roughly similar pace to what it went through over the course of the first half of the sorry, the second half of last year. So it continues at that pace. And the other end of the spectrum is the same, if it continues at roughly the same pace into Q1 and then stops and starts climbing again.
We know looking more broadly, what I'd say is we know from history that client cash balances will reach an equilibrium point, and they will grow again with the growth in total client assets and the growth in accounts. And so what we're going through here is this sorting process. We're in a bit of a transition here, and we see this transition taking place through 2019. I think we're talking about probably quarters, not weeks, but also not years to get through this transition process. But from a long term standpoint, when we look here 5 years, 10 years from now, I think we'll see that the growth in client assets, the growth in cash balances and the growth in balance sheet assets will look pretty consistent over time.
Just a quick follow-up on the interest rate piece. I appreciate some of the color there as well. Is there any opportunity to potentially do anything different with duration? I know kind of the curve today maybe is not that attractive. But to the extent we do get some re expansion there, how are you guys thinking about that and maybe the ability to be opportunistic to juice kind of the upside case on interest rates?
Yes. So duration is something that we manage our duration of our overall investment level. It's not something we're looking at extended duration right now, but it's something we may revisit in the future. As we see the profile of what's left on the balance sheet, I think it's quite possible that once all this sorting process goes on and completes, what's left on the balance sheet has a different profile than what's been on the balance sheet for the last 6, 7, 8 years, has a long is more sticky, therefore has a longer duration. And perhaps that gives us the opportunity to extend duration.
And hopefully, we're doing an environment where actually getting rewarded for extending duration, which you're not really today.
Yes. Peter, I was just trying to go back to the balance sheet again. Could you just clarify, is that from the end of period bank earning interest earning assets at $2.88 What number are we starting with?
On that 8% to 9% range. That's from the twelvethirty one balance sheet assets, which was 296, something like that, 296.5.
Okay. And then on the buyback, so you gave us the 2 bookends, like you said, the balance sheet declining and the balance sheet up 2% to 3%. Can you give us the 2 bookends on the buyback given each scenario?
I can't. I can't do that, unfortunately. I wish I could, but I can't because there's so many other pace of capital formation during that period of time. And so it's hard to say. But just know that we want to be effective stewards of our stockholders' capital.
It's not ours, theirs. And so we want to be effective stewards of that. So we are always looking to figure out how do we optimize that capital. And if we are above that 6.75% to 7% level and we feel like it's a good opportunity to be buying the stock, then I think it would be reasonable to expect that we might be doing so.
Craig Siegenthaler, Credit Suisse. Peter, you gave us long term expense guidance. You said it's sort of low to mid single digits, I'm thinking kind of 3% to 5%. But if I think about the revenue side, if you have a flat rate environment and you have 5% to 6% organic growth than normal markets, so client assets are up, let's say, like 11%. What does revenue growth look like in that environment?
Because 2019 obviously isn't perfect.
So that if we go back to that financial formula I talked about here, this essentially assumes a flat rate environment, right? So this is not we're not there's nothing in here that says, oh, NIM has got to expand for this to be true. This is assuming essentially through the cycle. The point of this is, this is a through the cycle formula. So one point of the cycle on rates to another point of cycle similarly on rates.
And if you look over how it performed over the last 9 years, that's basically the NIM in 2009 was pretty close to the NIM in 2018 as well. So it doesn't that doesn't depend on an increase in rates to be to make happen. There's a question over here.
Jeremy Campbell, Barclays. So just one point of clarification on Rich's question. 7% to 8% down is still average earning assets up about 7% or 8% on a year over year basis, correct?
That's what
I'm trying
to let
you know.
I haven't done the math in my head in terms of what that looks like. So this is point to point.
Point to point, yes.
That's what
I'm talking about from Twelvethirty Oneeighteen to Twelvethirty Onenineteen.
Got it. And then finally, in your client sorting, your kind of aggressive client sorting scenario here, I know you're a little bit in uncharted territory because previously sweep was money funds and now it's on deposits. But what does that contemplate as far as a mix? I think you showed that end of year 2018 is like 30% purchase money funds. I guess what's the mix in the aggressive sort scenario here?
Is it fifty-fifty? Is it
Yes, we'll have to see. I mean, it's hard for me to say ahead of time what where that's to end up. I do think that as that process goes forward, you are going to see more money flowing into purchase money funds, CDs, fixed income. I can't say today exactly what the right mix is going to be between or what the where that's going to end up over those 3 different products, only one of which is counted within those cash as a percent of assets. So it's a little hard to say because it really depends on client behavior, relative yields and so forth.
But we do think there'll be some clients going as they have been moving out of the transaction or sorry, out of that transaction cash into that investment cash. But again, I'd emphasize this could all change. Markets down 10% the next 3 months, all bets are off. And this will be it look like a very, very different scenario, very different outcome there versus even within the range that we talked about here.
And just one final one here is, it sounds like the excess capital generation is going to get deployed one way or the other. And then Walt talked about earlier, it may not be a buyback, you can be opportunistic. But is it fair to say that kind of in depending on the deposit growth and how much you need to allocate to fund that, that excess capital will get paid out and it's a form factor thing between either a buyback or some sort of special dividend
policy? Yes. I mean, I'm not sure I want to make that kind of firm commitment and say it absolutely will be paid out. I if you look historically what we've tried to do over time, over frankly, our most of our history of being a public company for the last 30 years, I think you've seen we've been effective stewards of capital and have found ways to return that capital to stockholders through different ways. Doesn't mean we're always in the market always doing that.
There may be opportunities that we have. But I think in general, over time, I think we look to try to return that capital to our stockholders.
Okay. Peter, Brad, I can hear. Yes. Sorry.
Yes. No, the one here and then maybe go to see if Jen's got any questions from the web.
Okay. Just one nitty gritty one and then a broader one. So, the assumptions that you laid out where you have a Fed fund hike in the middle of the year and then, a bit of an increase in 10 year versus the sensitivity that you provide. Those sensitivities are full year, right? So the mid year Fed fund, we'd get half of that, right?
The 10 year expansion, how much of the year do we have there? Is there a way Yes. So
all those sensitivities are sensitivities in the 1st year after the event happens. In other words, for the tenure, if a tenure jumps up by 10 basis points tomorrow, we'd expect to have that amount of revenue incremental revenue over the next 12 months.
Largely.
Okay. And then again, given in that one in particular, of course, that would build over time as more of that of the fixed portfolio re prices.
Sure. Okay. And then CCAR, you guys were included in the NPR. That would what's your updated view on that on the potential to be included in CCAR in 2020, assuming that the NPR goes through as expected? Is a component of additional regulatory spend in order to prep for CCAR inclusion included in the 6% to 7% expense guide?
How should we think about both the capital side and the expense side?
Okay. All right. So there's a bunch of questions in there. Let me see if I can pick them off and hold me get me honest if I forget one. So first, the Fed's NPR on CCAR and the different tiering.
So we've submitted a comment letter on this that's public. I encourage you to take a look at it, which really does, I think, a very good job of sharing our views on the proposal. We think there's some parts about it that are good, and there's some parts about it that can certainly be improved upon. From a timing standpoint, if this goes through and we are subject to CCAR and I think there's some questions around the authority to be able to do that. If it goes through, we're subject to CCAR.
This was finalized late in 2019. If you look historically at firms that have gone into CCAR, they typically have a bit of a ramping in period. And so our current thinking would be that it would probably not be in 2020. It might be in 2021, 2022, some place down the road on that. In terms of the amount of the regulatory related spending, what I say about CCAR is we when we have our conversations with our regulators, they compare us today, and the conversation we have with them, with large institutions of our size, whether they're in CCAR or not.
And so we're held to a lot of the same standards that other large institutions are held to in terms of model risk management and governance and the controls and capital stress testing and so forth. We've been building towards this knowing, recognizing that we're going to be an advanced approach as institution. We're going to be held to higher regulatory standards. And this is part of the spending increases that you've seen over the last several years. The incremental spending there is incremental regulatory risk regulatory spending built into that 6% to 7% assumption.
It's built into our case or our plan, if you will, for 2019 as well. I think I got to cover them all? Good. Okay. Let me go to Jen.
Sure. So Bill Katz from Citigroup has two questions. The first is given client sorting and potential for elevated volatility, how should we think about that range of Tier 1 capital? And then his second question is about NIM guidance.
Okay. So the first question around the range of Tier 1 capital and I ask
The ratio.
And the sorting process, I think maybe the question is around, can we manage it down? What we do if we get an influx of cash and so forth? So because I get this question asked, I get asked the question a lot, which is you're keeping your Tier one leverage ratio, managing down to 7%. And then what happens if you get influx in cash like you did in the month of December? And I would say there's we feel confident about our ability to absorb relatively large unanticipated increases in balances.
And we do it through a couple of different ways. One is by managing that Tier 1 leverage down to that 7% and camping that buffer down to 6.75%. So in other words, that allows us that in of itself allows us to absorb some balance sheet growth. And because Tier 1 leverage, as I mentioned, is based off of average assets, that gives us even a little bit more capacity, if you will. 2nd is typically run our guideline for preferred to total capital is 15% to 20%.
At the end of last year, we're at 13%, preferred to total capital. So that gives us a little capacity on the preferred side as well. And so those are really, I would say, the 2 primary mechanisms that we have to manage that. Now even the 6.75% to 7% is above our internal limit, which is 6% on a consolidated basis, 6.25% at the bank. So we have buffers on top of buffers, really on top of buffers.
So we feel very confident in our ability to absorb balance sheet growth. There's a second part of that. NIM? NIM. NIM question.
Wow, it took yes, it took a while to get to a NIM question. So our expectation for full year NIM so our NIM in the Q4 was 2.39%. Now the floating rate portion of the portfolio only partially reflected the December increase in the Fed funds rate.
And so
we should see more of that flow through into the Q1. On the we built up some liquidity in anticipation of meeting the higher outflow assumptions associated with being an advanced approaches institution and with being able to manage some of these cash flow. So that's on the asset side. And on the liability side, we did increase our rates by about 4 basis points at the end of December concurrently with the Fed increase. And so that will flow through in the Q1 as well.
You put all that together, and our expectation for full year NIM is probably in the mid- to upper-2.40s with that range being based off of whether we get that midyear Fed increase or not.
Hi, Peter. Thanks. Just very quickly in terms of how you all are learning to manage the client sorting and the sweep deposit cash. Can you tell us how you think about management of relative yields versus 3rd party money market funds? Is there a delta there that increases your urgency with the sensitivity there of those deposits to potentially roll off?
Just curious how you're currently thinking about that?
And are you assuming you mean the client what the yield for clients are going to be?
Correct, correct. Versus where they could get in the private market?
Sure. Yes, great question. So we made the move in late 2017 to reduce the pricing on our purchase money funds. And we did that to make our purchase money funds more competitive with other alternatives that are out there in the market. That was a very, very conscious decision, anticipating that we're going to be going through a process like this.
So we want to make sure we have very competitive products for that investment cash. Our purchase money funds are very competitive. Our CD offering is very, very competitive. It's not Schwab CDs. It's a brokered CD offering and it has very competitive yields from a variety of different providers.
So we have
to be very, very competitive on that investment cash. But by virtue of the fact that our clients essentially are self selecting, in other words, they are doing this bifurcation process between the investment cash and the transactional cash, there's not as much sensitivity
on the yields on that transactional cash, in other
words, the balance sheet cash. Other words, the balance sheet cash is there's not a lot of elasticity within a reasonable range of pricing there. So whether it's 40 basis points or 43 basis points, doesn't really matter that much at the end of the day in terms of the balances that we expect. So when we look at that, when we look at pricing our Bank Suite product, we look at our competitors and look at what they're doing. We listen to what our clients are doing.
But it's not we have essentially we have products that have essentially 100% beta to the market. And therefore, the betas on the Bank Sweep and Schwab 1, the balance sheet products, can be a lot lower than that.
So first Peter, on the following up on the buyback. I guess, what other factors besides the balance sheet could materially influence it? Because I'm just thinking, if you have a balance sheet contraction of 8% to 9%, this is the hedge that everybody looks for. You got an offset with the excess capital and you could buy back more.
So I'm
trying to think what would draw into and you have a solid market, so you probably have good trading and good flows. What would be the hesitant to not say
And I don't want you to hear any sort of hesitation. I mean, again, doing $1,000,000,000 of buybacks in the 4th quarter, I was doesn't suggest any sort of hesitation. And we won't be hesitant about buying back our stock if we have the available capital, and we think that it's the right opportunity to do so. I just don't want to say suggest that we're putting it on autopilot necessarily, that the buyback is on autopilot and we're just going to mechanically say anything above 7%, boom, let's move it over and start buying back shares regardless of what else is going on in the environment. So that's what I'm just trying to I'm trying to emphasize that's not the process.
But we do we are we do very much focus on trying to be good stewards of capital. And I think you've seen historically, we've managed close to that line.
And then the other question is, so if your this balance sheet contractancy of 8% to 9%, if we've already seen the uptick from November, December, what makes us feel it from the Q1 on that this rebalancing would continue to go on considering that people had a chance to rebalance with an upmarket, double digit upmarket January through September or October?
So I guess the short answer is, I don't know that I can say I am confident it's going to continue. What we've seen in January is it has continued. That process has continued. But yes, it's expected. It's a function of the environment.
But if the environment changes, the sorting process will likely change as well. I think what we saw in December was the retreat from the market and the pausing in that sorting process was a function of what was happening we think was a function of what's happening in the equity markets, right? So our view is if we don't have another 10%, 15% reduction in the equity markets, then it seems likely, somewhere between possible and likely that this sorting process would continue.
Peter, one more from the web perhaps. We had a couple of questions on this. The latest one came in from Chris Shutler from William Blair. Why can only half of the $30,000,000,000 of remaining sweep money market funds be moved to the bank?
Yes, it's because the remainder is, they're ineligible. And they may be ineligible because of the account type. They may be ineligible because they're in a we're acting as a fiduciary on the account. And therefore, when we're acting as a fiduciary, we can't move it from a money fund over to a balance sheet product. So we are moving most of what we are able to move.
I know we're just about out of time. Let's see if there's maybe time for one more question, yes.
Maybe going back to the
Will Nance Goldman Sachs. Going back to the sorting process that we've been seeing, can you give us any color on whether that sorting process has been more or less prevalent across the institutional and retail channel?
Yes. So what we see across the or the advisor channel and the retail channel is, I'd say, a couple of things. One is retail clients tend to keep a higher portion of their portfolio in cash than advisor clients. Advisors tend to keep sort of high single digit and retail clients keep low- to mid double digit levels. But the actual portion of the cash thus far, the portion of the cash that's in these transaction, in the sort of transaction cash bucket is actually pretty similar across the two channels.
And some of the dynamics that we've seen are, I wouldn't say they're identical, but they are, generally speaking, aligned. And so you see some of the activity being concurrent, I guess, between the two channels. So not huge differences there.
Got it. And then on a different note, the interest rate sensitivity continues to be pretty high. You noted that was one of the biggest sensitivities in the outlook. Any thoughts longer term on just ways to kind of mute some of the rate sensitivity, particularly given how long we've been? And it seems like we've seen the end of rate hikes.
Is there any way to kind of lock in some of the margin today?
Yes, it's hard. And the short answer is it's hard. I mean, if we could get hedge accounting, it would be a bit easier, and it's not clear that there's an easy way necessarily to do that. So I'd say that's just right. But it's something certainly we talk about.
But we don't like the what I'd say is we don't like the we don't like what essentially comes with that. And we like the fact that there we have this a bit of an internal hedge between asset management fees and net interest revenue, and that gives us a little bit of cushioning depending on how we can do in different environments. So I don't want to cut us off. I think we're out of time. Jen's giving me the nod that we're out of time.
So first, I want to thank you all. You guys have been sitting here for a long time. Thank you for those of you who flew in. Thank you those for you who have driven in. We certainly appreciate your interest in the company.
We appreciate you're hearing our story from us. It's a story that, as Walt mentioned, we're entering a new chapter here. But he also talked about this is a new chapter. This is not a new book, meaning I think as we enter this new chapter, consistency will be a theme. There may be a different plot line.
There may be different outcomes and so forth. But the consistency of the management team, the consistency of our focus on our clients, that should still be the same. And I think as we look back on this chapter 10 years hence, I think we'll look back and say this is very rewarding for our clients, for our stockholders, for our employees and really for our company overall. So thank you very much for your time. Really appreciate it.
And we'll talk to you and give you an update in just a couple of months. Cheers.