The Charles Schwab Corporation

Good morning, everyone. Welcome to Schwab's 2018 Spring Business Update.

This is Jennifer Como, Vice President of Investor Relations for Schwab, coming to you from sunny San Francisco. For those of you wondering where Rich Fowler, Head of IR is, don't worry.

He's right here in the studio sitting next to me. Also with me here today are Walt Bettinger, our President and CEO; and Peter Crawford, our CFO.

In our agenda today, we will spend a focused hour sharing our perspectives on Schwab. Walt is going to start us off with a strategic picture, and 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. And 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. [Operator Instructions].

Before we start, let's spend a minute on that ever-important forward-looking statement page, the main point of which is to remind everyone that outcomes can differ from expectations. So 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. And with that, I think we're ready to begin.

Let me hand it over to Walt.

Thanks, Jennifer. And good morning, everyone.

We're grateful that you've joined us on this wonderful spring morning to talk about the first quarter of 2018 here at Charles Schwab. The first quarter was clearly different for our clients than recent quarters.

As opposed to an equity market that seemed to consistently move forward with pretty low volatility as we've had in the last year or so, this quarter, the market see-sawed and volatility returned. Amidst that, though, our clients and prospects engaged with us at record levels.

As reflected in the metrics, we had record net new assets across both of our primary business lines, record trading activity and near-record new accounts. We think it's attributable to our no trade-offs positioning of world-class value, service, transparency and trust that's driving organic growth among both retail investors as well as independent investment advisers.

And we've continued to reinvest in our business, to be in a position to both continue driving growth and ensuring that we're able to provide the type of service and experiences that our clients expect as our growth continues. So let's go ahead and get into the meat of the conversation and some of the details of the quarter.

So as I mentioned, the first quarter was unlike recent quarters. The S&P ranged from almost 2,900 in late January down to below 2,600 in early February.

It recovered a bit, and then it fell again back below 2,600 in late March. And at the same time, as we know, we had some big spikes in volatility, particularly in early February.

Now throughout the quarter, though, our clients were relatively active, both in terms of trading as well as opening new brokerage accounts, I mentioned at a pace we haven't seen early since early 2000. Maybe more importantly from a consistent growth standpoint, March was the 16th consecutive month that we've opened in excess of 100,000 new accounts.

Along with trading and opening of new accounts, clients entrusted us with over $65 billion in core net new assets. This is a record quarter for the firm.

It's also all-time record quarters for both of our primary businesses, our traditional retail, again, as well as our business-serving independent investment advisers. Now as we had planned and previously communicated, we wound down several of our large mutual fund clearing client relationships.

Just as a reminder, these generate very, very low revenue per dollar of assets, particularly relative to the inherent operational risk in processing those trades. The rapid growth, again, in net new assets, was driven by both ongoing market share gains as well as new clients coming to Schwab.

In terms of market share gains, you can see the continuation of outstanding results in our transfer ratio, well over 2:1. And in actual dollar terms, up over 50% relative to the first quarter of last year.

Again, relatively extraordinary market share acquisition going on. This is billions of dollars every quarter, and we're winning these from effectively every segment of competitor: wire houses, banks, mutual fund firms, and I would -- both active and ones that are predominantly passive, independent broker-dealers as well as other online or traditionally online brokerage firms.

As these clients continue to invest with us, they're actually taking advantage of a very broad spectrum of solutions that we make available. We've just chosen a handful here to share with you so you get a feel for the growth rates going on in areas of very significant growth continuing in our proprietary ETF space as well as in our purchase money funds.

And you can see also since the repricing we made in our index mutual funds to make them a bit more competitive, the growth has really started to accelerate there also. So with the strong business momentum, I thought it might be valuable to do a little bit of a deeper dive into a couple of areas of the firm, very important areas that are contributing to the outperformance that you're seeing.

So the first slide here talks a bit about our Advisor business, again, the business where we serve independent registered investment advisers. Rate of market share gains in this space is accelerating relatively rapidly.

We actually exceeded 2.5:1 in the first quarter of this year. That's a 35% increase in actual dollar terms.

Growth was aided by advisers or brokers moving to the independent model. We saw both an increase in the number of teams that moved.

Keep in mind, we tend to report teams rather than individuals, which can create confusion in understanding whether you're actually growing or not in this space. But also, the size of the teams that moved was up quite substantially, up over 60%.

This all contributed to, again, record levels of net new assets. And it followed sort of the historic norm of about an 80-20 mix.

And by that I mean, about 80% of the growth in this business tends to come from our existing adviser relationships, and about 20% comes from advisers who are moving into the independent model from some other form of maybe more traditional brokerage or wirehouse type model. Now let's take a look at digital advisory.

So our efforts in this space continue to be very well received by our clients and prospects. We're now in excess of $30 billion in our digital solutions.

The portfolios that we put together are very well diversified. And particularly for quarters like we had in the first quarter of '18, our 40-plus years of experience with investors ensures that we include asset class slices that aid in the downside protection.

And that's not only particularly important in periods of volatility, but especially when you have new investors, who might be investing in equity markets for the first time, that downside protection is critical so they don't overreact during quarters like we had in the first quarter of 2018. We're also continuing to attract a younger population.

We have almost 1/4 of our users under the age of 40. And you can see in the charts on the right, we're at now up to where over 1/3 of our advisory clients are new to Schwab or making up over 1/3 of our flows, new-to-Schwab users in our digital advice solution.

Now let's take a look at Schwab Private Clients. So of course, this is our premier investment advisory program in our retail side.

We now advise on over $100 billion. It's a nondiscretionary model, which is really an ideal approach for clients who are traditionally self-directed.

It allows them the opportunity to keep a hand, if you will, on the steering wheel and customize their portfolio decisions. And given the information in the middle, you can see how it all ties together that our average Schwab Private Client has been with us for almost 20 years.

So virtual certainty that they were long-standing self-directed investors, which makes the nondiscretionary model very appealing for them. They're also interestingly our highest promoters, with a Net Promoter Score -- or Client Promoter Score, the term that we use, of 76.

So certainly, a world-class number in this metric. We've also redesigned our cash offerings in recent years in response to client demand.

Cash has grown to play both an ever-increasing important role in our clients' investing and the way they do business with us but, of course, also to our firm-wide economics. Our goal is to offer clients a broad array of outstanding cash solutions they can match to the unique needs that they have for different cash buckets, and our research indicates that that's how most individuals think about cash.

They bucket it in their mind, and then if they can ideally match those buckets up to uses, that's what works best. So it starts with sweep cash.

We have outstanding cash management features. We pay competitive yields within the competitive set from dollar 1.

This is intended for cash that will be used in the near term for expenses or possibly to pay for trades. And with recent changes, we now can offer up to $500,000 of FDIC insurance in this sweep cash.

We also offer purchase money funds. They have very low expense rates.

They start at 35 basis points for someone with as little as $1 to invest in the fund. And they can fall down to 19 basis points for clients who have $1 million or more to invest in cash.

So again, for yield-sensitive cash, wonderful purchase money fund options. One other thing we've done, which I think is particularly interesting, is that we simplified our pricing for our purchase money funds, charging the same expense rate for treasury, government or prime money market funds.

And what that achieves for investors is it helps them better understand the differing yields as well as, I suppose, potential volatility in NAVs based on each of those 3 different product sets. So presumably, in most times, prime funds would offer the highest yield, followed by government, and of course, treasury would typically offer the lowest yield.

But the client is able to easily understand those differences by the fact that we've standardized the expense rates. And then we offer a broad array of fixed income and CD access with full online capabilities to buy and sell as well as expert bond [ desk ] capabilities with professionals with fixed income experience.

So if you put all these services together with the incredible value that we offer our clients, in other words, the words we like to use, no trade-offs for investors, and third parties take notice. We were honored for the third year in a row to receive the award from JD Power for highest in investor satisfaction for full-service brokerage firms.

So the first quarter, it was another illustration of our virtuous cycle of work. We were challenging the status quo for investors and advisers that led to outstanding asset flows, followed by record financial results and a commitment to continue to invest while enhancing that no trade-offs offering.

And of course, that starts our cycle all over again. And we think this commitment to the cycle -- virtuous cycle is playing a key role in the growth of our new asset flows.

We plan to continue to emphasize it to drive organic growth and to continue to capture market share from competitors, not just in the short-term but for many years into the future. And we're continuing to make investments.

We're investing prudently for both today and tomorrow. Strong organic growth that occurs by trading off the quality to client experience is fool's gold.

And the investments we've been making in recent years as well as the ones we're making today are -- they're designed to ensure both growth into the future, but also they're designed to ensure that existing clients trust us with the care of their hard-earned dollars. They're designed to ensure that the clients that we serve get the world-class level of service and experience that they've historically received from Schwab, even in the midst of a period in which we're growing organically as rapidly as we are now.

So let me go ahead and wrap up before handing it off to Peter. A quick summary.

Again, it was a volatile quarter for investors, and yet prospects and clients entrusted us with a record level of assets. They were driven to us, in our view, by our unique combination of trust, service quality, value and breadth of offerings -- really the fruits of our no trade-offs approach.

And we plan to continue to invest to both ensure this growth is sustainable as well as accompanied by ongoing superior service and client experience. So that's sort of our view on the first quarter from a strategic standpoint.

And Peter, let me turn it over to you for a bit more details on the finances.

All right. Well, thank you very much, Walt.

And good morning, everyone. So Walt talked about the record business momentum we enjoyed in the first quarter of 2018, just really a continuation of what we saw in 2017.

So in my time today, I'll talk about how that business momentum, that organic growth, combined with a generally helpful market environment, produced outstanding financial results as well. I'll also talk about bulk transfers, something I know is of interest to many of you.

A summary of it, we're full speed ahead and moving the majority of the money remaining in sweep money funds onto our balance sheet with really strong progress in the first quarter and a lot more expected during this year. And finally, I want to reiterate what I said at the winter business update about expenses, which is that our level of spending is likely to be largely consistent throughout the year and under various macro scenarios which means, of course, that if the year turns out better than our baseline scenario, which is looking more likely given how the year has started and expectations for future rate increases, we should see more operating leverage than that baseline scenario.

And I'll talk about our financial results in a moment. But as Walt said, none of our financial results would be possible without the trust our clients place on us, that the business growth that leads to and the nearly unsurpassed scale that follows, which as you've heard us say repeatedly, is a significant competitive advantage.

And the 3 client metrics on this page speak to how well we're performing on all 3 fronts: growth, scale and client trust. Now you've all had a chance to read the earnings release that came out earlier this week.

And for those of you who haven't had the opportunity to speak with our IR team, let me provide a bit of color on the first quarter results. Revenue was up 15%, driven largely by net interest revenue, which was higher due to both higher yields and higher balances.

Asset management fees were up 3% as higher balances overall were offset in part by lower balances in our sweep money funds. I'd also note that despite the commission reductions in the first quarter of 2017, trading revenue was actually up over last year.

On the expense side, spending was up 13% year-over-year. This is a bit above our in-going expectations due to a few factors: the unsecured margin loss related to client trading in fixed products in February; the strong asset gathering, which drives higher incentive compensation; higher third-party expenses in our Schwab funds and our Schwab ETFs due to strong flows there; and the heavy call in trading volumes.

On the right side, you can see that even so, our pretax margin climbed 1.3 points to 41.8%, helping our pretax income, I'd emphasize pretax income rise 19% year-over-year. And with the benefit of tax reform, certainly, our ROE jumped to 18%.

So turning our attention to the balance sheet. We finished the quarter just shy of $250 billion in assets.

We transferred $25 billion of balances from sweep money funds to our balance sheet and that enabled us to pay off $15 billion of FHLB borrowings by the end of the quarter. We also redeemed some debt that was maturing in the quarter and our Tier 1 leverage ratio decreased slightly to 7.5%, but still well above our target range of 6.75% to 7%, leaving room for additional bulk transfers in Q2 and over the course of 2018.

Now reflecting back to the baseline scenario we described just a couple of months ago. Most macro factors certainly helped us.

Interest rates were clearly a positive. And though the equity markets finished the quarter down for the year, as Walt showed earlier, the S&P 500 was actually above our scenario assumptions for most of the quarter.

And while client trading was up much more than that slightly level we assumed in this scenario. So given all that, how are we tracking relative to the financial results we shared under that baseline scenario?

While I want to be careful about comparing financial results for a single quarter with the expectations we set for a full year, it is useful to look at how we're starting out relative to both that baseline scenario as well as the alternative scenario, which assumed 3 rate increases this year. So given the strong client engagement to start the year and the fact that the Fed hiked rates in March earlier than what our baseline scenario had contemplated, as you may recall, we were assuming a June increase in the Fed funds rate, it's not at all surprising that we're tracking ahead of the baseline expectations for revenue growth and operating leverage.

And should the Fed hike 3 times this year, we'd expect our financial results to fall within the range that we communicated for that higher interest rate scenario. Our view on spending remains the same.

As we said at the winter business update, we don't expect to modulate our spending levels based on what happens with the interest rates or the equity markets within reason. Now that being said, it's important to recognize that some of our expenses are tied to our success in gathering assets and/or client engagement, as you saw, for example, in Q1 with the asset gathering and trading activity.

So this will flex a bit based on conditions, meaning that if conditions continue as they have in the first quarter, it's possible to finish the year a little higher on the expense side than those scenarios suggested. I'd also repeat something else we said at the update, which is that we expected our year-over-year comparisons to be higher in the first half of 2018 than the second half given how we increased our spending levels over the course of 2017.

So regarding net interest margin. Our NIM increased 9 basis points from Q4 to Q1 and 25 basis points over the last year.

But note that the Q1 NIM was weighed down a bit by the impact of the FHLB borrowing, which of course is a higher-cost funding source than the sweep deposits which replaced them. And with the Fed moving in March rather than our baseline scenario of June and assuming no further Fed increases, let me say that again, assuming no Fed increases in 2018, our full year NIM should be in the upper end of that 210 to 220 basis point range we communicated previously, and of course, higher than that level if we see further Fed action, which currently looks likely.

And given consistency in our spending level, it means that the incremental benefit from further rate increases should flow largely to the bottom line. Now I know there has been a lot, a lot of talk about deposit betas and a lot written about deposit betas.

So we thought it would be useful to provide some historical perspective on the topic. Our deposit rates thus far have been a bit lower than they were in the last rising rate cycle, which is in 2004, 2006.

Over the course of that last cycle, the beta on bank sweep was about 40% over the course of the entire cycle. Our betas this cycle have clearly been lower than that.

And while we expect them to edge up over time, as we've said previously, we see no indications they will exceed that level overall and they may not even get close to that level for quite a while, if at all. Of course, we'll continue to monitor client activity and competitor pricing, ensuring we're responsive to both.

So to summarize, no change to our view on deposit betas. We've seen more competition for commercial deposits than retail deposits.

And we continue to believe our betas will be low and perhaps, as we said before, a little bit lumpy. So I want to spend a moment on something we don't typically talk about in this quarterly update, which is our CapEx.

You've seen in the last couple of quarters higher levels of CapEx in recent history. And that's largely a function of building out our new facilities in Denver, Austin, and more recently, Westlake, Texas, outside of Dallas.

For 2018, you should expect our CapEx levels to be a little above our target of 3% to 5% of revenue. That's not a new baseline.

It's rather a temporary increase as we do a lot of the foundational work to create and build out these new campuses, which we expect will support our headcount growth for years to come. So on the bulk transfer front, we completed $25 billion of bulk transfers in the first quarter, and we have a further $88 billion in sweep money fund balances remaining, the large majority of which we plan to move.

And of the amount we move, we expect the majority to stay on the balance sheet. And while I can't say with certainty the exact amount we'll do through the rest of 2018, our earlier guidance of at least 15% balance sheet growth is still appropriate.

A function of 3 dynamics: new cash coming into Schwab through the net new assets, that Walt talked about; existing clients making allocation decisions; and of course, bulk transfers. And this growth should get us closer to our 6.75% to 7% Tier 1 leverage ratio objective.

Many of you have asked why we wouldn't do more -- do these bulk transfers faster? And the answer is that we want to be thoughtful about how we do these.

We've shown our ability to do $25 billion in the quarter. But there are some months, April, for example, or December, when we don't necessarily want to do it as much in the way of bulk transfers, when those call volumes tend to be higher.

Getting these bulk transfers done quickly is less important than ensuring our clients are aware of what is happening and are making informed decisions about what to do with their cash. So the end of the bulk transfers is looking a lot sooner than what we might have envisioned even just a year ago, given tax reform and our client's engagement in the market.

We're getting more and more questions about our capital priorities once we're done with the bulk transfers. Now let me emphasize, we're going to continue to be good stewards of our stockholders' capital.

Our dividend should grow consistent with our earnings since we targeted a 20% to 30% payout ratio. To the extent that we build up capital beyond those levels -- beyond our operating objective at 6.75% to 7% level, and that we need to support the growth of our business, you should expect that we'll look to return that to stockholders one way or the other.

Now that's too early to say right now what the exact mechanism or mix will look like, but I'd anticipate us sharing more about this approach as we get closer to that date. M&A, of course, will continue to be something we consider, but rest assured -- let me assure you -- let me reassure you, that we're going to stay true to our highly selective and highly disciplined approach.

So let me close by reiterating the themes I hope you heard today. One is we're experiencing very strong business growth, the product of investments we've made to improve our competitive position and renewed client engagement.

Two, that business growth, combined with a favorable macro environment, is producing record financial results. And three, that's allowed us to make important high-ROI investments that will help us continue to grow in the years ahead.

It's that virtuous cycle that Walt talked about. And with that, let me turn it over to Mr.

Fowler for some Q&A. Thank you.

Thank you, gentlemen. Well done.

Before we plunge in, let's just spend a second on logistics. We will continue to take questions through the webcast console and over the phone, as always.

[Operator Instructions] So with that, operator, can we go to our first call?

Walt, Peter, so I guess the first question is on the bulk transfers. The $87 billion is still -- you said you could -- you think you can bulk sweep the majority of it.

So I guess the retention rates, so the stickiness rates that you first originally assumed, which were, I believe, 50% of the roughly $150 billion off-balance-sheet when we started. So the question is what are the retention rates now, the stickiness rates?

And can you give us any help at all on this $87 billion that's still left to go, what might be swept, say, by year end?

Sure. So we had said, I guess, probably about a year ago that we expected that the net impact of the bulk transfers to be in that $60 billion to $80 billion range.

And again, that was a net impact. And the way that we figure that is at the time, we had roughly $120 billion of balances on our sweep money funds, and we assumed that roughly 1/2 to 2/3 would stick on the balance sheet after we bulk transfer those balances.

So 2 things. One is we've already moved some of those balances, right?

So we moved between last year and this year perhaps 1/4 or a little bit more of that $120 billion. But second is what we're seeing is some of those -- as expected, some of those clients, some of that cash is, which is rate sensitive, which is part of our original assumption, is moving from sweep money funds into the market or into purchase money funds, CDs, fixed income and so forth even ahead of the bulk transfers.

So what I would say is that $68 billion net number overall is still the right number. But we may not end up moving the full $120 billion.

We may move something less than that, and seeing that the stickiness of what we end up moving, ends up actually being higher. So that's how we get to that -- those numbers.

Now in terms of what move this year, Rich, I know it probably is a little bit perhaps frustrating that I can't give you an answer, a definitive answer. And just -- it's because it really depends on what we see in terms of our organic cash balance growth, and that's a function of the net new assets that we bring in, the mix of cash in those net new assets, allocation decisions that our clients make.

What I can say is I think that you should expect that our overall balance sheet will grow -- should grow by 15% or more this year. This is our #1 priority from a capital standpoint.

So we will move forward to the extent that we can as aggressively as we can, again, consistent with that I said earlier, which is making sure that it's a good experience for our clients.

I will stick to the one follow-up. My one follow-up is on the deposit base, I know you talked about, I think, ultimately going to 40%.

But when you raised pay rates in March -- at the beginning of March, beginning of April, we could back into -- and the tiered level, the way you did it between people with less than $1 million in cash and people -- accounts with greater than $1 million, we could back into -- given the public data, how many -- what -- how many people fell into this category of $1 million-plus? And we came up with what appeared to be nonsensical numbers.

So I guess I'm just trying to figure out, of the $177 billion in -- that was the average, I think, sweep deposit in the first quarter, how many fall in that different category? Or do we have all the data that we need to try to do the math here?

Because we did have 1 month of higher rates in the first quarter, and that's what allows us to back into some numbers.

Sure, Rich. So 2 things.

One, I want to just correct on one thing. You said we expected our deposit betas to go up to 40%.

And I want to be really clear. That's not an expectation.

That was a historical frame of reference. [ We've ] seen from assumptions out there that we're well north of that.

And I want to make sure that we put that out there to provide a little bit of a benchmark. Our expectations on deposit betas are they'll continue to be low.

And who knows, they may not ever get up to that 40% level that we saw. They certainly haven't been at that level to date.

They have been tracking below that level thus far this cycle. In terms of your question around the rate and the mix of clients and the different tiers, without getting into the exact balances at every single tier, which of course, that can change from month-to-month, quarter-to-quarter, what I can tell you is certainly, the majority of our balances are in that under $1 million -- those $1 million tiers, probably isn't surprising given the fact that we have a lot of $1 million accounts.

And what I can also say is that the weight average beta on that move is consistent with what we said previously and what we talked about in terms of betas. The weight average beta on the move that we made at the end of March, and as a reminder for folks on the phone, we increased our under $1 million tier 3 basis points to 15 basis points and the $1 million-plus tier 20 basis points up to 50.

The weight average beta on that move -- and that was after the Fed increased in March -- the weight average beta is in the 20s. So just to be really clear, that implies a 5 to 7.5 basis point rate change in response to the 25 basis point Fed increase.

Hopefully that helps you get some less nonsensical numbers in your model there, Rich.

I think it does.

Peter, can you talk about reinvestment rates currently? And given the current curve and the outlook for future hikes, what NIM could look like in a 3-rate kind of hike scenario this year?

So in a 3-rate hike scenario, I think it's reasonable to expect that the NIM will be north of that 210 to 220 basis point range. You'd certainly expect that.

In terms of what we're seeing right now and more of a near-term path on NIM, I'd say a couple of things. So one is with the increase in our LIBOR rates throughout -- as well as longer-term rates, the 10-year treasury throughout the first quarter, our NIM increased month over month in the first quarter.

And so we exited Q1 at a NIM that was a few basis points above that overall Q1 average. Our reinvestment rates right now are [ broadly ] in the 20 basis point-ish range, above our overall portfolio yield as that was longer -- sorry, that was higher.

Long-term rates have more than offset some of the spread compression we're seeing on some of the floating-rate securities that we've seen. So I think it's reasonable to expect that in the near term that our Q1 to Q2 NIM increase will be certainly up, but perhaps up a little bit less than what we saw from Q4 to Q1.

Now I will say that the actual path of NIM in the near term is really dependent on, I would say, 2 or 3 different variables. So one is what happens with LIBOR, both in terms of -- influence, both in terms of the expectations for Fed increase in June and beyond, as well as potential -- what happens to some of the technical factors that have lifted that LIBOR OIS rate or spread.

And so we ought to see how that unfolds. And then second is, to what extent do we access FHLB borrowings in the second quarter?

As we mentioned at the winter business update, we expect that it was possible that we'd use FHLB sporadically throughout 2018 to even out the investing activity and decouple it to a certain extent from the pace of bulk transfers. And so it's possible we may do some of that in the second quarter based on what happens with organic cash balances.

Operator, I'll take one of the webcast questions now before we go to the next call. Folks are curious, gents, if we have any initial take on the SEC discussion and vote on Best Interest rules, et cetera?

It's very early. I think we have some reasonable understanding of the 3 different duties, the duty of disclosure or the duty of the obligation of care and then the obligation to mitigate or disclose conflicts.

I think our initial take is probably consistent with the one, if I roll the clock back and look at the transcripts that I was probably saying 2 or 3 years ago on the DOL proposed rule, which is we do not see any meaningful impact to our business nor did we anticipate market share shifts at a meaningful level as a result. Even down to the title-based issue, I don't -- I would guess that there are very, very few investor clients who could tell you what the title on the business card read of the person that they choose to work with.

So we just simply don't anticipate any measurable impact to us or to market share based on this initial proposal.

All right, thanks, Walt. Okay, let's go to the next call.

Maybe just one here on the announcement you made on the futures offering and kind of some of the expanded elements of the platform and the reduction in pricing, which looks like it can get you into more of a competitive rate there. I'm just curious, obviously, futures being a smaller percentage of your DART, say, relative to some peers, kind of what your expectation is there and kind of what you're hoping to accomplish?

I would just categorize, the pricing move is nothing more than other pricing moves, where we really wanted to try to not have price be a barrier to people choosing Schwab for any of the services that we make available. And our pricing prior to the move was probably was a barrier, so nothing really more than that.

Okay. Okay, that's helpful.

And then maybe just a follow-up here on purchase money fund activity. Obviously, you saw a reasonable amount of buying in the first quarter, and it sounds like that's kind of on budget and not unexpected.

I guess, can you give us any sense of, is that is occurring in your Investor Services or Advisor Services cash or just how to think about that? And then with the expectation that you're still going to be able to transfer out the vast majority of the remaining kind of $88 billion of sweeped money market, I guess, is the expectation that you don't think that we'll see a similar pace of purchase money fund buying or just how do we think about that?

Or what would history tell us?

So the purchase -- the activity in the purchase money funds has really been across the board. We're seeing it in both Investor Services and Advisor Services.

And again, it's consistent with our expectations that some of that cash is rate-sensitive. And as there is now a differential, there's an opportunity to earn yield and purchase money funds or CDs or fixed income that some clients are more rate sensitive and we'll take advantage of that and capitalize on that.

And I would say our expectation is that, that will -- that activity will continue. Now I think it's not clear to us yet and we're certainly looking at history to guide us.

But it's not clear yet how that -- what slope of that curve is and how that moves forward. And to what extent is that influenced by interest rates and to what extent does that tend to subside because the most rate-sensitive cash is already moving into the purchase money funds.

And so perhaps that trails off of that activity. But it is across the board.

I'd also say that we're not seeing a notable difference in that activity among clients who are being bulk transferred versus those who are on balance sheet. And so we think it's consistent with that -- with our view, our expectation that some clients are just going to be a little bit more rate sensitive than others and some cash is a little bit more rate sensitive than other.

Maybe Just a question on the expense outlook and really where you're allocating some of the investments and whether we use the 13 or just kind of the low double digits. If you can just give kind of an update on what's core.

Obviously, the net new asset growth is coming in very strong. So what kind of portion is being allocated in order to continue to drive that?

And probably more importantly, over the longer term, you mentioned like the CapEx and some of the spending that you're doing on some of the different locations. What does that mean over the next, say, 3 to 5 years for maybe the long-term core expense growth rate?

Meaning, is there some investments that are being made today that can reduce some of the areas, whether it's on the locations or on the technology?

Yes, it's certainly a great question. So I'd say a couple of things on this.

So one is we would fully anticipate that as the environment change, that we'll change our spending levels. And we -- this 13% growth that you see in the first quarter is not at all inconsistent with our view, which is a long-term expense growth is in that more mid-single digit level.

Now if we end up in an environment where we're managing expenses down to that level, we have a number of levers at our disposal. First is we pull back on some of the discretionary spending that we've been doing in the last couple of years that we've been able to do given the environment.

Second is there's some volume-related expenses that naturally go down. As I recall, volumes decrease or the markets -- if it's an environment where the market is actually going down, there's certainly third-party expenses that go down in that scenario.

And then third is there's areas where we can actually cut the level of spending. So more project spending, for example -- we've shown the ability to -- or marketing, we've shown the ability in prior cycles to be able to trim that as the environment unfolds.

I'd also expect that we will reap benefits from -- cost benefits from some of the investments we're making right now. So the work on digital.

A lot of the work on digital is removing friction out of the system, eliminating the need for clients to have to call us to do simple tasks, eliminating the need to process some of the paperwork as we process new accounts and change of addresses and things like that. And business process transformation, Joe Martinetto talked about at the winter business update.

And even these investments we're making, CapEx investments we're making in the buildings long term, it's less expensive for us to own a building than to rent it. And so even that is an investment towards greater efficiency.

And so those are all the kinds of investments that we would expect to make and we are making to allow us to operate this company in that more mid-single digit level and continue to drive down that really, really important metric. That expense line client asset is a really important competitive advantage for us.

We're very committed to continue to drive that down over time.

Thanks, Peter. I just want to jump in real quick here and reinforce what Peter said.

Discipline is a hallmark of the way we operate the company today. And discipline goes both ways, right?

I mean, discipline is when your clients are coming to you and prospects are coming to you at extraordinary rates that you're there to serve them. That in the month of March, when we had all-time record net new assets across our business, we answered the phone in an average of under 20 seconds.

That is discipline also, but it does require some spending. Discipline exists throughout the cycle, and you should be very confident that if we move into a different type of environmental cycle that the discipline that you saw from this leadership team in difficult years will be right there and that we'll continue to drive operating leverage through the model in an environment where we don't have the benefit of the level of revenue growth that we have today.

I just can't emphasize enough how important we think of discipline in our company and discipline in different parts of the cycle.

We'll take a webcast question here next. We're getting asked -- we've been asked off and on whether we're seeing impacts in Advisor Services with the -- I guess, we'll call it the sort of stirring or swirl around broker protocol.

So maybe we could spend a second on whether we're seeing impacts.

Yes, yes. So I think when you have a substantial change, as you have going on now with several meaningfully sized firms opting out of protocol, you're going to have to have a new set of rules.

And what's happening is the desire on the part of individuals to move to the independent model has not decelerated. In fact, if anything, I would argue that it's actually accelerated as a result of those decisions.

But they have to figure out what the new rules of engagement are, and those will be figured out. In the meantime, because our pipelines are so strong, you still see record net new assets coming into that business.

But they have to figure out the new rules of engagement, what will be the means by which they will move to independents. But I guess I would say that at the biggest picture level, the idea of captivity has never been a successful one in an effort to try to compel people to voluntarily stay with any individual organization.

And so we think it's a bit misguided, and we do not think that it will have any impact in the long run on the movement toward the independent model.

Thanks, Walt. Okay, let's take the next call.

Walt, maybe a question for you. Just listening to you talk about your strategic focus being on both growth and market share.

I certainly appreciate Peter's commentary around the implications for margins in the short term. How are you thinking about where you are in terms of pricing or margins to sort of affect both the growth and the share opportunity?

Is there any give-off here in terms of long-term margins otherwise just offset some of the top line opportunity?

I think from a pricing standpoint, we feel comfortable with where we are. Again, our view on pricing was not to win or lead with price but rather to simply remove price as a barrier.

If you look at the history of our firm over the first 40 years, we were a premium price provider within our competitive set, within our broadest competitive set. And all we've done now is taken away that barrier.

I would not anticipate that we would proactively move on pricing in the near term. Although I will reinforce again, we are highly committed to not having a price premium relative to any major competitor.

So if any of them were to determine to move, we would move very aggressively and very quickly. So I guess, rolling it all the way through the margin, I don't think I would expect at this point in time moves around pricing on our part that would be a trade-off on margin.

That said, longer term, of course, it's something we'll pay close attention to. One of the powers of operating the firm on 16 basis points of cost on client assets, and as Peter indicated, looking to drive that number down in subsequent years, is the ability for us to apply continual pressure to less efficiently operated or less scalable competitors via the means of price moves.

So it is an important tool in our tool chest. I just don't anticipate the use of it in the short term.

Okay, thank you. And just my follow-up for Peter.

You mentioned that your capital management seems to be maybe on the other side of the sweep opportunity set. So it sounds like this sweep is going to sort of persist through '18 but linger potentially into '19 perhaps.

So I was wondering if you can clarify that. And then if that's the case, should we be thinking about capital management on the other side of the sweep?

Or I should get a little closer to the end? I'm just trying to understand better this time line of potential capital return.

Yes, I would definitely think about capital management on the other side of sweep. Our #1 priority from a capital standpoint is to move forward on the sweep opportunity -- on the bulk transfer opportunity, and so I wouldn't anticipate us taking any capital actions beyond the natural growth of our dividends until we complete the sweep opportunity.

In terms of when that actually is, as I mentioned earlier, hard to say, but I think our baseline scenario would suggest that probably extends a bit into 2019. But it really depends on a number of other factors that I've talked about previously.

Thanks for all the increased color on the bulk transfers and some of the consumer behavior you've noted. Just kind of curious.

When you think about differences in behaviors that you've seen in some of the different channels, whether that be the RIA versus Retail, how has that broken down? And have you seen any demonstrable differences there?

And then when we think about the remaining population and cash balances to come, how does that break down in between RIA versus retail?

So I don't think we've seen measurably different behavior on the money that has been bulk transferred to the bank by clients, whether they are in the retail or the adviser side. I think what Peter alluded to earlier is that just as interest rates have moved up and even yield differences between sweep and purchase funds have become more evident or, say, other options like CD rates and short-term fixed income, you do see more people moving into those purchase type of investments even before we bulk transfer them.

I think that was part of the point that Peter was making. But once bulk transferred, we're seeing behavior entirely consistent with what we'd expected and consistent with what -- and consistent between retail and adviser clients.

Peter, you want to talk about the remaining bulk and where it allocates?

Sure, yes. So in terms of -- let me say a couple of things on the cash allocation.

We certainly spend a lot of time looking at the movement of cash and off the balance sheet and what's happening with the clients and trying to make sure we answer a handful of questions. One, is this leaving Schwab for higher-yielding alternatives elsewhere?

The answer is clearly no. As you can see in our net new assets, we track the flows back and forth within Schwab.

That's certainly not an issue. Is it a function of the rates that we're paying on bank sweep?

That doesn't seem to be the case because we see the same level of migration whether our clients are in our sweep money funds or on the balance sheet. So it doesn't seem to be necessarily a function of that.

They're just -- it's consistent with the view that we've had all along, which is that some clients, with some portion of their cash, are going to look for the highest-yielding alternative regardless. In terms of the exact mix of the remaining bulk transfers, I don't have those numbers off the top of my head right now between AS and IS.

But I would say, our view is that what remains, given the fact that some of what's moved is the most rate-sensitive cash, that what remains will be stickier. And so we'll be consistent again with that $60 billion to $80 billion net number that we talked about a year or so ago.

Again, a reminder of which we've already captured some of that.

Okay, great. I appreciate it, and I appreciate it's difficult to maybe answer that thoroughly.

But next one is actually more of a request. But if Rich decides it's a question, then I'm willing to pay that price.

But just given your commitment to transparency, I just wanted to make a public request for you guys maybe to enhance the balance sheet disclosures in the earnings release. The balance sheet is really important for you as an earnings driver.

So we just request you consider a full average balance sheet disclosure in the earnings release as well as a spot balance sheet disclosure. A lot of other banks do this.

It's a pretty standard practice. And I'd just like to make that request publicly here.

Back on the ever popular topic of deposit beta, just maybe a different way. Can you run some numbers on basically how you ended the quarter on your deposit rates across those investor checking and savings and then sweep account -- tiered sweep accounts?

And that's -- you were getting something like a 25 basis point rate coming into the quarter -- 25 basis points on the actual bank deposits overall versus the 15 that you published in the first quarter. So I just want to see first just to check if that sort of makes sense.

And then back on the adviser question on the deposit. I think it's still over $100 billion of cash in the adviser channel, correct me if I'm wrong on that.

But just to get a sense of how the advisers behave with their client cash. Are they comfortable with getting that lower rate of 15 basis points on the lower accounts?

Or are they really trying to actively seek higher-yielding assets more so than retail?

Yes. Sorry, I'm not sure exactly what numbers you're referring to in terms of the numbers you're looking at for deposit rates.

What I can say is we moved our checking and savings rates up by about 5 basis points again after the Fed increase, so 5 basis points on 25 is a 20% beta there. And we talked about what we did with bank sweep and Schwab One.

So I'll let Walt talk about what reaction we're having from the advisers.

So the work that we're doing in the bulk transfers with advisers is the culmination of several years of conversations with our adviser population, with the Advisory Board of the Advisor Services business. And I think what we've anticipated all along is that advisers on average through the cycle have kept somewhere in the high single digits of cash in their clients' portfolios.

Probably about half of that is investment cash and about half of it is transactional cash. And so we anticipate and they anticipate, and in general, they have comfort with the half that is transactional cash being balance sheet because, again, it is anticipated to be utilized for something.

And I think the metrics are bearing out that that's fairly close to what's actually occurring.

Yes, let me just add 2 other points. So first is what we're doing with the bank with Advisor Services is not new.

We switched the default feature on new accounts and Advisor Services to the bank a couple of years ago. And we have advisers who are actually actively asking us to move all of their accounts over to the bank so they can have a sort of a single solution for all their clients' cash.

There's certainly some who like the higher rates and are using the purchase money funds, but there are also many who like the fact that cash, they don't have to worry about the safety of that cash. They like the fact that it's an FDIC-insured product.

They remember some of what happened in the 2007, 2008 timeframe. And of course, while money funds are in a very different situation today than they were 10 years ago, not having to worry about it, having it being an FDIC product with the full sweep features is helpful.

Now we look historically at advisers. As Walt mentioned, they tend to keep lower levels of cash in the client accounts.

But interestingly, of that smaller portion of cash, they actually keep a higher portion -- historically, they actually keep a higher portion of it on balance sheet than our retail clients did. So I think that makes us all feel very comfortable that this is the right approach.

And again, we're having conversations with them to make sure that they're making informed decisions on behalf of their clients as well.

That's great color, thanks. And then a follow-up question would be E*TRADE announced last night in their earnings that they're going through a review process that will conclude in the third quarter in terms of largely a decision of staying independent or seeking other solutions, which we think would obviously potentially include an acquisition.

So maybe, Walt, just your thoughts in general. Obviously, Schwab has a long heritage as an organic company.

You did some acquisitions very early in the century that I would argue probably didn't play out to your expectations initially. As you think about -- if another large broker like an E*TRADE were to become available and you think about after you get through the bulk transfers and the use of capital in the longer term, would that be something that would be attractive to you?

Or do you really feel that you kind of really want to stick with your organic growth heritage given you've executed so well with that?

Yes, thanks. I think we would look carefully at any opportunity that presented itself in the industry that made sense.

We don't really want to comment on any individual company or any individual speculative opportunity. But we would look very carefully at anything that we thought would drive shareholder value and was strategically aligned.

That's really all I could say about something that -- the specific situation you're referring to.

We're going to take one more and then we're going to wrap. So operator, who's our last caller, please?

First question here, do you plan to add more deposit pricing tiering besides the 2 with future rate hikes?

Craig, it's something we're going to continue to take a look at. We -- our tiering that we did $1 million was in response to what we see among our competitors.

Competitors certainly tier. I think we'll have to wait and see and see how all that unfolds.

I can't really make a commitment one way or the other on that front. But it's something we will take a look at.

Yes, I think competition will drive that issue. But I would just reinforce that if we do incremental tiering, that's not code for moving away from the beta type communication that we've already shared with you.

Got it. And then just as my follow-up, do you anticipate using preferreds potentially late 2018 to maintain a high pace of bulks?

Or actually do you think you can finish the bulk using just organic capital generation?

So right -- as of right now, I wouldn't anticipate us using -- going to the preferred market necessarily to enable the bulks. We want to preserve some of that capacity in case we see our clients move heavily into cash, something like that.

So as of right now I wouldn't anticipate that. But again, it's something we take a look at, but that's our thinking as of right now.

Okay. All right.

Well, with that, I think we want to hand off to Peter to finish this up here and send everyone off on the rest of their day.

All right. Well, thank you, everyone, certainly for your time today and for all of your questions.

And hopefully what came through in our hour here today is that Schwab is a company that is clearly thriving, winning with clients, driving strong business momentum and outstanding financial results and also that this is a company that is not complacent, that is making the investments necessary to drive growth in the years ahead and also supports the growth, the strong organic growth that we're seeing. We look forward to seeing you or talking to you, I guess, I should say at our next business update in July.

And thank you again.