Good morning, everyone. Welcome to Schwab's 2018 Summer Business Update. This is Jennifer Como, Vice President of Investor Relations for Schwab, coming to you from a somewhat foggy San Francisco. Also here with me in the studio today are Walt Bettinger, our President and CEO, Peter Crawford, our CFO, and Rich Fowler, our Head of Investor Relations. In our agenda today, we will spend a focused hour sharing our perspectives on Schwab. Walt's going to start us off with a strategic picture, Peter will take a look at our recent financial performance and current outlook. Rich will then facilitate the Q&A until it's time to wrap up. While we're on the topic of Q&A, let's review the process. As usual, we'll do so via the webcast console as well as the dial-in.
To help us get to as many folks as possible, we very much appreciate you sticking to our guideline, which is one question plus a follow-up. Before we start, let's spend a minute on the ever-important forward-looking statement page, the main point of which is to remind everyone that outcomes can differ from expectations. Please keep an eye on our disclosures. Last, for those of you looking for the slides, we plan to post them on the IR website following the prepared remarks. With that, I think we're ready to begin. Walt?
Thank you, Jen. Good morning, everyone. Before we get underway, as a long-suffering Baltimore Orioles fan, I was just hoping we could have a brief moment of silence in mourning of the trade of Manny Machado to the Los Angeles Dodgers. I am wearing my L.A. Dodgers blue shirt today, which makes me not very popular here in the Bay Area. Welcome, everyone. Thanks for being with us, let's get right underway. Two words summarize the performance of Schwab right now, consistency and discipline. We've been executing for over a decade on a clear, straightforward strategy, very understandable through clients' eyes. We've done so when we faced severe environmental headwinds from 2008 through 2015, of course, in the form of ultra-low interest rates, and we continue to do so today as we operate in a more favorable environment.
During both environments, though, we've continued to invest in clients in our business. Whether it's the half billion dollars we invested in enhancing our client experience during those darkest days of the financial crisis, at a time when actually many of our competitors were laying off staff and pulling in the reins, or the approximate half billion dollars in annualized savings for clients that we invested in lower pricing over the past 18 months. Even the ongoing investments that we're making in information security, risk management, digital services, application modernization, other client capabilities today, we are continuing to make disciplined decisions that balance long-term growth and returns for our shareholders. Our results in the second quarter and the first half of this year are simply a reflection of those efforts to deliver on our unique no trade-offs offering for investors and advisors.
As we sit here today, we think our opportunities and prospects for organic growth have never been brighter. Let's look at some of the specifics from the second quarter and the first half of this year. It was a solid quarter from an economic standpoint, although to many of our client investors, it felt relatively volatile as the equity markets made a number of upward and downward moves, despite through all that what was actually a relatively stable VIX. During the quarter, our clients were relatively active. New accounts were strong, and by June, we had marked the 19th consecutive month opening over 100,000 new accounts. Clients also were active in the trading area. We saw revenue trades up about a third for the first half of the year versus the same period last year, and overall trades up just under 30%.
From a net new asset standpoint, both of our primary businesses, retail investor services, as well as advisor services, had superb results. In fact, for both businesses, it was not only our best June in history for net new assets, it was also our best second quarter in firm history. First half 2018 net new assets substantially higher than the same period last year and actually approached full-year totals if you go back to the years 2013-2016. Although it's not actually reflected in this presentation, our flows into Schwab-managed variable NAV mutual funds and ETFs also experienced strong growth. In the first half of the year, flows were about 12% ahead of the same period last year. For the second quarter, those flows were about 19% ahead of second quarter 2017.
Let's peer a little bit deeper into our two largest business units. We'll start with advisor services, where we serve more than 7,500 independent investment advisors. Our market share gains have continued into this year with net transfers from competitors as measured in actual dollars up another 18%. Continuing a trend from last year, we're winning more teams than in most prior periods, and they are larger when measured in terms of their assets under management. All this combines to achieve record net new asset levels, as I referenced. Net new assets are up another 24% from the same period last year, almost double what they were in the same period just two years ago. Let's move over and look quickly at our retail investor services business, where we're also experiencing record-setting growth.
Here, net new assets are up 46% over the first half of last year. Retail clients are also relying more and more heavily on us for advice. Our fiduciary-level advisory services are growing faster than the overall rate of asset growth for the firm. Another aspect that is very important in discussing our retail business is the demographics of the clients that we're winning. Of course, the demographics play a very important role in terms of our long-term growth. Today, about 20% of our retail clients are under the age of 40. However, in terms of new clients, over half of them are under the age of 40. Maybe just as important, these younger clients are equally affluent as our traditional new client households. These are very important metrics.
They illustrate both the power and success of our no trade-off client offering and brand, and the impact they have across all generations, whether it be silent generations, baby boomers, Gen X, or millennials. As I referenced, importantly, as we succeed in rapidly expanding our millennial client base, they are affluent millennials. Our virtuous cycle, a slide that you've seen many times in the past, continues to be highly effective, challenging the status quo on behalf of investors, leading to superior organic growth, resulting record financial results, and then a portion of which we reinvest to further benefit investors and, of course, start the cycle all over again. We continue to execute with consistency around our guiding principles, the principles that drive all of our decisions at Schwab. Trust is everything earned over time, lost in an instant.
Price matters more than ever, and in our industry, more than most. Clients deserve efficient experiences every time. Every prospective or existing client is critical to our future growth, no matter how large or small. Last but not least, of course, actions matter more than words. Clients, press, influencers, and employees will give credit to what we do versus what we say. Principles that guide us on a daily basis in leading and developing and growing the company. We put these actions into place every day, our virtuous cycle and our guiding principles, as we execute with diligence and discipline. Even as we generate the strong financial results that you see and that Peter will talk about momentarily, we continue making important investments for long-term growth in 2018 and beyond.
These are all designed to further our position as the only investment firm able to offer investors and advisors the no trade-offs proposition. Of course, we apply the same level of diligence to our hiring. What we share with you here is a summary of our hires within the past year. You can see that over 75% of them are either in client-facing roles or roles developing technology to improve and enhance the client experience and lower our operating costs, all being done while building the scale we need to continue driving down our industry-leading cost structure. Of course, when you add it all together, the results speak for themselves. Rapid organic asset growth, along with lower operating costs than any publicly traded competitor. Along with these, we have abundant growth opportunities. We still only have about 7% share in the U.S. wealth market.
We think we're just scratching the surface of what Schwab can become, and maybe even more importantly, just scratching the surface on how many investors and advisors that we can help achieve better outcomes by experiencing our no trade-off capabilities that combine incredible value, service, transparency, and trust. Let me go ahead and wrap up here before I turn it over to Peter. It's about consistency. It's about discipline. Every day, every week, every quarter, results are simply a reflection of these efforts to deliver on that unique no trade-off offering for investors and advisors. The metrics prove it, the financial results prove it, and I think our transparency proves it also. Peter, let me turn it over to you to go into some of the details of our financial performance.
All right. Well, thank you, Walt, and good morning, everyone. Walt talked about how our through clients' eyes strategy, our no trade-offs approach, has really resonated with clients, leading to strong business momentum and a lot of opportunity in front of us. In my time today, I'll talk about how that record business momentum in the second quarter, combined with a generally helpful macro environment, led to record financial results as well. I'll also talk about the progress we've made in executing on our cash strategy and growing our balance sheet, which as you've no doubt seen, now exceeds $250 billion. Finally, I'll share our updated thoughts on what we're anticipating during the rest of 2018.
The headline is that we're continuing with our plans to keep our spending levels relatively flat, which means that if the market environment continues to track better than even the three-hike scenario we described earlier this year, our financial performance could exceed the expectations we communicated back in February. In our winter business update, we actually communicated two different financial scenarios given the range of possible interest rate paths. As Walt said, 2018 has definitely been an up-and-down year thus far for investors. We're tracking a lot closer to the three-hike scenario than our baseline one-hike scenario. With the equity market a bit behind our scenario long-term rates a bit ahead and trading much stronger than we'd anticipated.
While the interest rate environment has generally been helpful, our financial results were also the product of our success in driving strong business growth with record core net new assets, as Walt discussed earlier. Strong growth in advised assets, which I'll remind you include both our advisor services business and our retail advisory assets, and a 19% increase year-over-year in end-of-period interest earning assets. You've all had a chance to read the earnings release we shared on Tuesday. It was a very strong quarter from a financial standpoint. We produced a 17% increase in revenue year-over-year, our 12th consecutive quarterly record. Revenue was propelled by both net interest revenue and trading, which more than offset a decline in asset management and admin fees, which was really mostly due to declines in sweep money fund balances we had transferred over to bank sweep.
Expenses were up 11% year-over-year, a function of hiring we've done to support our growing client base and investments we've made to drive growth in the years ahead that Walt talked about. This is actually a bit below our plan for the quarter, a function of slower than anticipated hiring. We began catching up late in the quarter and would expect that to continue in Q3, consistent with our earlier communication about relatively flat spending throughout the year. With that 17% increase in revenue and 11% increase in expenses, our pre-tax profit increased 24% year-over-year, and our pre-tax profit margin jumped nearly three points from the second quarter of last year. Our ROE hit 19%, the highest level in nearly nine years. Turning our attention to the balance sheet.
Thanks in part to $20 billion in transfers from the sweep money funds over to bank sweep, our balance sheet reached nearly $262 billion at the end of the quarter. We used some FHLB advances during the quarter but had no balances at quarter end. Despite the balance sheet growth, our Tier 1 leverage ratio climbed a tenth of a point due to the strong capital formation arising from our financial performance. As I mentioned, we continue to move balances from sweep money funds to bank sweep. The $20 billion moved in Q2 brings the total year to date to $45 billion. As balances in sweep money funds decline, we're certainly glad to see our clients turning to our purchase money funds for their cash needs.
We still have $58 billion remaining in sweep money funds, and we expect to migrate the majority, or as I said in our last update, the "strong majority" of those balances over to bank sweep in the next 12 months, moving as briskly as possible. Quite importantly, in doing so, we expect to grow our balance sheet by at least 15% from December 31st, 2017, to December 31st, 2018. So far through the first half, we're at about 8% growth, so certainly on our way. We've gotten a lot of questions about our clients' cash balances, which have obviously been relatively flat the last few quarters and actually have come down as a % of total client assets as investors here and elsewhere have engaged in the markets.
I want to emphasize that from our perspective, we see no evidence that client interest rate sensitivity is greater than we expected and somehow creating a longer-term balance sheet growth issue. We want our clients to be engaged investors. We want them to invest. If they're yield sensitive and they're going to keep that cash for a while, we absolutely want them to utilize our higher yielding alternatives, CDs, fixed income, purchase money funds, and so forth. In fact, we do a number of things to make them more aware of those alternatives because we'd much rather have them find those solutions here rather than elsewhere. We've seen this pattern before. There have been a number of times in our history where client cash balances have been flat for several quarters and even a couple of years.
In 2004 through 2006, for example, as the Fed was hiking rates, we saw clients move out of cash. After that period and the other periods when we saw a plateauing, cash balances inevitably resumed their upward trajectory. Though, with the standard disclaimer that past performance is no guarantee of future results, we don't see any evidence thus far to believe that pattern won't repeat itself this time around. As I mentioned earlier, the market environment to start the year has looked a lot more like the three-rate hike scenario we communicated at the year-end business update rather than our baseline scenario, which assumed a single Fed increase. With a strong start of the year, if the Fed follows through in December as the market is anticipating, we now expect our financial performance to be somewhat better than our expectation five months ago.
We can see revenue growth in the mid to high teens as a potential outcome. As 2Q expenses were a bit below our expectations due to the timing of certain adds to staff, as I mentioned earlier, we expect to catch up in the second half of 2018. We still expect the level of spending to be relatively consistent quarter to quarter. This would imply a 400 to 600 basis point spread between revenue growth and expense growth and a pre-tax margin around 45%. Not too dissimilar from the results we had in Q2. Of course, it's still early days, and we'll have to see how the market environment unfolds. We will, of course, update you at the next business update. Let me quickly recap before we get into the eagerly anticipated Q&A portion of the hour.
For those of you who followed the company for a while, the story should look pretty familiar. The results, as remarkable as they are, largely consistent with what you would expect given our strategy and the market environment. By controlling what we can control, our no trade-offs approach to serving clients, the discipline with which we operate, how we have managed and grown our balance sheet, capitalizing on what the market gives us. We put ourselves in position to produce strong operating and financial results to actually outperform the expectations we communicated earlier this year, while investing to continue the momentum we've worked so hard to build. With that, let me turn it back to Rich for some Q&A.
All right. Thank you, gents. Well done. Yes, as Peter said, the moment you've been waiting for has arrived. Welcome to Mr. Fowler's neighborhood. Let's dig into Q&A. I think we all know the drill by now. Star one for questions if you're on the phone, use the webcast console. I'm sure we've got a queue going here for the phone side. Operator, why don't we go ahead and take our first call?
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star and then one. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. To withdraw your request, press star and then two. One moment, please, for the first question. Our first question comes from the line of Craig Siegenthaler. You may now ask your question.
Good morning, Walt, Peter. Despite the risk of not getting too far ahead here, I think it's important to understand what you're planning for on the capital management front for life after bulk transfers. First, when do you think the bulk transfers will likely finish up at this point? When they're completed, how do you think about the right mix of capital deployment for new investments, bank growth, buybacks, and then also dividends?
Sure, Craig. I'm going to have an easier time answering the first question than the second question. The first question on the bulk transfers, we'd expect to complete the bulk transfers over the next 12 months. I think the Q3 pace that we see for bulk transfers will probably be somewhat similar to what you saw in Q1 and Q2, perhaps a bit lighter. I think we're likely to slow down a little bit, even maybe take a pause later in the year, in November and December, just given that's a busy time with the holidays and all that. I would expect that the majority of the remaining bulk transfers we would do are likely to happen in 2018, with the remainder happening in the first half of 2019.
In terms of life after bulk transfers from a capital standpoint, what I would say is a couple of things on that. One is we're going to definitely talk to you more about that at our winter business update in February of 2019, and I can offer you more details on that. Our number 1 priority from a capital standpoint is just continuing to support the organic growth in the business. When you talked about the list of things, growing the bank, growing the balance sheet, that's certainly a top priority.
To the extent that we have capital above and beyond what we need to support the growth of the business, the exact mix between share repurchases, dividends, and so forth, I think is still TBD and something we'll be talking with our board about over the rest of this year and sharing more details with you on in the early part of 2019. I'd point out that our dividend policy is to dividend out 20% to 30% of our earnings. As our earnings increase, the dividends should naturally increase with that. To the extent that we do dividends beyond that level, I think that's something that we still need to have conversations around.
Thank you.
Okay. Let's go next call.
Thank you. The next question comes from the line of Ken Worthington. Your line is now open.
Hi, good morning, and thank you for taking my question. Along the same lines with the bulk transfers approaching their finale, maybe Walt, is there a revenue stream that you think will replace the incremental revenues that have been coming from these bulk transfers to the bank? Maybe said another way, the bank has driven excess growth for much of the last decade for Schwab, but the bank now seems on a longer-term track to grow more in line with the broker. What's really next here for Schwab?
I think what's really driven most of our growth is the fact that we have been winning in the marketplace in large numbers since 2008. Much of that growth was masked from 2008 to 2015 due to ZIRP. Yes, you're getting some lift from transfers to sweep at the bank. At the same time we're doing that, we've made our pricing more competitive overall. What's really driven the growth of the franchise in the last decade, and I think will drive it going forward, is winning in the marketplace. It's winning new clients, it's transfer of assets, it's net new assets. That's the ultimate driver of the firm's growth and will be the long-term driver of our growth going forward as transfers to the bank diminish and eventually largely stop.
Okay, great. Thank you very much.
Okay. Let's keep going with the calls for a couple more maybe. Next caller, please.
Thank you. The next question comes from the line of Devin Ryan. Your line is now open.
Hey, thanks. Good morning, Walt. Good morning, Peter. I guess another one here just on the cash balances, and appreciate some of the detail you gave. Obviously, one component is money could flow back from risk assets, which are obviously seeing a big buying effort right now. When you look at the pace of yield-seeking behavior today and the movement into purchase money funds and other cash alternatives, how would you say this yield-seeking behavior is compared to expectations? Did the movement this quarter seem outsized relative to normal, or why do you think it was elevated? Just any historical perspective you could share around just other rate tightening cycles and maybe a view that the trajectory could slow from this quarter's level.
Devin, let me go quickly and then I'll ask Peter to fill in. I think what we saw in the second quarter was exactly consistent with what we expected. As we have said repeatedly, and mean it, we want clients' yield-sensitive cash to end up in the highest possible yielding cash solution that fits within their risk profile, whether it's purchase money funds, CDs, bonds. We're actually very proactive in reaching out to our clients when we believe that they might have yield-sensitive cash in balance sheet and encourage them into other alternatives. We think that's the right thing for our clients, and obviously, therefore, it's the right thing long-term for our company. What we're seeing is what we expected. It's consistent, and it's the right thing for our clients, which is the way we want to approach every issue that we're faced with. Peter?
Yeah, I don't have a whole lot more to add. I think Walt really said it. It is absolutely consistent. We are seeing that cash move into a range of solutions, purchase money funds, CDs, the fixed income markets, and the equity markets as well. Again, it's very much consistent with the expectations that we've had through this process and the expectations we communicated six months ago and even a year ago.
Okay, that's helpful. Just a quick follow-up here. To the comment on the increased momentum in new accounts under 40 years of age, I guess the question is, what would you attribute that to? Where are they coming from? Are these from discount brokers or wire houses? Are these new younger clients using Schwab the same way as the existing customer base, meaning the same balance of products or the services they say they value the most from Schwab?
Those clients are coming from a broad array of different competitors, very consistent with the rest of our new client acquisition. Folks who are over 40, they come from a mix of online brokers, the traditional wire houses, banks. You can't really pinpoint one specific area they come from. It's very broad. Their behavior actually is very consistent with the behavior of other Schwab clients, everything from cash weightings to usage of advisory solutions, trading. There's not a discernible difference between these clients coming to us under age 40 and our regular base of clients.
Great. Thanks, Walt.
Let's take one more call, and then we'll do webcast after that. Next caller.
Thank you. Next question comes from the line of Rich Repetto. Your line is now open.
Good morning, Walt and Peter. First, I want to say I'm a Boston Red Sox fan. I'm sort of at the opposite end of the spectrum this year, but I've been there before. I feel I know your pain over the years.
Thank you for that, Rich.
Anyway, hopefully it'll change for you. Anyway, my question is first for Peter on the NIM. You experienced a real big increase quarter-to-quarter of 18 basis point increase in NIM this past quarter. In the coming quarter, if we do get a rate hike, can you talk about should it be similar, should it be somewhat mitigated? I know we had some beneficial things happen to the yield curve, et cetera, in 2Q.
Thank you. Thanks, Rich, for that question. With the Fed having hiked in March and June and assuming they follow through as expected in September, our expectation for the full-year NIM would be probably somewhere in the upper 220s plus or minus a couple of basis points. In the next quarter or two, I think we're probably more going to consolidate, if you will, the gains that we've made in the first half of the year with NIM increasing, but not certainly to the same extent that we saw in the first half of the year. There's a couple of factors that go into that that might be worth touching on. First is on the deposit cost. As you probably saw, we raised the rates on our deposit products by between two and seven basis points at the end of the second quarter.
That will flow through into the cost of funds as we head into the third quarter. Second is the rate environment. We are reinvesting at rates above our overall portfolio yield, but the real benefit there is on the fixed-rate assets, which as you know take a little while to work through and show up in the actual overall portfolio yield given the time to reprice on those assets. Then the third dynamic is around HQLA. As we've talked about before, as we are now an advanced approaches institution and will be subject to the higher outflow assumptions as part of the liquidity coverage ratio, which we'll need to meet at the end of the first quarter of next year, we're going to be building some more liquidity into the portfolio. This will be a mix of Ginnies and Treasuries and excess Fed reserves.
Unfortunately, we're doing so at a time when the yield curve is pretty flat and credit spreads are relatively tight. While we still think that overall it's probably about a basis point of NIM impact, the impact to NIM may be a little bit more in the near term as we seek to build up that portfolio, if you will. The real uncertainty, of course, in all this is what happens with LIBOR. LIBOR over the first half of the year has been relatively elevated relative to historical norm to Fed funds. Our assumptions as we say that high 220s is that some of that elevation, some of that lift which is due to technical factors will reduce over the next quarter or 2. We may not see the same lift from a LIBOR standpoint when the Fed increases in September.
You put all that together, that's how we get to high 220 ±12 basis points. Again, some lift from Q2 to Q3 and Q3 to Q4, but not to the same extent as what we saw in the first half of the year.
Understood. Very helpful. I guess my follow-up question would be for Walt. Given the bulk sweeps, the interest rate hikes, net interest income now in the second quarter made up 57% of revenue. It's gone up steadily over the last couple of years, and I guess you could see it even going further the rest of 2018 and into 2019. I guess as a board member, how do you view that percentage? Is it things that you need to do? I know it's more capital intensive at the bank. Is this purely just a client choice that you ride along with, or are there things that you need to do to sort of brace Schwab given the concentration now in NII? Thank you.
Thanks, Rich. Again, I appreciate your empathy with respect to my bulk material. Our view is it starts with this is client choice. Clients are making a determination how they want to pay for various services that they receive in the brokerage world. I don't think that it's vastly different for us than it is for any of the firms that we compete with in that space, that this is how many clients have chosen they want to pay. I think what's incredibly important for us is the way that we generate that net interest revenue. Unlike many other organizations where net interest revenue makes up, say, more than half of their revenue, we strive to ensure that we are not subjecting our investors to degrees of either credit risk or duration risk that many of the other firms do.
I think when you look at our results, including our return on equity continuing to grow, even as net interest income makes up a bigger share of our profits overall, we're achieving that goal. I've heard it said in many ways, there's not a whole lot of difference between revenue generated from a money market fund and revenue generated in the form of net interest income the way we do, so long as we are very careful to not subject investors to undue levels of credit risk or duration risk, and that is our model. I think the board feels very comfortable with that revenue generation, the way we do it, and the fact that we're not asking investors to subject themselves to the kind of risks that I referenced.
Understood. Thank you very much.
Okay, let's pause with the calls for a second and go to the webcast questions. One thing we've been asked about, gentlemen, is any sense of perspectives, reaction, et cetera, with regard to an action recently announced by one of our competitors, Vanguard, in the ETF space, and their essentially no transaction fee offer there. Any reactions from us?
Yes. Well, of course, we originated the idea of ETF trading without transaction fees initially when we introduced Schwab ETFs and then expanded it with ETF OneSource. Our plan is to continue to expand ETF OneSource. It's certainly possible that we'll expand it more rapidly than we may have otherwise. I think there's a certain point with investors, whether you have 1,500 commission-free ETFs or 900 or whatever, there's a certain level in which enough is enough for people to choose from that are commission-free. If I were to project into the future, cognizant of our forward-looking statements at the beginning of each one of these meetings, I'd say we're likely to expand ETF OneSource to a measurable extent.
All right. Thank you, sir. Okay. Why don't we pop back to the call queue, please? Let's take our next call.
Thank you. The next question comes from the line of Daniel Fannon. Your line is now open.
Thanks. Good morning. I guess, Peter, can you discuss what your deposit growth has been ex the bulk transfers to give us a sense of kind of the stickiness of the bulks?
Sure. I think if you go back on the slide that we showed you earlier in the presentation, if you take out the bulk transfer, you can see the ongoing sort of balance sheet growth ex bulk transfers. We are seeing our clients engage in the markets. We are seeing clients moving out of cash into fixed income, purchase money funds, CDs, and the equity markets. There's two dynamics happening. We bring in new cash as part of our net new assets. Our clients make allocation decisions. The sum total of those dynamics are what we see in terms of the growth of the balance sheet that you've seen thus far this year. Again, it's a pattern we've seen before.
We know that can turn relatively quickly if you see a correction in the equity markets, or you see a rapid increase in yields potentially in the fixed income markets where people start to get scared of the fixed income markets. We can see these patterns reverse, but that's what we've seen thus far this year.
Great.
Just real quickly, this is part of the power of our business model in that it autocorrects for different environments. When you have an environment like what we've experienced in the last handful of years, a strong equity market and then higher interest rates over the last three years, what's happening is exactly what we would expect. At the same time, as Peter said, if those reverse, it self-corrects. Clients tend to move more to cash. That lifts our revenue there. What's unfolding is, as Peter said, what we've had in the past, what we expect in the future, and one of the very important, powerful positives of our economic model.
Great. Thank you. Just to follow up, as you get close in 12 months or so with the bulks, is the balance of the money market funds, do you expect to be in purchased product?
We expect that once we're done with the sweep transfers, that the majority of money that's in money funds are actually in purchase money funds. There will be some balances in sweep money funds, accounts that are ineligible for one reason or another to be able to use a banking product. The majority of the money that's in money funds, as you've seen in that presentation, you see the growth of purchase money funds, we expect that will likely continue as clients use those. That's part of the reason we reduced the pricing on those purchase money funds back in the fourth quarter of last year, is to make sure those purchase money funds are very competitively priced relative to products that our clients might be able to use elsewhere.
Great. Thank you.
Okay, let's keep going. Next call.
Thank you. The next question comes from the line of Brian Bedell. Your line is now open.
All right, great. Good afternoon, guys, or good morning. Maybe just to dive into the client behavior on cash. Maybe either Walt or Peter, if you could just walk us through the process of the bulk transfer in terms of if the client gets a notification that they're going to be moved from a money market fund that's probably earning something like 150 basis points into the sweep, which is earning 22 basis points right now. Let's say they're too busy to deal with it, so it moves automatically, it sits there. Is there an outreach to that client to let them know that they're 130 basis points down in their yield? I guess, the other thought is why not maybe even tier the sweeps a little bit more than you have?
You have the $1 million and over, but maybe create, say, an MMDA sweep or something of that variety that would reward people for putting more cash on, but give them a much higher rate.
Sure. I'll take that one. In terms of the process around the sweep money funds and the transfers over to the bank. I get asked this question a lot, why can't you move more quickly on these transfers? One of the real reasons why we don't move more quickly is that we want to make sure we have an opportunity to reach out to as many of these clients as possible through this process. We want to be very transparent about this process, and we want to use it as an opportunity to engage with investors about why they have that cash, what's the intention of that cash. We try to reach out to as many of these clients as we possibly can through this process. We do send them a communication.
That communication is very upfront in terms of what's happening and the relative yield between all the choices that they have, the other choices that they have if they don't want to be on the bank. Very transparent about that. We reach out to them. We use it as an opportunity to engage with them. I was actually just reading yesterday a note from folks in our client-facing organization about how many of these conversations are actually leading to additional opportunities to work with the clients. The clients are certainly very appreciative about it and using it as an opportunity to talk more about their broader financial needs. That happens on the retail side of our business. We have the same conversations with the advisors, the RIAs.
Of course, we don't talk to their end clients, we talk to the RIAs, have a similar conversation with them about the alternatives that we have at Schwab, want to be, again, very transparent with them through this process. Your second question around tiering. As I think you know, we have a tier at the million-dollar level. Tiering is something that we look at when we think about our pricing, we do our pricing, we do look at the competitive context. When we're thinking about tiering, it's a balance between trying to give higher rates to clients who have more cash, at the same time, we also don't want to have an overly complex pricing schedule. One of our trademarks, one of our hallmarks, I should say, is around simplicity.
It really is trying to find that right balance between those two objectives, I guess I would say. We feel good about that million-dollar tier that we have. Again, if the clients have more money and are looking for other alternatives, there are other alternatives out there, again, in the purchase money funds or some of these other solutions that we talked about.
Great. That's good. Thanks so much for the detailed answer. Is there any data on use of CDs, increasing use of CDs within the fixed income bucket that you guys report?
I don't have the exact numbers off the top of my head, but we are definitely seeing a resurgence of interest in CDs. As you may know, we have a Schwab CD OneSource platform. At Schwab, we don't have our own CDs. We broker those CDs through Schwab CD OneSource and allow our clients to get access to third-party CDs that have very competitive rates. There has been, as the CD rates have increased, we are seeing definitely a resurgence of interest in some of those CD products.
Great. Thanks. My follow-up will be just for Walt. Maybe on the industry pricing, maybe just your view. You've talked a lot about how certainly you don't want clients to make a decision to be with Schwab or not based on price. Maybe just your view of how you see trade pricing in the industry going and also ETF pricing and whether you think over the next couple of years you're likely to be more defensive in that notion in terms of keeping clients from moving to a competitor platform or rather be offensive and look at pricing initiatives to actually crank up your NNA like you did with the trade price cut back last year.
I think that trading is largely a commodity. I think there's greater disclosure and transparency coming to trading. For example, we're now providing to our trader clients information on price improvement as part of the confirm. I expect that to go broadly throughout all trades and all clients. I've publicly stated I'd like to see the industry get to a point where any payment for order flow is disclosed in real time to clients as part of every trade that they do. The fact that trading is largely a commodity, most commodity-oriented products and services in our economy, pricing tends to go down over time. I'm not sure I can think of any reason why web equity or option trading would be any different than any other commodity.
With respect to whether we'll be offensive or defensive, I'm going to pass on that because I'd rather not share our thinking in that level of detail with our competitors who we welcome to phone calls like this.
I do. Great. Thanks so much.
All right. Thanks, Brian. Maybe we can spend a little more time on this client cash thing, just evolve that discussion a bit further with the questions we're getting. Maybe take it off into the future. I know we've talked about this in past updates, but I'm going to adjust the question here a little bit and just pose the, have we had any new insights, any new information, any new perspective really on where we think client cash levels might go longer term as we sort of work through rate normalization and things, as Mr. Fowler likes to say, find their level? Is today, in fact, in our minds, artificially low and does it go to somewhere slightly above that proportionately, et cetera, over time?
The short answer is hard to say. I certainly can't predict the future. I think it depends on what happens with the markets and consumer psychology and so forth. What I can say is that in years past, the second half of the year tends to be a period of time when client cash levels historically have grown more than in the first half of the year. The first half of the year, of course, you've got seasonal tax payments, and so we may see something along those lines. We're prepared for this, and we're not, I guess I'd say is we are focused on what we can control and focused on our strategy and executing on our strategy. As you said, Rich, the cash levels will go where they're going to go. Historically, they've averaged around that 12% level of the total portfolio.
Whether that's the level going in the future, I can't really say at this point. We know that, again, if the markets have a correction, that those cash levels will likely build again and create a little bit of that internal hedge that Walt talked about.
All right. Thank you. Let's go back to the calls. Let's see how many more we can get through here before the top of the hour.
Thank you. The next question comes from the line of William Katz. Your line is now open.
Thank you very much for taking the question. I'd like to spend a minute on the asset management business for a moment if we could. Walt, how do you sort of see the interplay between the very strong growth that you're experiencing in AUM versus the yield that you're generating off of those assets that the yield has been trending lower over time. How do you sort of see that as you look out over the next 12 to 24 months?
Hey, Bill, I couldn't quite understand the first part of when you identified. Are you referring to the advisor business or-
I'm just stepping back. I apologize if it's not clear. I'm just stepping back and looking at the asset management business in total. As I think about the AUM business-
No, no, I got it. Thanks, Bill. I didn't understand what you were referring in terms of decline in revenue per dollar. It's mix shift that is going on. Are you referring into the proprietary side or are you referring into asset management overall?
Well, I was looking overall, just the management fees divided by AUM.
You have client-driven mix shift. Because of the way we aggregate and report as clients move more to passive-oriented products, passive ETFs, you're just seeing the natural implications of client preference. Of course, in our model, we want to be there for whatever client preference happens to be, and serve them in that manner. The result of that washing all the way through shows a decline in revenue per dollar of client assets in that particular line.
Okay. Just to follow up, maybe for Peter, just sort of listening to the timeline of the sort of sweep and then sort of the discussion on capital management. If the larger industry opportunity to consolidate on the broker side were to avail itself in the second half of this year, is that something you pass on because you want to get through the sweep and then have the conversation with the board into the new year? Or would that sort of alter that plan a little bit and reallocate the timeline?
I'm sorry I'm laughing a little bit, Bill. Of course, we're going to look at from an M&A standpoint. We look at a lot of deals. If something presents itself, it certainly would be reasonable to expect that we would take a look and that would become something that would I wouldn't say that our sweep transition strategy and executing in the last few months would impact the thinking around that. It would be impacted by a lot of other more significant longer-term factors and considerations.
Okay. Thank you.
Okay. Let's go to the next call.
Thank you. The next question comes from the line of Chris Harris. Your line is now open.
Thanks. My question's on deposit beta. We know your view is really that the betas will be in line with the historical experience assuming rates keep going up, and obviously that's been the case so far, much has changed since the last rate cycle. As you guys have pointed out, investors are more focused on price than they've ever been. They're more focused on investment returns than they've ever been. I guess I'm wondering, why wouldn't that focus apply to the returns that customers are getting on their cash balances?
Yeah, it's a great question, and it's one that we get quite often. Just to recap, our view on deposit betas are that they'll continue to be low and somewhat lumpy. With the last Fed increase, our betas were in the twenties, which is consistent with our expectations. We do think that over time, those betas will edge up as interest rates increase. The reason that we feel confident about our deposit betas and our view on deposit betas is the way that we essentially allow our clients to self-select into the different products. In other words, if our clients are rate sensitive, we have products, money funds, purchase money funds, CDs, and so forth, that essentially have 100% beta to interest rates. If the clients are rate sensitive, they can use those products.
For the clients that are not rate sensitive, their cash is on the balance sheet, we can have essentially a lower deposit beta on that less rate-sensitive cash. All in, if you look at the beta that our clients' cash may have access to, and you mush all that stuff together, maybe it's in the 50s or something like that, I don't know, I haven't done that calculation, or even potentially even higher. We've essentially allowed the clients to self-select. That is the point. You're absolutely right. There is somewhat more transparency out there. Again, we have those products that will cater to those clients that are more yield sensitive, therefore the less yield sensitive cash is what is sitting on our balance sheet.
Peter, that's exactly correct. I just think this is so often missed in this discussion around deposit betas that there's comparisons going on between companies that have virtually all their client deposits on the balance sheet to us. It's simply an erroneous comparison because, as Peter said, everything in a money market fund is running at virtually 100% beta. When you add it all together, the betas are very competitive. It's just that all we're dealing with on the balance sheet because of our aggressive efforts to ensure clients move yield-sensitive cash off the balance sheet, all we're dealing with, for the most part, what's left is yield-insensitive balances.
Got it. Thank you.
I'll just chime in too, just to be fair to poor bank sweep. The rate we pay on bank sweep is by design an attractive rate relative to the alternatives for literally that type of balance. Is that fair to say?
Yeah, if you think about the Schwab brokerage account, it's a brokerage account that offers check writing and certainly all the features that you would get at a competitor's checking account. If you look at the rate that clients are getting in bank sweep, it is significantly better than what competitors are paying on their checking accounts, which still are paying zero, one, two basis points. I think you've seen the largest national banks are actually having higher deposit growth than some of the regional banks, despite that relatively lower pricing on their checking accounts because their clients value some of the other services that they offer. We believe the same thing is true here.
Okay, thanks. Let's move on. Next call.
Thank you. The next question comes from the line of Michael Carrier. You may now ask your question.
All right. Thanks, guys. Maybe the first one, Peter, you got a few questions on if as we get into next year if you get some slowdown in revenue growth or if the asset management fees come under some pressure. I guess I want to just switch it around. It seems like you guys drive down costs fairly well, and you show that over time. It seems like you've been making investments on the infrastructure side, like automation. When we think about if you do see some slowdown in the revenue growth pace, what are you doing on maybe the efficiency or the cost side that could help maybe the expense growth or drive the efficiency improvement over the next few years?
Mike, thanks for the question. That expense on client assets, what we call EOCA, it's not a very great sounding acronym, but expense on client assets, 16 basis points in this last quarter. That is a really important metric. It's a metric that we look at on a regular basis. We see that as a very important competitive advantage for us is the efficiency with which we operate this company, and that does allow us to respond to what's happening in the industry and to make investments. There's a lot that we're doing on an ongoing basis to make sure that we continue to drive that down. Now, part of the way you drive that down, of course, is the A side of the equation. You grow.
You're able to spread the fixed cost over a larger client base, and we've been very successful in doing that over the last several years. Part of the way you make that grow, of course, is making investments that will pay dividends in terms of lower costs. A couple I would point to there are two things we talked about at our Winter Business Update. The application modernization effort, which is this multi-year effort to really modernize our technology, which will create a more scalable technology foundation on which we can grow. The second is the digital transformation that we're doing. We talk a lot about digital in terms of what it's going to do to the client experience, and I think that's really, really important, particularly for attracting the more digitally savvy consumers and investors.
There's a big part of that as well, which is around removing friction in the system. There's a large number of the calls that we get into our phone centers are clients checking a status on a wire transfer or a check that they requested, or clients resetting their password. If we can move, transition those calls online, that's better for the client, but that's also calls that we don't necessarily have to take. We can use that time in other ways or that's the kind of thing that can allow us to drive down that EOCA over time. Something we're very focused on continuing to do.
All right. Just a quick follow-up. Just on the competitive front, it seems like some of the platforms that are newer in the industry, like Robinhood, need more, I don't know, either attention and accounts. On a lot of the industry, if we look at millennials and those that have assets, it does seem like they're using a decent amount of advice. Just wanted to get any perspective that you guys have. When you look at that client segment, do you still see sort of the interactions and the use? Because it does seem like we're seeing that, but just wanted to get your perspective on that.
Yeah. We definitely know that the millennials who come to Schwab are very interested in advice. We know that they like programs like Intelligent Portfolios, both the version that they can do it entirely on their own, as well as the version that they can work with a certified financial planner. I think what's critical about this whole discussion around millennials, though, is you want millennials, you want to add millennial younger investors, no different than in years past at Schwab, where we wanted to add baby boomers, or we wanted to add Gen X, because this is a never-ending conversation. You also want to add those who have money or are likely to have money in the future. When we report things like account metrics, we focus on funded accounts. We're very transparent around our account metrics.
When we report information to you about millennials, we give you information that shows you it's not just any millennial, it's millennials who are more affluent or likely to be more affluent. This is just critical for our long-term growth. I've shared this story many times in the past, but when you look back at a strategy document for Schwab from 30 or 35 years ago, the number 1 challenge facing the firm was how are we ever going to grow if we can't figure out how to win baby boomers? It's just the nature of the beast. You're always pursuing future generations and ensuring that your offering, and we believe our no trade-offs offering, is highly appealing to that next upcoming generation.
All right. Thanks a lot.
All right. Thanks, Mike. We have one more call we're going to squeeze in, and then we'll call it a day. Let's take that last call. Thank you.
Thank you. The last question comes from the line of Michael Cyprys. Your line is now open.
Hi, good morning. Thanks for squeezing in the question. Just coming back to the point on M&A. You've mentioned in the past that it's something that you'd consider. Just curious how you're thinking about M&A here, where it can make sense for Schwab, either as a consolidation or expanding your verticals or new technology capabilities, how you're thinking about that. How would you approach it versus, say, partnerships, say, on the technology side, and what criteria do you have?
I think our view on M&A is consistent with what we've stated in the past, which is we start by looking for things that create value for clients. Does that mean that we are not open-minded to transactions that would be primarily scale and efficiency plays? No, of course, we're going to look very carefully at every opportunity that comes our way. Again, our first criteria is what does this do for clients? Our organic growth rate provides us that flexibility and helps ensure that we think about clients first. With respect to technology partnerships, things of that nature, again, we have many of those in terms of the way we run the company. What is very important, though, is anyone that we partner with has to be developed sufficiently that it's acceptable from a regulatory standpoint.
Not everyone who's involved in technology is appropriate for the level of regulatory scrutiny that an organization our size that works with Federal Reserve is subjected to.
Great. Thank you.
All right. Thanks. Well, at this point, I think we're ready to close. I'm going to turn it to Peter to finish us off here.
All right. Well, thank you, Rich, and thanks to all of you who've dialed in, called in, and tuned in on the webcast. We've had a lot of conversations and talked about a lot of numbers and aspects of what our clients are doing. Hopefully, the story that comes through, the story you take away from this is that this is a company that is absolutely thriving. That has never performed better and never been in a better competitive position. Our priority going forward is to continue to do right by clients and trust that when we do right by clients, they reward us with more of their business, and that's what allows us to grow our revenue. By continuing to be disciplined, we're able to translate that revenue growth into healthy, robust returns for all of our stockholders. That's what we've been doing.
That's what's made us successful, and that's what will continue to make us successful in the years ahead. Hope you guys all have a great summer. We'll look forward to talking with you again in October. Thank you.
Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.