The Charles Schwab Corporation

Richard Fowler Joseph R. Martinetto - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Chelsea de St.

Paer Charles Robert Schwab - Founder, Chairman, Member of Policy Committee, Chairman of Charles Schwab & Co and Chairman of the U S Trust Board Nigel J. Murtagh - Executive Vice President of Corporate Risk Walter W.

Bettinger - Chief Executive Officer, President, Director and Member of Policy Committee Bernard J. Clark - Executive Vice President of Advisor Services John S.

Clendening - Executive Vice President and Co- Leader of Investor Services George Andrew Gill - Executive Vice President and Co-Leader of Investor Services

Michael Carrier - BofA Merrill Lynch, Research Division

All right. Let's get things underway here.

So for folks on the webcast, that means you have about 4 minutes before you have to start paying attention. For you guys in the room, I'm sorry.

You're stuck with me. So good morning.

Welcome. I'm Rich Fowler, Head of Investor Relations for Schwab, and this is the Summer 2013 Business Update for the company.

We've been looking forward to sharing this session with you for a while. We've been working on some fun stuff here, we're going to show you.

We really appreciate you making the time to be here with us today. I know this might be getting a little old.

But I got to say, it is a top-down day today. It's just a classic San Francisco version.

So the city is covered in a gray soup. But the outlying areas, like where I live, in marvelous Marin, the only county in California allowed to have an adjective in its name, it's perfectly clear.

But don't worry, because by the time we reopen the curtains and send you forth at the end of this session to go have oysters at the Ferry Building or watch America's Cup or check out a Giants game later on or headed up to the Wine Country, the sun will be beaming on us here as well. So let's get a few things out of the way.

Let's set the stage for the day. Do some administrative stuff and get me off.

So you can see by this agenda that we're doing things a little differently today. And here's the context.

We're in the middle of the year where, I think it's safe to say, things are generally better than worse. And also I think it's safe to say that the wall of worries, specific to Schwab, has been taken down a number of rows, at least for the time being.

And we thought under those circumstances that we take advantage of that lull in the proceedings, as it were, the relative lull in the proceedings, and spend some time focusing on a couple of areas that are important, but not tied to sort of interest rate bingo that we've been dealing with so much in our recent lives. But don't panic, we are going to talk about rates.

Mr. Martinetto will take care of that for us right upfront though.

And he'll provide an overview not only of our current financial picture and the outlook for the year, but also walk through some sensitivities around how things might look as interest rates move from here forward. We're then planning to have Nigel Murtagh, our Chief Risk Officer, come up and spend some time talking with you about risk management at Schwab, kind of important, right?

Something we want to understand better, but not something that we've been able to spend time on in a group forum like this before. And you see, Walt will come up and talk about the strategic picture before the business heads, John, Andy, Bernie, will share their perspectives on what's going on.

Now with John and Andy in particular, I just wanted to be clear. There's a ton of stuff going on in Investor Services.

You might imagine we've been talking about that for a long time, all across the spectrum of investor need. Today, we've specifically asked them to drill down into a couple of areas.

And you'll hear more about the work we've been doing on our brand. You'll hear more about the work we're doing in serving affluent clients.

Feel free, they'll be very happy to talk about everything else that's going on during the Q&A. But we, obviously, don't change something as enduring and successful as Talk to Chuck on a whim.

And it's clear that our evolution as a full-service firm in executing our strategy is a complex process. And these are, obviously, things that take a little more time.

They're hard to get to if we're going through a stem-to-stern review of the business every time we get together. So we thought, we take this opportunity, spend a little more time on those 2 items.

Please don't view this as a change in focus, change in strategy, any of that stuff. This is very much part and parcel of what we're doing and who we are.

Let's see, all right. So that's our agenda.

Let's go on to our administrative stuff. We have forward-looking statements, of course, the wall of words, same story.

We try to keep you up to date on our thinking as it evolves. Please stay in touch with IR.

Please stay in touch with our disclosures. Let's talk about the rest of the administrative stuff.

For Q&A, we'll do the same drill in here where we have mic runners. For folks in the room, if you'd please wait for the mic so everyone can hear, both here and on the webcast.

Then question and follow-up and then we'll try and work around the room. We'll take questions on the webcast.

Chelsea will compile, organize and pose those for the webcast audience. So be nice to her.

Restrooms are out to my left, past the back doors and down the hallway. Refreshments are in the back.

Please help yourselves whenever. There will be a second break, and we'll setup lunchboxes, so please feel free to have those in the room or take them with you.

Dial-in, in case anything happens. The dial-in is (800) 871-6752, conference ID 13108755.

I think that's it. Hopefully, what will come through today, thematically, is strategic progress that we are well positioned to drive strong profitable growth through financial strength, brand, expanding capabilities, regardless of how the rate environment unfolds from here.

So with that, I'm happily going to get out of the way and ask Professor Martinetto to come up and start us off.

Great. Thank you, Rich.

I'll add my thanks to everybody who is either here in the room or tuning in online. We do realize we're probably a little earlier in the process than we've been in the past, and we're conflicting with a lot of people's earnings announcements.

This is a major commitment of time. We put a lot of effort into it, but we do appreciate you taking your time to pay attention to what we have to say.

As we jump in, it's not inappropriate at this point in the cycle where we're looking at a market that's up almost 20%, and we've seen the long rates move up 80 to 100 basis points to be talking a little bit about the easing of the headwinds. But in that context, I also want to make sure that you understand the various trade-offs of the reality of how all of this is going to fit together within our financial picture.

I'm hoping this doesn't become my Larry David moment why I'm a little too enthusiastic in curbing your enthusiasm, but I want to make sure that we put it in the context of the economic realities that we're facing. So things have definitely improved, but I want to make sure that we're giving you the appropriate trade-offs, and you get the chance to see how it all fits together.

So with that as background, I'll talk about 3 things primarily today. So one is, a quick run through on how did we do in Q2; two is, our expectations for the remainder of the year; and then third, we'll do a bit of a deep dive into the interest rate story and how we might expect to see all of that unwind as we come off of this period of extraordinarily low interest rates.

So let's jump right in and talk about client metrics to start, because without growth in the client metrics, it's hard for us to drive growth in revenues and growth in earnings. And here I think it's fair to say, we've been on a tear.

We had a very large inflow back in Q4 that was related to the changes in tax code. But that has continued on as we've moved our way into the first half of the year.

You can see net new assets on a core basis up over 50% versus same period prior year. So really good results here.

I'd also point out that these results incorporate some pretty large tax outflows in the second quarter. Definitely larger than we've seen in the last couple of years driven by a couple of things.

So one is, to the extent that those inflows in Q4 were driven by tax-motivated strategies, people pulled forward income and had a bigger tax bill that they had to pay in April. They also had bigger quarterlies they're making as they got into June because to get inside of the Safe Harbor, they have to pay a higher income or higher tax level to make sure they're paying that 90%, so they don't end up subject to penalties at the back end.

So we saw outflows that were pretty large in April and June, and we still have net new assets up substantially over prior year. So how does that turn into financial results?

If you exclude the $70 million onetime item in the second quarter of last year because it was clearly a one timer, revenues were up 10% over that same period last year, driven primarily by asset management fees. Now there, you've got some positives and some negatives that run through that line.

The positives, higher market valuations definitely help advise fees and other revenues that are linked to those market valuations. Our continued progress on selling -- on the sale of advisory services.

So you're going to hear a lot more about that over the course of the day. But that's definitely been a contributor to the growth in the asset management fee line here in the second quarter.

Offset a little bit by lower revenues related to money fees -- money fund fees. So again, to the extent that we've seen long rates up, we've also seen short rates down.

The short end of the curve has put a little bit of pressure on the revenues were continuing to earn off of those money fund fees. And that's a bit of an offset to those other positives in the asset management line.

Same kind of dynamic going on in net interest income. So we've seen interest rates move up on the long end of the curve.

That's been helpful. We've seen interest rates move down at the short end of the curve.

That's put a little bit of pressure on. But the bottom line is, when you look at the relative stability of the net interest margin for the past couple of quarters, the pressure from the rate environment is definitely abating.

And we've seen a period of more stability relative to where we've been for the past couple of years. And so the growth in the client franchise that turns into growth in client assets is now starting to show up as growth in revenues on the net interest income side.

And then last, trading. Trading's up 7% over where we were in Q2 of last year.

That's a great. That's definitely helpful.

But I remind everybody, our baseline scenario called for trading to be up 15% to 20%. So when I start talking a little bit more about our expectations for the remainder of the year, we're going to have to keep in mind that trading's up.

That's great. But it's not up as much as we might have hoped as we were laying out our baseline.

Revenues, we're up 10%. Expenses, we're up 9%.

So we did manage to get to a place in the second quarter where we were showing some financial leverage again, growing revenues a little bit faster than expenses, put up an almost 31% pretax profit margin. Income up 11% over second quarter of last year.

So really solid results in the context of the various ins and outs. Moving on to the balance sheet.

We talked about this the last time we were together. We saw really large inflows in Q4.

We expected that the pace of growth of the balance sheet was going to slow as we saw people put some of that money into the market and pay their taxes, both of those things happened. So as we move through Q1 and Q2, the pace of growth of the balance sheet has definitely slowed some.

And along with that, you can see the recovery in the leverage ratio. So we bounced off of the lows of Q1 as we anticipated, and we've got a leverage ratio that's about 6.3% at the end of the second quarter.

So good news, and again, very much in line with how we thought this might all play out. I'll make a couple of other points on the balance sheet.

So one is, we are still sitting at about $1.1 billion of cash at the parent company. So very strong and very solid liquidity.

You might have seen that we raised about $275 million of debt this week. So we issued a 5-year bond with a 2.2% coupon on it.

We had talked back in the fourth quarter when we redeemed the $750 million of senior notes that you might see a follow-on tranche of a smaller size. This was that follow-on tranche.

So we've topped up cash levels at the parent. In addition, we expect to see a little over $200 million contributed to the bank in Q3, in relation to some bulk transfer activity that's occurring there.

So 2 different pieces. We've got $3.5 billion to $4 billion of money moving from the brokerage over to the bank cash, and then we've got another roughly $1 billion related to monies coming out of money funds moving onto the balance sheet, related to clean up of activity tied to our enrollment rules.

So both of those things will be happening in the second quarter. So we'll see the bank grow a little bit, but we should see an offset in the broker for the bulk of that cash.

So the total balance sheet shouldn't be changing very dramatically. Finally, I'd note that you saw capital actually shrink a little bit on a book basis here in the second quarter.

And as a result of the accumulated other comprehensive income related to the mark-to-market on the available-for-sale portfolio, those marks came down some and come out of the book capital. But I'd remind everybody that, that mark dynamic is excluded from the computation of regulatory capital at this point.

So it's a book equity impact, but it is not a regulatory capital impact. I talked a little bit about a commitment to giving you some more on the trade-offs on the expense side, and so this is a way more detailed page than we would normally go into.

But we thought it was important to provide some transparency because of the degree of the puts and takes that we've been experiencing over the course of the first half of the year. So when you look at the revenue side, there's a number of items that have been pretty sizable.

That have been both positives and negatives as they relate to that baseline scenario that we set out. Starting with trading.

I talked about the difference between the 7% growth that we're seeing and the 15% to 20% we're expecting. Over the course of the whole year, our estimate would say, we've got about $100 million shortfall in trading revenue.

So pretty big number there. We're also falling about $70 million short across the whole year on money fund fees.

Now I'll remind you, there is roughly $160 billion rounded of money funds. So this implies that the average gross yield on the funds is 4 basis points or so below our expectations.

So again, trying to tie that out so you can see it in context of what we've seen in terms of changes in the rate environment. This shouldn't be a surprise, but there's a lot of leverage to revenue to changes in those short rates related to the money funds.

Offsetting that is some of the good news. So higher market valuations, along with the continued higher enrollments and advisory offers, have led to about $100 million positive in the other parts of asset management fees.

And then finally, we expect net interest revenue to be about $80 million higher than our baseline scenario, driven by that higher long-term part of the curve, with a little bit of offset from pressures from the short end of the curve. But the movement in the higher rates is more than enough to offset that short run pressure.

So you put it all together, and we're about on track with some pretty sizable puts and takes versus our revenue expectations coming into the year. Same story roughly going on in expenses.

So we've already talked in Q1 about -- we made some changes in vesting provisions for retirement-eligible employees. That added about $10 million that wasn't in our budget.

And we're running about $70 million higher over the whole year on incentive comp for the field. That's driven by 2 things: one is, the higher market valuations is driving up what we call service pay.

So they've got a component of the compensation that's tied to the overall level of assets that they're servicing. Two is, the outsized performance on sales of the advisory products is driving up the sales pay component.

Now those pressures are being offset by actions that we took to take down our expenses by about 2 points. So we had talked, I think, in the last update that we have some adjustments that we needed to make.

I wanted to make sure people had some visibility that we actually did deliver on about an $80 million reduction in our plans, which is a little over 2 points of our expense base. But there's some other things that have crept in that have pushed the expense line back up a little bit.

Smart expense management is not necessarily about religious adherence to a number. We're trying to manage the trade-offs to make sure that we're delivering on results in the near term, as well as leaving flexibility to drive results in the long run.

We could probably offset some of that sales compensation pressure if we wanted to change how much we pay the field. The flip side of that is, we would probably slow the pace of enrollment into advisory offers, which would hurt us on revenue going forward.

So to put that in context, we're running about $500 million ahead of our expectations monthly for enrollments in advisory offers. That's about $6 billion over the course of the year.

The incremental yield on those assets is about 50 basis points. So that's about a $30 million annualized revenue lift that we're getting from those outsized enrollments.

So the payback on all of that is well under 2 years. So we think that's a pretty good payback, and we're happy to bring those assets in, but it does put a little bit of pressure on the reported expense numbers.

You put all of these together, we are still on track to achieve the numbers that we talked about in our original baseline scenario. We're looking at EPS in the mid-$0.70 area, and we're also still on track to be able to deliver the enhanced financial leverage we've been talking about.

You should start to see some of that as we move into the second half of the year. And we still expect to deliver a growth rate differential between revenues and expenses of 300 to 500 basis points as we move on into 2014.

So with that covered, let's start the deeper dive into interest rates. And over the first 6 months of this year, we've seen both near-term highs in the 10-year Treasury and near-term lows in LIBOR rates.

This is a really typical [indiscernible] pattern if you go back and look at the various cycles that we've seen around interest rates over a long period of time. As people start thinking rates are going to go up, they start selling their long-term bonds, the money has got to go somewhere.

It goes into cash. The sale of the bonds drives up the long end of the curve.

The movement into cash drives down the short end of the curve, and the curve starts to steepen a little bit. So it's relatively typical, and I think it's largely good news to the extent that we are benefiting from the higher rates.

It's even better news that it's starting to signal market expectations of ultimately moving out of this really low period of interest rates. Our balance sheet is constructed to be more levered to those short rates.

It's an intentional positioning, we've carried it at all the way through the cycle here, but I'll reiterate some of the ins and outs around the balance sheet. So at the broker-dealer, there's 2 primary blocks of assets.

You got the segregated client cash, which is the excess credits over debits. That money is highly regulated in terms of what we're allowed to buy and also because the broker-dealer is required to use mark-to-market accounting.

We keep it pretty short to make sure that we are not inducing volatility and income from marks from that portfolio. So the average duration on that portfolio is currently around 60 days.

The other big block of assets that sits at the broker is the margin loan book, but that's all floating rate. So virtually, the entire balance sheet, the asset side of the broker-dealer is floating rate.

As you move to the bank, we tend to managerially put the 2 portfolios that we report, the held-to-maturity and the available-for-sale back together. We manage it as one portfolio.

We use those 2 accounting constructs to manage reporting and capital, but we tend to manage it as one pool of money. And you might even want to think about stapling those things together in your model because I think it would probably make it a little easier to manage the volatility around some of the changes in interest rates that you see.

But the average duration on that bank portfolio is still about 2.5 years. So it has moved up a little bit with the increase in interest rates and the slowdown of prepayments.

We've seen a little bit of portfolio extension, but not a lot. And we've been through the details, and our disclosures are pretty good, the majority of the assets are agency mortgage-backed.

We tend to put the majority of the fixed-rate product in the held-to-maturity book, so that we exclude those marks from any balance sheet or capital computations. The assets that are sitting in the available-for-sale book tend to be primarily floating-rate assets.

The fixed-rate assets, just to go a little deeper, they tend to be priced off the 5-year point in the curve. So if you're trying to figure out what our marginal investment rate is, that's a good place to pay attention to.

But the prepayment activity tends to be driven more off the 10-year point in the curve. So the amount of cash flow that we're getting is being driven more by how that longer point on the curve is moving around.

And then into the bank loan portfolio. So it's actually a little bit for fixed than floating as the majority of the first mortgages we have are hybrid ARMs that are still in their fixed period.

But they tend to be, actually, a little bit shorter that the combination of the loan book tends to be a little bit shorter than the duration on the investment book all put together, as the HELOCs are floating rate and the pledged asset lines are floating rate. So when you put it all together about 3/4 of our balance sheet is floating rate or short-dated and about 1/4 of our balance sheet is longer-dated and sensitive to those points out in the curve.

So when you overlay the balance sheet with changes in the interest rate environment, where do you end up? Right now, we would expect our net interest margin to remain around 150 basis points through the end of the year.

The last time we spoke about this, we were looking for a decline down to the mid-140s. So we're seeing a little bit of incremental lift and certainly some stabilization in our expectations for rates for the remainder of the year.

I'd make a couple of points here. One, we're investing at marginal rates that are at or above where our average bank portfolio yield is today.

And that's the first time that's happened in a while. So we're definitely at a point where we would expect a degree of stability around our net interest margin from that.

While that's good news, there's a little bit more challenge that prepayments have definitely slowed. So we're going to have less cash to invest at these higher levels of interest rates because we're just not getting as much cash flow off the portfolio as we were getting even just a quarter ago.

And then finally, remember, as you're thinking about the long end of the curve, you still have some offsets coming from the short end of the curve. So as we net it all out, we expect the net interest margin to roughly stabilize for the remainder of the year.

So trying to look a little further out and give you a sense of how all this may play out. I've got to put a bunch of caveats around his page because I actually like Rich, and I don't want to see his head explode here, but we tried to create a somewhat simplistic and static point of view, so that you can get an idea of how just our current existing book might reprice under various interest rate scenarios.

So this assumes no change in our balance sheet to the extent that we get cash flows, and we're reinvesting those cash flows in the same instruments that they came out of. So we're basically maintaining a stable balance sheet over a couple of year period.

It doesn't include incremental growth. It doesn't include any incremental bulk transfers.

It is literally just a roll forward of our balance sheet from the end of Q2 going forward. So you can see the repricing characteristics play through.

So the green line down at the bottom of the page is what we would have been talking about last time we got together. That was rates as of the end of Q2, and you can see that, that modest decline would have been consistent with that expectations for mid-140s by the end of the year and then some additional decline as we would've move forward into subsequent periods.

The blue line is where we are today. So you can see with rates as of the end of Q2, we've got relative stability in that roll forward net interest margin.

And that roll forward goes out through a couple of years. So that stability is something that we should be able to count on if interest rates stay roughly in line with where they are at this point.

So then we ran a couple of other scenarios just to give you an idea how, as rates move up, things might play through. The purple line at the top is a 100 basis point parallel shift in the curve.

So assuming that rates start moving up at the end of Q2, move up ratably through the end of Q2 next year, 100 basis points whole curve parallel shift. You can see that we get the repricing characteristics pretty fast and pretty consistently over that period.

Again, linking that short-term sensitivity to those movements in the markets as that curve starts to move up, we will get those results nearly immediately and fully implemented pretty quickly. But that's not likely the scenario we're going to see.

We rarely get those kinds of parallel shifts in the curve. So we ran one more scenario and said, what might the market actually -- the evolution here look like.

And so we ran the forward curves as of the end of the second quarter. Now that has long-term rates continuing to tick up pretty modestly over the course of the scenario.

Short-term rates don't really start to move until the end of 2014 in anticipation of a movement in Fed funds in early 2015. Today's forward curve is probably even a little bit more conservative and has those short-term rates a little bit further back in the scenario.

But this was as of June 30. And you can see that we actually end up in about the same place.

It's just you get there in a little different path. So the continued upward movement in those long-term rates will be helpful, but you really start to pick up the acceleration in net interest margin as those short-term rates start to move up.

I should remind everybody, this only is the net interest margin. It doesn't include money fund fees.

So to the extent short rates start to move up, we'll also pick up the benefits of the elimination of the waivers in that scenario. A couple of more points to make here.

So I talked about the duration moving out a little bit. To the extent that nothing happens in rates and all we do is roll forward our investments, there would actually be a little bit of bias toward a pullback toward more of a 2-year kind of duration on the portfolio.

The flip side of that is, even under some pretty extreme rate increases, we don't expect the portfolio to move out more than about 3/10 of a year from here. So we've been pretty careful about managing the convexity risk and don't expect that we're going to get a tremendous gapping in our duration as interest rates move up and prepayments continue to slow.

The other point I'd make is around that accumulated other comprehensive income. We don't expect -- because we have predominantly floating-rate assets in the available-for-sale portfolio -- to see a material movement in book capital as a result of increases in interest rates.

Now again, I'd remind everybody that movements in marks are excluded from regulatory capital. But just from a book equity perspective, we don't expect to see real volatility in capital as a result of changes in rates.

Talking about capital, a few points to make. We are a non-advanced approach bank.

So non-advanced approach banks have an opt out under the new rules that allow them to continue to exclude those available-for-sale marks from their capital computations. While we haven't made a final determination, it is highly likely that we will elect to take that opt out.

We are not a G-SIB. So we are not subject to the enhanced capital requirements that we're just issued for the largest banking companies, so our regulatory minimums didn't just get raised on us.

Finally, to the best of our ability to compute them, we currently meet all the minimum standards for the proposed rules already. So we're not looking to have to change our balance sheet construction or our capitalization levels to comply with the proposed rules.

So as we put it all together, I hope you've got a sense that there's definitely been sent trade-offs, but we're pretty much in line with where we expected to be at this point in the year and ready to -- and poised to deliver continued results consistent with that through the remainder of the year. We are definitely structured to provide superior levels of revenues and income as rates start to move up.

The short of that, we're also committed to delivering the financial leverage that we've been talking about, so that you should see continued improvements in profits regardless of what happens in interest rates from here. So at this point, I'll open it up to questions.

There's got to be a brave soul or somebody on the web. Mike had his hand up.

Maybe 2 questions, just on some of the points that you just covered. So first, just on the transfers that you mentioned, the $3 billion to $4 billion.

Because when we start thinking longer term because it just seems like maybe every 6 months, 12 months a few these pop up. So when you look at the plans, what should we be expecting over time, some transfers onto the bank?

And then just on the regulatory side, is there any conversations with regulators where, like firms wouldn't be able to have that opt-out plan or that opt-out provision?

I'll cover that one first. So there seems to be a little bit of confusion around how all of that's going to work.

But it doesn't look like there's any limitation for standardized approach banks to be precluded from being able to make that election. So at this point, we're not aware of anything that would impact our ability to make that choice.

On the bulk transfers, so I would say where we are at this point is we are pretty fully implemented against our strategies. So the various enrollment rules have been in place for a while.

I think we've gone through pretty much every bucket of cash and tried to get people where we would expect them to be. These are really a couple of cleanup tranches, the $1 billion coming out of the money funds is -- it's a relatively small number.

And quite frankly, if we didn't have the money coming out of the brokerage, we might not have been talking about it at all. So I think you might see something in that order as we look to people that no longer qualifies for a sweep and roll them on the balance sheet as a kind of regular course of business.

The movement from the broker to the bank was a largely similar activity. I think we had a few additional registrations that we were able to identify that would qualified for the bank.

But to be honest, versus today's existing criteria, we're pretty fully implemented. So I would think that you're going to see things that look more like the smaller numbers moving forward.

That said, there's always an opportunity as we have some fairly large amounts of cash that sit across the balance sheet and off the balance sheet. And if we got into a window where we had a substantial level of capital generation, we might look at it and revise those criteria.

And so you might see bigger chunks of money moving around. But I'd say today, we don't have any plans to make those changes in the near term.

Got one from the web.

A couple on the parallel shift scenario in the NIM slide. Why would NIM come down slightly after the initial big increase?

And then also, it looks like from the chart that the parallel shift gets us about 50 basis points improvement in NIM. Does that differ from past estimates of rate sensitivity?

Yes. So a couple of things.

One is, when you get the immediate left, but then over time, you're still getting some cash flows coming in off the portfolio from bonds that have coupons that are higher than where you're investing a 100 basis points from here. So there is a little bit of continue downward pressure if all you get is 100 basis points.

So we showed that on the chart. I don't think there's anything inconsistent in what we've shown in terms of the net interest margin lift versus the prior guidance from around the 60 basis points.

One, I think there's a little bit of imprecision with the construction of charts and how they get viewed. Beyond that, I think that there's a lot of assumptions that roll in, and that 60 basis points has incorporated some of our expectations for growth and some additional movements and flexibility around how do we get cash reinvested.

So I'd remind you that this is a static point of view, and we've never really talked about just a plain static point of view before.

I have a pile. What minimum revenue growth is required in 2014 to achieve that 300 to 500 basis points of operating leverage?

Yes, so we haven't committed to the levels of revenue growth, but I think we have talked about it in a scenario where we get relative stability in interest rates and a fairly modest level of market appreciation. So we're not getting a lot of lift out of the overall market and basically just a roll forward of our existing products and strategies.

So not looking to enhance any of the revenue delivery dynamics. We might be able to do a little bit better than that on the revenue side.

But if you just do the math on that, it leaves you kind of in high single digits and that's, I think, consistent with that kind of expense guidance.

And that does that operating leverage hold true for all of the interest rate scenarios highlighted?

No, it does not. We've said multiple times to the extent that we start to pick up incremental revenue from higher interest rates, we would expect to drop a vast majority of that to the bottom line.

We would look at the incremental margin to be at least 75%. So the leverage would definitely be growing in periods where we were getting the lift in revenues driven by interest rates because higher interest rates really drives very little in the way of expenses.

Anyone else in the room? You can probably go all day.

What's your latest view on what happens to the size of the balance sheet as rates rise in an improving economic environment?

So there are some trade-offs that end up happening in our projections. I will net it out at first and then talk about the detail a little bit.

We would expect the balance sheet to probably remain relatively stable, but that's going to be the net of money going into the market and new clients bringing cash into the firm. All of our modeling would say, basically because we have predominantly isolated the cash on the balance sheet to the retail client base, that we wouldn't expect to see really large outsized outflows in a short period of time.

So the better environment might push people to be more aggressive on investing. It is also likely to start to ramp up our retail acquisition and cash flow related to new clients coming in.

And those 2 factors tend to offset. So we don't think we will see a dramatic reduction in our balance sheet if that scenario occurs, but you might get a protracted period of basically kind of sideways levels of the balance sheet.

Sort of related, given still a fairly limited wiggle room in the leverage ratio to our own internal targets, what do you see as the normal growth rate in average earning assets?

I'm going to sound like a broken record on this. We would expect the overall balance sheet to be growing in line with our pace of client acquisition.

So to the extent that we are pretty much fully implemented on our strategies, you shouldn't see big movements of money onto the balance sheet from off balance sheet. And so to the extent that the client cash is a relatively consistent percentage of their total client assets with us, as we drive additional acquisition, a percentage of that acquisition will come in, in the form of cash.

And that cash should be growing at a pace that's relatively consistent with our overall acquisition rates. We're going around, just to make sure.

I think you and I are having a dialogue here for a while.

Back to the parallel shift scenario, how does the second 100 basis points in the shift impact NIM relative to the first 100 basis point move up?

Yes, so we didn't actually run the static balance sheet through that model. But there is nothing embedded in those assumptions that would lead me to believe that we don't get a fairly similar NIM expansion from that second 100 basis points.

We won't get the benefit on money fund because the first 100 will cover all the fees to the waivers. But the second 100 basis points should give us a relatively similar level of net interest margin expansion just based on how we would expect the assets to reprice and what we would expect to be doing with deposit rates for clients.

Another good one there?

Just on that last question that you answered, just on the transfers. You mentioned capital generation is much stronger.

There is the option, meaning to use some of that to bring more cash on to the balance sheet. So just did that concept -- I just want to understand the strategy behind that, your other options once the capital generation is much higher.

And then does it have anything to do because it doesn't seem like on the money fund regulation, meaning it's not final but it also seems like it was very favorable. I just want to get your thoughts on that.

Yes. So I think our take is very favorable on what finally came out in money fund reform.

We were quite pleased to see some of our ideas incorporated into the proposal. I think our belief is we're heading toward a set of products, which will allow us to continue to meet client demand for products like money funds while continuing to basically preserve the economics of the product set.

So I think that was all pretty much good news as we saw it evolve. I think any subsequent changes, it's fairly complicated and so we can probably do a deep dive session on cash balances at some point.

We are really aware of the need to be able to earn an adequate incremental spread on any money that comes on to the balance sheet to make it worth putting the capital up to do that. And so the first constraint is we have to believe that the money is rate-insensitive sensitive enough and sticky enough to allow us to get an incremental spread either via pricing or the return dynamics of what we're investing in.

And pricing impacts the sensitivity and the rate dynamic is impacted by the stickiness. So all of that has to come together because we do have to be able to earn returns consistent with our expectations and your expectations.

So to the extent that we could identify those types of money, either money that we believe already looks like that or via some modest changes in eligibility requirements, we might be able to segment off some additional cash. But it's just way too soon to start talking about relative magnitudes of how that might work.

You got one more?

Do you feel like that you're currently under investing in any aspect of the business, so are you holding back any discretionary spend for a higher rate environment?

I'll probably answer the question a little bit differently than it would ask -- that it was asked. I think we are investing at a very fulsome level in covering off all of the major strategic initiatives and making sure that we have money available to meet regulatory investment and preserving the availability and security of our infrastructure.

So we've continued to invest in infrastructure, we've continued to invest in client-facing systems, we're building out some pretty major initiatives. So I'd say we're at a pretty healthy level of investment.

That said, as the economics of the business change, there are some things that may look relatively more attractive than they look today. So given where interest rates are today, we may not want to dramatically expand the retail field force.

But a couple of 100 basis points from here and a higher ROCA and continued progress around advisory sales, we may look up and say, that's something that makes sense to do. So I don't think, given where we are in the cycle and the relative profitability dynamics, that we're really under investing in anything important.

But I think you may see those priorities could evolve as the economics change with the higher rate environment. You have a follow-up to that?

Just one. Well, if there's not one more in the room, we have a few more here.

I could give one more. Will you be able to hold pricing integrity or keep prices up on your Schwab money market funds when rates rise?

And if so, why are you confident that you can do that?

I don't think anything has changed in the competitive environment that would lead us to believe that we will not be able to achieve the same kind of product dynamics in the future that we have in the past. That said, I don't think we are completely done with our analysis of the changes in the rules and what impacts that might have.

It is likely that we will see some resulting pressure from that, although we think it's going to be pretty small. But it's -- again, we're still working through it.

It was a pretty big pronouncement. We're trying to figure out exactly how all the pieces fit together.

But I think -- it's our belief at this point that we would expect to recover the bulk of the economics consistent with what we've seen in the past. Okay.

So that, I will be around so I can -- if you have additional questions, I can catch you at the break or around lunch or even afterwards. But at this point, I am going to turn it over to my esteemed colleague, Nigel Murtagh, to talk about all things risk.

Great. Thank you, Joe, for that introduction.

Good morning to everybody here in the room. If you're like me, Friday morning, get an opportunity that someone come up and maybe talk about complex calculations and algorithms and [indiscernible] and how we stress test portfolios.

Get you pretty excited. If you're not like me, there is fully caffeinated coffee in the back of the room.

You may need it through the presentation. If you do, I won't be insulted.

I want to take some time today, I appreciate the opportunity to talk to you to cover a few topics around the risk management at Schwab. Our risk management culture, where that emanates from, our governance structure, some of the more current initiatives that we're working on to continually enhance risk management at Schwab.

Then I'll touch at a high level on our loan and investment portfolios, the quality there. And end up with a little bit on the interest rate risk management, given the discussion that Joe just had.

Schwab's risk management culture is driven by the firm's vision and strategy. That is the key thing to understanding how management approaches risk at Schwab.

We're not exotic about the way we approach risk management overall. We focus on the vision, the idea of having our clients' trust and we focus on the strategy of looking at things through their eyes.

That -- working through that lens is one of the things I and my team are passionate about in our jobs. I get an opportunity at client events to talk to individual investors, to talk a advisers.

And one of the things they tell me is that nervousness, the unsafety that they felt in 2008, issues like Lehman Brothers, Bear Stearns, wondering what was going to happen to their accounts; and more recently, MF Global. They don't want to feel that again.

They want to have their assets at a firm where they are confident that, that firm is managing for the long term, and that's Schwab. All of that, that drives us to, on a relative basis, a more conservative risk management stance.

I mentioned we're not exotic about the way we approach risk management. We hold to some basic principles that have been long held at the firm.

If I think about the investment portfolio, that's around the idea of having transparency in the products that we invest in, so that we can adequately understand what the risk is in a downside scenario. Again, long-held belief at Schwab.

If I look back, prior to the financial crisis, we were investing in residential mortgage-backed securities, RMBS. We evaluated subprime RMBS, it was a very popular asset class, generated more yield.

But as we went through our stress analysis, we determined that the risk, the potential risk in those products, was higher than our risk appetite, so we avoided them. About at the same time, we looked to add collateralized debt obligations that are backed by RMBS.

In that case, when we did our analysis, we kept coming to a different conclusion in the market about the safety of those products. And our assumption actually was that we probably didn't understand them well enough to invest in them.

So again, we avoided that asset class, turned out to be a pretty good decision. The same process is used today.

More recently, collateralized loan obligations have become more popular back in marketplace for investors. As we look at that asset class, the transparency of the final investment pool that you're going to be exposed to is insufficient for us to do the kind of downside analysis that we like to do.

So currently avoiding that asset class again. That's not to say we avoid all structured products in the investment portfolio.

We do have an obligation and an expectation of generating yield. We invest in commercial mortgage-backed securities, we invest in dealer floor plan products, covered bonds, credit card ABS.

But only products where we believe they have the transparency for us to do the kind of analysis that we want to do to understand what happens in the downside scenario. We keep the same kind of concepts, basic underwriting for our mortgage portfolios.

We ask clients to come to us with equity in their home. We ask them to have good credit and we ask for them to have a documented way to repay.

You do that and you start with a good client base like we have, it turns out you get pretty good loan metrics. And we'll talk about that a little later as we get to the portfolio structure.

Now our risk management governance structure is one that includes all of the executive management team at Schwab, not just the risk groups and the oversight groups. The highest level risk management committee that we have is the global risk committee that you see in the middle of the chart here.

It includes all the heads of the main client-facing business lines, advisor services, investor services, the investment management, mutual funds team. It also includes, of course, the operations teams, the technology teams, finance and then risk and oversight as well.

This gives us an opportunity to view risk from a more holistic point of view and have everyone on the same page in terms of where we're headed as a firm with regard to risk management. We have a well-defined structure for identifying risk, escalating risks with the -- and that starts with the management governance committees.

You see those here, asset and liability management, liquidity, capital, interest rate risk, credit and market risk, operational risk, a long list of operation, technology and sales practice-type issues that we would look at there. And then a new products and services committee that's separate.

This is where we look at any new product before we launch it to make sure that we have the controls in place that are necessary to meet our internal standards and that ultimately the risk is consistent with the risk appetite of the firm. Those management committees report up to the global risk committee where we bring it all together and the global risk committee directly to the board risk committee.

We use what I think is a fairly traditional approach to risk management, consider the 3 lines of defense. The business line, the front line, the people that are managing the business, they have the first obligation.

They're the first line of defense. They need to establish the policies and procedures to manage adequately the risk that their businesses face.

Second line of defense is risk management, my team and corporate oversight functions. We establish policy, guidelines, basically the boundaries within which the businesses operate when they're taking risk.

Then the third line of defense, the fully independent line, is internal audit. Internal audit doesn't make any policies.

They assess our controls, the implementation of our risk management process and report directly to the Board of Directors on their findings. A little more about my team, corporate risk management.

We have the obligation, responsibility for establishing the enterprise risk management framework at Schwab. It covers credit, market, liquidity, operational risk.

We establish and develop policies. We allocate limits.

We measure, monitor and test against those limits and we report up directly to the CEO and to the Board of Directors with the findings that we have. We're a key participant in the capital stress testing process that all financial institutions are spending more time on these days, so that we have, independent from the business lines, input into the results of stress scenarios on our balance sheet.

A couple of things on key initiatives that we've been working on at Schwab. We've always had an enterprise-wide risk management structure.

But we've been moving to formalize things more, particularly in the current regulatory environment. One of the areas I'll call out in particular is operational risk management.

I believe we've done a good job at Schwab managing operational risk. When we looked at the losses historically, we've generally accounted for them directly by an accounting method.

And what we're trying to do more of currently is also categorize those operational losses by the risks that resulted in those losses, the risks that may have caused them. This gives us an opportunity to look across the firm, look for commonalities, look for emerging trends and begin to address them before they become a problem.

It's a big effort. It covers every one of the business units at Schwab.

Another thing I'll comment on is risk appetite statements. I mentioned that the culture about risk at Schwab has been long-held.

We've been working, though, with Board of Directors to formalize our risk appetite across all the risk categories that I've been discussing with qualitative statements that guide management's actions. Once we have those qualitative statements, we've developed a process to run it through the organization and test ourselves against it.

So the risk appetite statement is on the left side of the chart. They start with the Board of Directors; passed down to the global risk committee, which assigns responsibilities to those management committees that I talked about for capital, liquidity, credit, market, operational risk.

Those committees are staffed with the executives of the firm, senior officers of the firm across again the entire firm, not just risk management, but the business units. We establish the limits that we will use to test ourselves against those risk appetite statements from the board.

Limits are allocated down to all the subsidiaries and operating levels. They report back up to the committees every month on metrics.

We aggregate them quarterly at the global risk committee and then I report them out directly to the risk committee of the board. This gives us an opportunity to measure how execution of our strategy impacts our tolerance for risk on an ongoing basis, allows us to make adjustments as needed.

Now I'm going to turn a little bit to the portfolio, as I mentioned, the investment and liquidity portfolio. Very strong investment and liquidity portfolio.

I started out by talking about basic tenets that we use to evaluate our portfolios. One of the things we want to maintain a lot of liquidity, we want to maintain high credit quality.

That's driven us in the current market to have about 65% of the combined investment and liquidity portfolio in government agency or agency notes. So a significant portion of the portfolio essentially without credit risk.

And we do have investments in asset-backed securities, ABS, as I mentioned. But we have a process to stress test those in all the downside scenarios that we have experienced in the past and taking things a step further, always assuming that the next problem will be worse than the last problem.

And assessing whether the outcome for those investments will meet our risk appetite in that downside scenario. And then we spread this across the firm.

So we aggregate all of our exposures, something we've always done at Schwab. I know during the financial crisis, there was a lot of discussion about institutions that had pockets of risk in places that they didn't know existed.

We've always aggregated all of our credit risk, market risk, including, liquidity capital up to those risk management committees that I talked about. We set limits at the corporate level and we aggregate that.

We allocate them down to the subsidiaries, so that from top to bottom, we know what our exposures are and we know that the risk taken by the subsidiaries won't exceed the aggregate limits we've set at the top of the house. Loan portfolio has very strong credit quality in our bank loan portfolios.

The majority, about 60%, is first mortgages. Next largest bucket are home equity lines of credit, a couple of metrics about this portfolio.

Average credit scores, 760 to 770, very strong credit. I mentioned our clients come to us with equity in their properties.

The average loan to value, even on a refresh basis, looking at home price indexes and the decline in the home prices, is in the high 50% range, low 60% for our first mortgage portfolio and low 60s for our HELOC portfolios. So both the first and second lien portfolios, very strong levels of equity by our clients.

I mentioned that all of that, along with good clients, generates good portfolio results. This chart shows prime mortgages and home equity lines of credit.

And in this case, we've looked at only mortgages that started with credit scores greater than 680, that's the lowest credit score that we accept, and started with loan to values less than 80%, again consistent with our underwriting. The dotted lines that you see is the rest of market.

The solid lines at the bottom, the blue line, and the -- blue line is our first mortgage portfolio; the orange line, our home equity line portfolio. So you can see throughout the last couple of years and certainly through the cycle, very consistent performance.

Never really peaking up above 1% even when the market was seeing rates in the same credit metrics above 9%. One of the key benefits we have in lending and focusing our lending on the Schwab client base is that they also have liquidity.

We found that a client that has $100,000 in liquidity at the broker-dealer performs significantly better even when they lose the value in their home or when their credit scores go down than those who do not. It make sense really if you think about an individual who's taken the time to manage their money and set aside some savings for the future.

If they do lose their job, it bridges them to the next job. So it results in very strong credit metrics.

Finally, I want to touch a little bit on interest rate risk management. Joe talked a lot about the assessments that we do, the impact of change in the interest rates on Schwab.

I wanted to talk a little bit about what my team does in terms of measuring and monitoring that process. We set policy limits for net interest income and the changes in market value of equity related to increases and decreases in interest rates.

We assess those every quarter, report them out to the ALCO Committee and on up to the board risk committee. We use parametric measures, Joe mentioned duration and convexity, to assess the impact of the change in rates on the valuation of our portfolio and the pace of that change.

We do scenario analysis. So we run 24 different scenarios every month, different shapes of the yield curve to try to get an assessment of what the sort of outcome space is in terms of what might happen at Schwab.

This helps us to inform how we manage the balance sheet. Of course, we also do complex macroeconomic stress testing.

So the type of stress testing that you see in the Federal Reserve having most of the larger banks do, although we're not required to do that kind of work yet. And then finally, sensitivity analysis.

One of the things you know if you're trying to forecast things or assess what the impact of rate changes will be 5, 10, 20 years out when you're looking at mortgage product, for example, one of the things you know is that some of your assumptions are going to be wrong. So you need to do sensitivity analysis.

You need to assume your assumptions are wrong and try to get an assessment what if we're off by 10%, 20%, 30% in our assumptions, what is the outcome going to be for the firm. So all of these is used to inform the Asset-Liability Management Committee about the potential outcomes and assist us in managing the portfolio.

So hopefully, in a brief time today, I've given you a sense of risk management at Schwab, the culture, where it comes from, the structure we have for reporting, escalating, identifying risk, and finally, the results that it turns into for our investment, loan, our balance sheet products and portfolios. And with that, I will open up to questions.

Could you talk about the size of the team that's working on the stress tests? And when did you start or when do you start formally participating in the stress tests?

So I have to count up the numbers, I don't know if Joe knows, because the stress testing team is really spread across 3 areas. So our financial reporting group that does standard income forecasting has a component of it.

My team have about 100 people in total. Not all of them work on stress testing, but some of them work on the credit stress testing, some the market risk, some the operational risk.

And then the treasury team participates a lot in the liquidity stress testing and what the ultimate capital measures would mean. So I can't give you a number in terms of the people that do it.

We started -- we've always done different versions of stress testing. We really started formally 2 years ago, even though we've not been subject to the regulatory guidelines, running the types of macroeconomic scenarios that the Fed has published and presenting that to the Board of Directors.

So 2 years ago, last year; we'll do it again this year. As best as we can tell, it would be next year, 2014, with disclosures potentially in 2015 when we'd actually become subject to the regulation and have to do the disclosures.

So you spoke a lot to how the high-quality assets you have and how conservative you are in your balance sheet. I guess at what point do you feel more comfortable moving out a little bit more on the risk spectrum?

Or how could we see that reflected in some of the assets you hold going forward?

Yes, it really depends on the assets, themselves, and that transparency that they provide us. So we don't limit ourselves in any particular asset class.

We don't say we're not going to invest in this type of thing. It depends on the information we can get from the issuers of those securities and the level of transparency that they're going to give us so that we can do that assessment of what can occur on the downside.

What we don't want to do is invest in products where we don't feel like we get the -- we have the ability to do that downside assessment, so that when a financial crisis comes, like 2008, it's a surprise to us. I think, through 2008, that proved to be a good method for us.

We stick to it. It can be difficult low-rate environments.

There's no doubt there can be some pressure to look at things that generate additional yields. But sticking to those basic tenets has served us well.

Chelsea?

What are your 2 to 3 greatest concerns on the landscape today and then also specific to Schwab?

That's the classic risk management question that keeps you up at night kind of question. Two to 3, well, let me sort of work through some things that we can control and then things that we don't always control.

And so things you can't always control or can't control as well that probably concern me the most. So when we're making these investments, we have more control over what we want to invest in and we can manage what the downside exposure will be.

The same with interest rate risk management. Joe talked about it.

We can do assessment of what would occur at Schwab. So those are easier to control.

And as a result, they don't concern me quite as much. That things that concern you are things that you have less control over.

So certainly, regulatory risk is one of them. We maintain this relatively conservative stance, keeping capital levels for us where they are is important to that.

If you have regulatory mandates to raise your capital levels, then you may have to raise your risk profile to generate an adequate return. You can't control that from the outside so that concerns you.

Operational risk that you can't control quite as well whether they're natural disasters, Superstorm Sandy that closes down the markets, cyber attacks. Those things are little harder to control because they're external to the firm and so they tend to worry me more whether or not we've done everything we can do that's reasonable in terms of managing those risks.

Another one, regarding rates rising, Walt and Joe have framed the upside for shareholders. What do you see is the greatest risk from your point of view?

Well, the greatest risk is clearly further downside in terms of the rates. We're coiled for the upside so we're in relatively good shape.

As Joe said, we're very conscious of managing the duration and convexity of our portfolio. So even sharp rises in rates, while they will have an impact on the duration of the portfolio, as Joe mentioned, the maturity level of our portfolios is such that it doesn't expand that far before it gets back into track.

So upside, we intend to be in pretty good shape. Downside, I guess, the worry is that you become like Japan some day, right?

You have 80 basis points on the JGB. If you have treasuries do that at a 10-year, that's a risk.

And there's only so much risk mitigation you want to put in place to protect yourself against that, right? One of the ways you will protect yourself against that downside risk is to extend that duration.

It's a whole long to longer term assets. And the way we view it is that taking that risk and giving up that upside that will occur to protect ourselves against downside is not the right place to be right now.

So that's the greatest risk to us really is further downside. So is there anywhere in the room here?

Chelsea?

Can you talk about risk management in the context of reducing Schwab's Tier 1 leverage ratio from 7.5% that it used to be at the back to the 6.25%? How do you think about the cushion now relative to regulatory minimums?

Yes, so the way we do we look at the capital levels and what's required is through the stress testing that I talked about. So our goal is to have sufficient capital that in an extreme downturn, we are still going to have a cushion to the regulatory minimums.

And so when we look at 7.5% and we did those stress tests, it still left a huge cushion. Certainly, we could get down to 6.25%, 6%.

And given the quality of the way we manage our balance sheet, we're able to absorb those significant downturns and still have a cushion to the regulatory minimums. That's the process that we go through on a regular basis.

To assess it, we set scenarios in the first quarter. In the mid-year, we run mid-year stress tests, report those to the Board of Directors.

Third quarter, we come back, additional scenarios that we'll talk about with the board. And then the fourth quarter and then January, bring those stress tests back.

So it's a constant process of looping through and understanding whether you have adequate capital to mitigate those downside risks.

Related to that, how do you think about recalibrating the leverage ratio target from here?

So I'm not sure exactly what you mean by the question. I guess, if I think about recalibrating, we continue to do this process, right, that this is sort of that sometimes perverse logic about raising capital levels.

If you raise capital levels on a firm like ours and you end up driving the firm, have to take on more risks to generate a return on that capital, that generates greater exposure to downsize during economic downturns that can cost you that more capital. It's sort of a negative virtuous cycle.

So we do this evaluation on a regular basis and that's the way we would set that. I don't know if that answers the question of the person's who's asking you.

Question here in the room?

I think on the 1 slide you show just the securities portfolio like the mix. And the 1 area that increased year-over-year was in ABS portfolio, which makes sense for a variety of reasons.

But when you think about your safer securities versus, say, that portfolio, what's your kind of max limits on, say, something like an agency versus ABS. I'm just trying to think how you do that or where would that get to?

Yes, so with regard to the agencies, we don't have a max limit with perspective of credit, but the limits there are going to be more driven by the market risk. Certainly, agency mortgage-backed securities have optionality in them and so we're going to want to maintain a certain level of market risk, interest rate risk.

With regard to ABS, we do have limits that we have established at the instrument-type level across sectors, across geographic regions. The growth that you've seen in the ABS portfolio in the last year has been primarily in Department of Education-backed student loan product.

So student loan asset-backed securities slabs as they call them. Those products come with a 97% government guarantee on the underlying loans.

And then they're structured as such that there's additional collateral in the pool to make up more than the additional 3% that's left over. So we have more than 100% credit enhancement in that pool before we purchase it.

That's where we've seen on a risk-return basis, the best opportunities and that's where you're seeing the growth in that portfolio. Chelsea?

Can you talk about the risk management process when evaluating potential acquisitions?

So the corporate development team, which is under Joe, leads the acquisition assessment process. And what they do is bring in subject matter experts from, certainly, from the business lines, from risk management, from legal, corporate oversight.

And we have a playlist, if you will, to evaluate and do the due diligence of the firms that we assess. Certainly, risk management always has a seat at the table there and an opportunity to have input or object if something comes up.

Chelsea, if you have -- no more?

Okay. If there's not anymore, then I stand between you and a break.

I appreciate the time to speak with you today. And I think we're going to take about 10 minutes.

All right. Thank you.

[Break]

Well, good morning, everyone. Good afternoon.

Those on the web, thank you for joining us today. I'm Walt Bettinger and I'm going to spend the next 30 to 40 minutes, talking a little bit at a higher level when I was reviewing the agenda for today and I realized that Joe is going to lead off with interest-rate scenarios, followed by Nigel, who by the way, is my favorite Monday morning one-on-one, as you can probably imagine.

But Joe would be followed by Nigel, talking about risk management. I said, I think, I'll take a little bit different direction.

So what I'm going to cover during my time is I'm actually going to invite you into what is a discussion with the board, around what the board looks for from me, within my role as CEO, the topics that we discussed, the big picture goals that they have in mind for me within my position. And they revolve around 3 primary long-term objectives for our company.

The first 1 is to win in the marketplace. And by win in the marketplace, what I refer to -- what I'm referring to here is gaining share, building a relative position within the market, building our asset base within the market so that we're in a position to continue to drive growth in the future.

The second goal is to execute on a long-term revenue transformation. We're actually the middle of, I would, say a multi-decade transformation of Schwab from, of course, a transaction driven company to a company that generates the vast majority of its revenue based on assets, whether that be asset management or net interest income.

And then third, continuing to build the long-term earnings power for the future. We spent a lot of time talking about our current earnings, we spent time talking about the upside in our revenue stream in a higher interest rate environment.

But a lot of my attention is focused on the earnings growth after we realized the eventual lift from higher movement in interest rates. Of course, what we all know is that the higher lift, the lift that we'll get in revenue and earnings from higher rates, is simply what would have been achieved and what has been earned during all the years since late 2008 when rates began to be lowered due to our organic growth.

So the ability to generate earnings after we received the lift from rates is the third area of focus. So let me go in a little bit more detail into each of these 3, starting with the winning in the marketplace and the objective of building our share.

It begins with our strategy through client size, you've heard be speak of this many times, very consistent it's been our approach across the company now for coming up on 10 years. A very simple concept but 1, which provides guardrails for us when we consider alternatives and ideas and options for the growth of our company.

The second point I want to touch on is the long-term decision that we made in early 2009. Early 2009 was a very difficult time for our industry and a particularly difficult time for a number of the firms that we compete with.

And so we made the decision at that point to begin what would be around a 4-year, fairly aggressive investment plan in our clients, in our capabilities, closing some gaps that we felt we had and actually widening some gaps that we felt we had advantages on our competitors. In early '09, if you were a firm who's revenue was based largely on asset management, of course, that was depressed.

If you were a firm who's revenue was based largely on transactions, that was depressed. And of course, if you were a firm whose brand was critical to your distribution and growth, many of the firms with that situation also felt pressure due to losses they incurred and damage to their brands.

So we made a decision to aggressively invest for about a 4-year period to try to separate us from a number of those competitors. Third point in terms of our winning in the marketplace, we think it begins with discipline.

Discipline, meaning that not every idea is a winning idea. They may all be good ideas, but they're not all ideas that we're going to invest in, we're going to be selective as we make our calls, we're going to try to determine which battles we want to win, which playing fields we want to be successful on and then aggressively pursue those.

And of course, fourth, in terms of market share, I would argue that today, we are in on a relative basis, the most disadvantaged position that we could be in relative to our competitors, because we're the firm that is hurt the most by what is the remaining outcome from the financial crisis, and that is the low interest rates. So that as we head more into a normalized environment over the next, hopefully, handful of years, we'll have a disproportionate benefit, disproportionate gain and be in a position to be even more disruptive relative to the firms who we compete with and continue to add sure.

So let's take a look at some of the implications and actual results from these decisions. This is a chart that shows our growth, our organic growth and net new assets on the core side.

So we don't factor in the mutual fund clearing assets that generate a couple of basis points for us. You can see the progress we've made since the beginning of 2009 when we made the strategic decision to ramp up the level of our investment.

You can also see the progress that we've made in terms of total assets, building our market share relative to these 4 competitors who, of course, are publicly traded and therefore, we can look at audited results relative to their assets, AUM. And you can see our line relative to a number of other lines and we're quickly closing the gap relative to the 1 publicly-traded competitor who has more assets.

Why do assets matter? Assets matter when we get into the monetization part of our strategy.

Because at Schwab, much of our strategy revolves around acquiring new clients, building up assets and then through win-win solutions for our clients, being in a position to monetize those assets with strategies that are good for the client and, of course, also good for shareholders. The second goal is this large-scale revenue transformation, the story that all of you are very familiar with.

But we are striving to continue to diversify our revenue stream, pull away from the transactional, what we consider the commoditized part of the business. Not that it's not important and not that it doesn't have strong marginal profitability, it does.

But for the long-term, we think it's a commoditized service and 1 who is likely to have pricing challenges when we look in the long-term out into the future. So we continue to strive to build toward more recurring balance revenues.

This is a slide that shows our progress in that transformation, peaking about 15 years ago. You could see around 60% of our revenue came on transactions.

Today, we're at 17 and we make a reasonable set of estimates out 5 years from now, we think that number will be somewhere around 10% of our total revenue. And then what this slide does is it shows the 3 main components of our revenue broken down at 5-year increments over the last 15 years and then makes an estimate for 2018.

So you look at trading revenue, net interest revenue, asset management administration fees. You notice how I carefully stay away from ever identifying colors, because for those of you who aren't aware, I'm color blind.

So, actually, I have no idea what colors those are. I could make a guess and you would laugh.

When you live 52 years with color blindness, you learn to make educated guesses and then sometimes people look at you saying, "What in the world are you talking about?" when your guess is incorrect.

But the light bar or lighter bar, I believe, on the left, trading revenue, the darker one in the middle net interest revenue and then the other lighter one on the right side. I was going to guess and I thought, no, I'm not going to do that -- is our asset management administration fees.

One item just to call out on this particular slide, from 2008 to 2013, the asset management line, of course, is impacted by what's going on with our money market fund waivers, which, what, I believe $157 million in the second quarter of this year. So that particular bar would look quite different if not for the waivers.

Of course, as would the net interest income. Along with this transformation from a transactional company to this full-service, high-value firm, monetization is critical for us.

And we began a strategy about 10 years ago to expand our capabilities in serving our retail clients with advisory driven solutions. And this is a slide that illustrates the implications of that decision, as well as I think the opportunity.

You can see that about 17% of our assets within the retail franchise are now under some form of fee-based advisory relationship. We think there is significant room for that number to run, whether it has the potential to get to 2x that number, I don't think it's completely unreasonable over a period of time.

But today, we're at about 17% and just under $140 billion. Joe alluded to it earlier this morning, and I'm sure that John and Andy will speak to it, but one of the short-term challenges we've had here in 2013 is that our success, whether it be within our Schwab Private client program, which is our largest advisory solution, but also Windhaven Investments and more recently ThomasPartners.

We've had such success in 2013 with the enrollment of existing clients into these programs that it's caused a bit of breakage in our field compensation. Pain in the short-term, but it's actually exactly what we want.

It's the winning strategy for the long-term, good for our clients and, of course, great for our shareholders also given the ongoing revenue stream that this generates for us, as clients move in to the advisory side. I would say there a few initiatives in our company over the last 10 years that have been more strategic, more important for our long-term future.

And I would also add, more challenging. Because this transition from transactional side to where you build enough trust and depth in the relationship with the client and credibility for them to be willing to pay you an ongoing percentage of their assets to help manage their money is an extraordinarily challenging undertaking to be easy to talk about, very difficult to achieve.

More in the service of our self-directed clients, we've continued to also invest in our commission-free platforms. So these are platforms that generate for us again ongoing recurring balance revenue.

On the left side of the chart, mutual funds from our OneSource program, as well as our Schwab equity and bond funds, our variable NAV products. And then on the right side, far more recently, our new Schwab ETF program.

You can see the growth within these numbers. Now I do want to call out -- I saw the lift from 2008 to 2013, the hockey stick there is rather remarkable.

In fairness, these are end of year numbers for the full periods we're showing you '98, 2003, 2008 and, of course, all we can show you now is the end of Q2 for '13. So as I'm sure we all remember, the end of 2008 values were depressed a fair amount because of the equity markets.

But continuing strong growth, this is a question I get on a regular basis. Walt, are you cannibalizing your OneSource programs with your advisory solutions?

Or are you cannibalizing your OneSource programs with your ETFs? And I think what this chart shows you by looking at these 2 side-by-side, the answer is, no.

We can grow both. We can grow our OneSource balances and our OneSource business with the great partners that we have.

And at the same time, we can grow our proprietary mutual funds, as you can see in the left-hand chart, and our ETFs, as you can see on the right. And then lastly just our ETF OneSource program barely out of the gates, just a couple of months old, we've already grown to about $3 billion in our commission-free ETF OneSource program.

And then the third area I wanted to touch on before going to Q&A is just the investment in our long-term earnings power. Again, as I mentioned, it can become confusing to talk about this because we all know there's this pent-up lift that comes from a more normalized interest rate environment.

What we always have to go back to is that's not happening out of magic. We have built that earnings power over the last 5 years.

And if rates today and over the last 5 years had been what where they were in, say, '07, '08, we would've instead seen this very steady growth in our revenue and earnings, as opposed to this waiting for this one-time lift. My goal is that ongoing steady growth in revenue and earnings after, of course, we get the lift that comes from rates.

We think that comes from further growth within our retail franchise, aggressive client acquisition and wallet share penetration. We think it comes from the continuing success in the RIA business model.

We think a strong business model likely to continue to gather market share gains, as it has historically. And then further monetization, enrollment within our advisory solutions and the conversion of assets from transaction-driven assets, driving transactional revenue to assets that drive recurring revenue.

I won't spend too much time on our new approach to the brand advertising. It's more than a campaign.

It's a positioning of our entire company. I think John and Andy will spend more time on it.

I just want to call out 2 particular important aspects of "Own Your Tomorrow". The first aspect is that this is a return to our challenger brand position.

Now it may seem strange for a company with over $2 trillion of client assets entrusted to it to be talking about itself as a challenger brand. But that's what Charles Schwab is.

Charles Schwab is the consummate challenger company, upsetting the apple cart, doing things that are unique within the industry, putting client's interest at the forefront. And I think as you see this program evolve from its initial just anthemic advertising into its ongoing presentations, both on TV and in print and on the web and with social, you'll see how it's positioning us in our rightful place as a challenger brand.

And then the second key point on this advertising and brand campaign approach is that it is far more inclusive of our entire company. Talk to Chuck, albeit very successful, was a highly retail-driven program.

It's very difficult to take Talk to Chuck and have that tie into, for example, our RIA business, whereas Own Your Tomorrow is inclusive of all parts of our company, whether it be retirement, retail or on the advisor side. So we're very excited, again, John and Andy, I'm sure will spend some more time and maybe he can give you an opportunity to watch a few ads, if I'm not mistaken.

Within our vision at Schwab, we are very clear. We believe that financial services is a business of trust.

In fact, maybe more a business of trust than almost any business line. And so our vision is to be the most trusted leader in investment services.

And we measure that in a number of different ways. One way we measure the course is with our net promoter score, or as we call internally, our Client Promoter Score.

If you do a valuated measure, we're at 55, both in our advisor business and in our retail business, near best-in-class for promoter scores. And from a trust standpoint, #1 rated by Temkin in the investment industry.

Very, very important to our long-term strategy and our long-term goals. And you would expect this of course with a company who's strategy is to do things through the eyes of its clients.

Further building for our long-term growth is the management of our balance sheet. And what you can see here is that we have grown our assets there, 14% CAGR, over the last 10 years.

We all know the story of that darker line, again I won't guess the color, but we all know the story of that darker line in terms of what it's done to our net interest margin, as well as we all are anxiously awaiting the story as that number turns and heads back toward where it was in 2008. But what we want to try to do, as we've discussed in the past is build this balance sheet number to the extent it is with yield in sensitive dollars.

We are not interested in building the balance sheet with highly yield, elastic dollars that will expect very high interest credits in a more normalized rate environment. We look to build this with yield and sensitive balances.

And of course, as I mentioned earlier, simply the growth of client assets is critical to our strategy. We need to add clients, we need to build the assets under custody at Schwab, so that we're in a position to monetize and further build our revenue stream in our earnings.

So the ongoing growth of our assets is critical 10% CAGR over the last 15 years. So let me just summarize very quickly before we go to Q&A.

Again my goals when I spend time with our board and we talk at our long-term objectives, winning in the marketplace, taking share, executing on this multi-decade transformation that is illustrated with our transactional revenue falling from the 60% it was back 15 years ago, on its way to around 10%, and then building that earnings power for the future. We're not a one-trick pony waiting on interest rates to go up.

We will deliver earnings for our shareholders between now and then, as well as we anticipate being in a position to do so, subsequent to the time that rates were to normalize. So let me stop there.

One thing I did want to mention before we go to Q&A, just for clarity, because we know that sometimes as these things come out in the press, they are often confused. But you'll see a report that I executed about approximately 1 million shares of stock options here earlier this week.

The natural questions come out of that, what does that mean, what's behind it? These were granted to me in early 2007.

They were set to expire. They were 7-year options, so they were set to expire at the beginning of 2014.

Very small amount in terms of in the money, unfortunately. But we know the press tends to report gross numbers, so it looks like a large number.

Subsequent to that execution I have around 6 million shares still and if you look at all of my vested and unvested options restricted stock units, as well as directly owned shares. But I just wanted to share that information with everyone, because when the press starts to report on those things, sometimes the context and the details behind them is somewhat lacking.

But let me stop there and open up to questions from the audience. I already see Chelsea as -- probably has a collection of them.

But any here for folks live in the room? Question here?

I want to focus on the RIA secular growth. One of your competitors last quarter said that they saw a slowdown in the advisor growth due to the rising markets.

Can you talk a little bit more about that how are you guys doing in the RIA growth segment in 2013? And do you refute or do you agree with this comment?

I think they're talking -- Bernie will be in a position to talk in a lot more depth about this, but I'll share my perspective on it. I think they're talking about the small segment of individuals who might be breaking away from maybe full-service or regional firms or maybe even independent firms.

But the overall trend rates in the advisory business continue very strong, our net new assets are very strong, our net TOAs are very strong. Bear in mind that for a franchise our size and the advisor business almost $1 trillion in assets that the amount of NNA that comes from a break -- from the breakaway brokers or advisors turning independent, I don't know what terminology you want to use, is actually very small.

And as we have indicated over the last handful of years, this notion that everyone was going to leave the wirehouses or leave the regionals and become an RIA was a nonstarter concept. I mean, that was simply not going to occur.

It's a long-term trend, it will have ups, it will have downs. But we don't see anything meaningful from the improving equity markets to change that long term trend or to have any impact in terms of the growth rates that we're seeing in that business.

Did I leave anything for you in that Bernie?

Yes, I was just thinking that's where [indiscernible] is.

Just on the advisory side, so you pointed to the growth over the past 10 years going from 7 to 17. And when you think about -- you had taken that from 17 to, say, 35.

Is it the current client base that as the sales force, the advisors, are talking to and bringing more cash into the doors into new clients, I think in the last investor update, you guys kind of targeted at I think it was maybe 2 million and below, but it was kind of a new opportunities. So any update on that?

I think to drive that number from 17 up to potentially double it, it's a combination of both. I believe the majority of that will come from existing clients.

But we do think that there is an opportunity to contribute to that growth rate from the acquisition of clients who might be today at one of the wirehouse firms. Again, I think John and Andy will probably talk about a little bit more in depth.

But it's I'd say a combination of both, but principally from existing clients. Again, you think about our model, we're better known today for delivering advisory services than we were a handful of years ago, but still, the vast majority of people think of Schwab today if you just go out in the street, on the retail side more as a self-directed firm.

So often, they come to Schwab and then become exposed and aware of the broad range of capabilities that we have, which is why the existing client part will often drive it. Now sometimes the window is very short.

So by that, I mean, they'll come to Schwab, say, from a wirehouse thinking that they're going to do more self-directed investing, not really aware of our capabilities, but within the first couple of months, they'll become exposed to those through their financial consultant. And then fairly quickly enroll into an advisory solution.

So the line is a little bit blurred, but I think the majority comes from existing clients.

So you talked about winning the market share battle over time and adding to the client assets. So kind of as a company, where do you think about over the longer term, where your investments are going to be tailored, such that you continue to win that battle and continue to grow assets, not only just growing them, but being able to monetize them very well like you're doing now?

I'm going to get the name wrong, I'm sure, was it Willie Sutton or something who talked about why'd he rob banks, because that's where the money was -- no, is that who it was? For our growth, it's going to need to occur from where the money is today, which means a lot of acquisition from the wirehouse firms that have a significant amount of the assets today.

And we see that in our net TOA results in both our advisor business and our retail business. So I think that's really where the assets are and where we're targeting for much of our growth in both those major segments.

Chelsea, I see your hand waving.

We have several. There's a couple related to the 2018 estimates that we showed on the revenue mix.

That's a shock to me.

What level of interest rates does that assume? It looks pretty conservative.

And I can help answer that, if you'd like.

That would be great.

It assumes just a very conservative 200 basis point increase in Fed funds.

Yes. In other words, the real question is are you somehow moving off projections that you had previously anticipated based on higher rates by 2018, right?

That's really the question. We're not moving off anything.

It's just the assumptions used in that.

To what extent versus the past, do you view the bank as not only a cash monetization vehicle, but also as a key competitive weapon for both wallet share penetration and also client acquisition? Specifically, competing more with banks and transactional banking.

So it's an interesting question. Let me first say what it's not and then there can be some examples of where it can be used competitively.

We're not interested within the bank is using it as a means to compete based on yield. That is not what our bank is there for.

So we are not interested in being in the money changing business where we chase deposits or clients or assets that are yield sensitive. Are there opportunities without being yield sensitive to use it as a lever?

Yes, there are. So for example, our pledged asset loans are an opportunity for us for growth.

And we think about our advisors that we serve and all of their clients. It's a natural for virtually every one of their clients to have a pledged asset loan.

If that client wants access, these affluent clients served by advisers wants access to money to purchase something. The advisor doesn't want them to sell their investments, we're not necessarily anxious for that and the client often doesn't want to either, the client wants access to rapid liquidity and so pledged asset loan is a huge opportunity.

Again it's up about, I believe, about 50% year-over-year. Of course, our margin balances are also up about 8% year-over-year.

But pledged asset line is an example. So in areas where we can utilize the bank to further our organic growth and take share without doing so, by playing, chasing money based on yield, we'll take advantage of those opportunities.

Go ahead Chelsea, you're on a roll. You're on a better roll if you have the answers too.

I'll let you answer this one. How's the competitive landscape been evolving?

It seems like traditional wirehouses are reenergized on wealth management businesses and some were challenged discount players are regaining footing, too.

Yes, the competitive environment doesn't change quarter by quarter, I would say, to a great extent. The wirehouse firms have great representatives and they build deep trusting relationships with their clients to a great extent.

And they will always be a wonderful competitor as a result. That's good, that challenges us.

It makes us get better in order to keep growing and taking share. So I have tremendous respect for them and maybe even more respect for their registered representatives who build these relationships with clients.

In terms of the discount side, very, very small implications for us, not a lot of money movement back and forth in terms of share gains, wins, loss or anything like that. That's really not where the money is, as you may recall from the slide I had up there.

So although they're there, they're not meaningful in terms of where we're going as a company and not meaningful in terms of the type of clients that we're pursuing relative to the ones that they pursue. Questions in the room?

Chelsea -- oh, here's one right here. Here we go.

Two parts. Just when we think about the ETF strategy and I know it's early days, but what have you seen in terms of keeping client assets or bringing new client assets in?

Because I think if we look at the fee rate, in, like, the advisory plus the ETS, it looks like the fee rate went down a little bit, but the asset growth could be offsetting that. And then just the second part, you mentioned in a more normal, say, earnings environment.

You can focus more on the areas that you can disrupt the industry. Anything that comes out besides like pricing?

I mean, you guys have been pretty active on the 401(k) side in terms of being a new strategy, but anything that comes up to mind?

So I think that the -- when you said advisory in your first part of the question, you're referring to the RIA business, in terms of price revenue compression there or are you referring to retail advisory?

It's overall. But, I mean, I think what I look at it is just the fee rate.

Sure. So what we're seeing with ETFs is not that ETFs are cannibalizing OneSource mutual fund or those types of revenue streams.

They seem to be cannibalizing more individual securities. So individual stocks, in some cases, individual bonds.

That's where we're seeing asset movement. We're also seeing a lot of new money go into those vehicles.

So I guess that's a more subtle form of cannibalization, than the obvious movement of money from one pocket into another pocket. But we're not seeing -- again, the chart that was up there with OneSource growth, to believe to $235 billion today, that continues to grow quite strongly.

So we're not seeing that cannibalization. But I would argue that even if we were, we would be doing the same thing, because that's what clients want.

And we're going to operate the business through their eyes and serve them as the forefront of our priorities, and then figure out ways with our scale and our efficiency and in our business model to be strongly profitable. But we're not seeing that movement to ETFs, cannibalizing our other revenue streams to any meaningful extent.

In terms of moves, in a more normalized environment, I'm probably not going to share some of the things that we think about there, because they're designed to be disruptive to the market. But I think if you just put yourself in the shoes of the consumer and say, if you were a consumer, what would be the ideal situation that you would like, whether you're a self-directed investor or you're an investor hiring professional management or you're an advisor looking to grow and build your own business, what would you ideally want to have?

Those are the types of things that we're looking to deliver to them. Just as I think, in fairness, we've tried to do for the last 40 years.

So, disrupting on behalf of the individuals and the firms that we look to serve, we think, is the winning strategy.

As you look at your advisory capabilities and other products, do you see any gaps or areas where you would like to muscle up even more in a manner similar to Windhaven and Thomas Partners?

I don't feel like we have any meaningful gaps right now, with our advisory solutions, that we're likely to be out engaged in deals on. Not that we're not always looking.

But just to run through the math behind, for example, deals like a Windhaven or a Thomas Partners, we have the most successful referral program of retail clients to registered investment advisors in the industry, by multitudes. We refer and close hundreds of millions of dollars of business every month, and the revenue stream on that works out to somewhere between 40 and 45 basis points to Schwab, between the fee that the advisor pays us, as well as the regular revenue that we generate with those assets being part of our custodial platform for advisors.

So, if you think about expanding the strategies that we undertook with Windhaven and Thomas Partners, where we buy the firm and then offer those services to capture a higher revenue stream, you'd have to only be acquiring firms where your revenue stream would be well in excess of the 40 to 45 basis points you make from referring them, to not only amortize the cost of the acquisition but then generate significant returns for our shareholders. So that math alone probably let's you rule out certain types of products that we are unlikely to go out and do acquisitions in, as well as helps you identify which ones would be in the opportunity set.

And, of course, we've done 2 of them, that match that 2 large ones for flows, dividend, equity and then global asset allocation. And then, I guess, the other point, just to reinforce, probably relatively obvious, but it has to be asset class large enough to gather meaningful flows, to make a difference.

So, to do it in a nichey asset class, where maybe you can get 90 basis points or 100 basis points. But it's such a small niche, really doesn't achieve much for us.

Questions here live? Chelsea?

How does Schwab ensure that sales of advise offers, which carry incentives for the field, as Joe mentioned, are in fact in the best interest of the client?

Well, as with any type of sale, not just advisory-based solutions, we follow a very robust approach to compliance, whether that would be on the brokerage side, if there are suitability in the non-advisory or in the fiduciary position. If they are advisory, we have compliance units that do ongoing regular checking of every sale that occurs, that reach out to clients and confirm that they understood exactly what they're buying, what they're investing in, how it works, what its upside is, what its downside is.

I mean, I think our track record is quite good in terms of not running into compliance-related issues relative to our fee-based advisory solutions. Another corresponding question that often comes up there are, what about the risks associated with the expansion of your advisory platform?

Are you going to run into the potential of another dynamic like what was experienced 6 or 7 years ago, around YieldPlus? I think though things are very, very different.

YieldPlus challenges were created from a client view, primarily from an expectation of a specific thing occurring, a very, very stable net asset value and then not actually occurring. These are solutions where clients, certainly at Thomas partners, Windhaven, Schwab Private Client, Schwab Advisor Network.

These are solutions for clients to understand the volatility, and they're not buying something that they might potentially think will be highly stable and then it turns out not to be. They understand there will be ups and downs, so it's very, very different.

Our view on building, designing and offering products where there's potential for the client mismatch, I think is well documented, even by our decision, a couple of years ago, to close our stable value fund that we offered within our 401(k) business is clear evidence of our sensitivity, from a risk standpoint, to offering products where clients might have a certain outcome expectation, but then maybe we can deliver potentially through no fault of our own, given environmental issues. So I think they're very, very different, but I might touch on it because sometimes that's a side question that comes up out of that particular topic.

Maybe time for one more question. Do you have one more Chelsea?

Nope, you do not. So are there any in the room?

All right. If not, thank you very, very much for being here.

It's great to be able to spend time with all of you. I'll also be around here at the break if there are additional questions that do come up.

And I'm going to introduce John Clendening who is coleader of our Investor Services business. So, John?

Thank you, all. Thanks, appreciate that.

Hello, everybody. As Walt mentioned, I'm John Clendening, and with Andy Gill, I'll be showing you an update on Investor Services.

This is the part of the business that focuses on individual investors. In the retail part of the business, we serve those clients directly.

We also serve clients indirectly, through retirement plans and corporate brokerage services. Today, we're going to focus entirely on retail.

When were last together, Andy and I spent a fair amount of our time showing a broad perspective on performance in retail, on what we saw us to major growth opportunities within the retail business. As Rich talked about earlier, we're going to talk focus and is one of the opportunities today, the opportunity to build momentum in the affluent segment.

I'm going to cover up a bit of background around that segment and then drill into how we're leveraging the Own Your Tomorrow platform to drive growth. Rich also mentioned, we're going to spend more detail than normal, probably there, given the change from time to check.

Then Andy's going to come up and spend some time and how you been evolving our affluent offering, to ensure that we're always better serving clients in that affluent segment. So it's our 40th anniversary this year.

We're very excited about that. Marks many, many waves of innovation in our past.

Walt also emphasized, in his opening remarks, that we're in the midst of this multi-decade transformation of the company, into a full-service, high-value investment firm. In the retail business, we're now entering our fourth wave of growth.

First wave, 70s and 80s, when Schwab was that pioneer discount brokerage, back when equity commission was a robust price of $70, considered an awesome deal way back then. The 1990s based on innovations like schwab.com, the firm had propelled itself into that #1 position as an online discount broker.

Though admittedly, serving that very, very small part of the market of self-directed investors. On the heels of the dot-com bust, Chuck and Walt set in motion expansion into relationships into advice, following client needs.

But at the same time becoming almost quietly relevant in the affluent space. So much so that by the end of the last decade we had amassed over 500,000 clients who had brought to us $250,000 or more in assets.

And now the fourth wave. Fully seizing the opportunity in full service.

Again, today, a focus on affluent. But I want to mention that at the outset this is not about abandoning self-directed investors.

Instead, this is all about building momentum where we see a huge growth opportunity, an opportunity that we believe has never been greater for 4 fundamental reasons. First, the capabilities that we've been building, the capabilities we've been building over that 10-plus-year period that Walt talked about, have put us in a position to well-serve investors were are looking for full-service.

Second, investors have responded. Affluent investors in particular.

We have a demonstrated track record of attracting, growing and earning the loyalty of affluent investors. And third, despite that growth, we see a huge asset capture opportunity ahead of us.

It's no secret that the majority of investors at full-commission firms simply are not fully satisfied. And then, lastly, we've identified a large segment of investors, an attractive segment of investors, part of that affluent at FCB investor, that has emerged and really solidified postcrisis.

A segment that we believe is perfectly built for the Schwab model and it comprises about $2 trillion of opportunity for the firm. So, I'm going to drill into each of these 4 and talk about how, together, they present the opportunity to drive growth through redefining full service for the affluent.

Capability building. So, last 10-plus years, we've been broadening and deepening our capabilities.

In terms of relationships, we now have almost $5 billion of client assets and a dedicated relationship with a skilled financial consultant. Help, guidance and advice.

Clients have never been more interested in Schwab's perspective than right now. We've never been more capable than now to share our perspective.

Walt talked about Windhaven and Thomas Partners, great examples of win-win monetization. We have the right products, whether it's a managed account, with a pledged asset line that Walt talked about, one of those gaps that we've closed in the last couple of years, from Schwab Bank.

We also have the ability to trade options online, creating income, hedging risk for our clients. We continue to build out multi channel service.

This is really important for 2 reasons. Reason one, it's a key part of our ongoing cost advantage versus our competition.

And second, you may have an affluent investor that really appreciates full service, but sometimes it's just a lot more convenient to use your smartphone or your iPad. Maybe you're opening an account, maybe you're moving money.

Maybe you're going in and retooling your financial plan, a lot more convenient to do that, outside the context of a person and the branch, during regular business hours. Now these together, we believe, firmly push Schwab far beyond any characterization of the firm as a discount broker.

Now clients have responded. These numbers are all on the affluent client base, so $250,000 or above, at Schwab.

Almost $700 billion of client assets today in that segment, up an average rate of 7% per year since 2005. So clients are responding to these capabilities that we've been building.

On top of that, they have rewarded us with their loyalty. We believe client loyalty, as measured by CPS, is the best single indicator of the health of a franchise and its future growth prospects.

We're at 54 right now, up 2.5x versus where we were in 2005. And to put that 54 in context, we believe, based on our analysis and research, that's about 4x or so greater, or higher, than the typical wire house.

Despite that growth, there's a ton of growth opportunity ahead of us. We tend to think about that multi-trillion dollar slice, that I alluded to just a bit ago, in 3 parts.

First, go where the money is. I'm not going to say we're going to rob these folks of their money, as Walt sort of again -- that Willie [ph] said, in the quotation, but let's face it, there are $11 trillion at firms we call full commission brokers.

So wire houses, regionals, $11 trillion. That's 6x the amount.

That's over traditional competitors like a TD Ameritrade. So go where the money is.

Second, go where there's dissatisfaction. Again, it's no secret that the majority of clients who had a full commission broker are not fully satisfied.

We know that in the data, there's evidence for this. So if you look at money in motion in the wire houses, about 3/4 of $1 trillion of money in motion.

Lost share. These competitors at wire houses, just a part of that full commission broker model, that legacy model, have lost about 6 share points, we believe, in the last 5 years.

That would translate to about $900 billion draining out of those firms. Why is that?

There's a lot of reasons for that, but certainly one is those clients don't truly, truly trust the firm. They may have a good measured trust for the individual, as Walt mentioned, but they don't truly trust the firm.

Almost 2/3 don't believe that, that firm is looking out for their best interest. So, the third part of this, though, is playing where you can win, and playing where you can profitably.

And for us, relative to affluent, it's targeting a $2 trillion piece of that market. What characterizes that market?

A couple of key factors. First, these are investors who are affluent, who are very open to working with Schwab.

Secondarily, they're generally willing to bring Schwab about $250,000 to around about $1 million. That sort of asset range they're willing to bring to Schwab.

And third, this is really important, these are investors that are incredibly complementary when compared to our Advisor Services business. So these are investors who are not willing to turn over most decisions to an RIA.

They view their needs, not as particularly sophisticated, much more straightforward. And then lastly, their affiliations is with the entire aspect of the firm, not just the person that they work with.

So affiliation is with all the channels that they work with at the firm. It's the fourth piece, though, that I want to share, that describes the most important element as it relates to the brand platform.

And that's around mindset. In the last meeting, we introduced you to a guy named Tobin, who's meant to personify that mindset, that attitude.

It's surprisingly how many questions and comments that I got about Tobin. Let remind me you what he looks like.

There's Tobin, right there. We're bringing him back, and here's some of the demographics around Tobin.

So mid-50s, successful entrepreneur. He's got almost $2 million in invested assets today, split across a couple of full commission brokers, very common to have a couple brokers.

He's married, a couple of kids, very active in his community. But the mindset here is what's key.

So the mindset's the following -- this is a mindset, by the way, that we've researched, indexed very highly in the current Schwab client base, but also fits people like Tobin, like a suit, exactly describes Tobin. There about 8 elements, I'm going to share 4.

The first is around viewing his financial life as an ongoing journey, where successes is defined by hard work and by informed risk-taking. Second, Tobin's engaged in investing, but also in life.

He's the type of person with a bucket list, and he's going through that list. As he ticks something off, he adds something to that list, very engaged in life.

Third, he's optimistic. He is a person who's willing to take a few swings after having stepped up to the plate.

And he holds himself accountable, holds himself accountable to the outcome. And, lastly, characterized by humble prosperity, the classic millionaire next door.

In terms of investing, Tobin really hates the idea of being managed. He wants more choices, more control.

His ideal concept is working in partnership where he's got one hand on wheel. Second, he's very interested in a more proactive relationship with his broker.

And he also wants know that, that comes with the right spot, that productivity comes from a spot of having his best interest in mind. And lastly, he's got a bunch of nagging questions.

Nagging questions around can he be doing better, am I getting the right type of value? Now we've identified this mindset, as personified by Tobin back in the last meeting, the question that we're then faced with is, hey, how do we tap into that mindset?

How do we gain the attention of people like Tobin, so we can grow and grow more quickly? The answer, of course, starts with a refreshed brand platform, built on current equities, but also specifically designed to gain the attention of Tobin, people like Tobin, and the $2 trillion that Tobin represents.

We express that brand platform in Own Your Tomorrow. So, own your tomorrow.

A concept of ownership that's based on shared values. Values that were present at our firm at its founding, 40 years ago, and certainly in the DNA of people like Tobin.

Tobin knows if you want to achieve something, if you want something to happen, you've got to own it. So, for Tobin, own your tomorrow means a rallying cry for accountability and responsibility.

Keeping that hand on the wheel. It's called a full engagement, not only in your life overall, but also in your investing life.

And it's also again game changing philosophy, a sharp line in the sand, in contrast and against that sense of being controlled by an advisor at a full commission firm. On top of that, it's optimistic, it's inherently a call to action, and it's about the future.

It leads with values, and as a result, provides a very sharp contrast to the competition. We're going to win with this platform.

We're going to win by calling out and then resolving a disconnect that we very plainly see in that segment represented by Tobin. In their lives, overall, they're highly engaged.

They're open to new relationships and they are able to act upon those instincts. When it comes to investing, again, this is very clear from the research that we've done, it leads up to this platform, they really feeling the have to accept what they've been given.

They tend to settle for lack of knowing about a better alternative. They intend to say things like, I'm not so sure I can trust my firm, but I think my guy is okay, right?

That is not a ringing endorsement of your current situation, that's much more around latent dissatisfaction. So we're going to hone in on that tension, take advantage of that tension.

To Get People like Tobin to rethink how and where they do their investing. We're asking Tobin to take more control, be more engaged and work with a firm that's been enabling clients to do those things for the past 40 years.

We're leveraging our towering strengths to tell that story, certainly our founder Chuck, our people and our clients. We're going to do that in a way, and have begun to this in a way that validates the current client.

We don't want to chase any of those clients away that are loyal Schwab clients who love the firm today. We're going to tell in a way that is attractive and causes people like Tobin to pause and think about Schwab.

Look, one of the biggest impediments to growth today, for any brand, is being met with a sense of indifference. The world is really cluttered, right?

And so we've initiated our connection with Tobin on the basis of shared values. It's through shared value to get some of the stop, pause and rethink your brand.

Now, what you're about to see is one of our first ads. In fact, our first ad.

And I think you'll agree it's very different than anything else that's on television today. Let's run the commercial.

[Presentation]

So when you look at that and sort of consider that piece of work, I think you'd agree, also, that it's very authentic. It's 100% authentic.

It's intensely personal to someone like Chuck. Unexpected for a category.

And maybe even most importantly, there is no way that you can substitute any other founder or any other current CEO into that advertising. It just wouldn't work.

It wouldn't be genuine or authentic. It would come across is a story.

And part of that reason is that values are simply different at Schwab. Now, next I'm going to show you an example of some of the advertising we're doing around our people, specifically our financial consultants.

These guys are some of our greatest assets, but also some of our least well-known assets. When you meet one of these folks, you absolutely know they're fundamentally different than the broker at another firm.

We figure that the best way to tell that story was to have some very real FCs tell it in their own words. Let's go ahead roll, Jeff.

[Presentation]

So that's the first of many. In fact, the second FC spot broke late last night, early today, potentially.

So we have 2 of these out now, several more to come. What you obviously notice is they're done in documentary style, but with a bit of a twist in the storytelling, it's there.

And we do it in a way that allows the commitment that, that FC has to doing the right thing by their clients to very plainly be shown. So as part of this brand platform launch, we've also updated the look and feel of the brand.

Example here is the schwab.com website. The look is meant to be more modern, more contemporary and highly appropriate for the million-plus clients that visit schwab.com every month.

It's meant to also be a little bit more upscale than the prior version, but not in any way sort of exclusive or niche since Schwab is, obviously, a brand for everybody. We're activating a new platform across all client prospect touch points.

What that means is everywhere clients and prospects are sort of communicating with Schwab, on an over time update to this new look and feel of the new brand platform. That's for television, print, branches, digital, you name it, relative to other venues like Hulu, a lot of eyeballs going to Hulu.

You'll see advertising running in Hulu. From a media selection point of view, we're purposely aiming to get to people like Tobin.

What that means is, on the television it'll tend to be news and sports. In print, news and also opinion leaders like The Atlantic.

On the lower right, the sitelet, so this is where we drive prospects who want to learn a little bit more about Schwab, opportunity to see some client testimonials, hear more from Chuck, season content around why is Schwab a potentially good choice for them, easy way to open the account. We're really excited of one of the statistics we've just recently seen here.

In the first month of the campaign, we've driven almost 300,000 individuals to that sitelet. That's about 4x greater than what the last campaign had done in its first month.

It's very encouraging. Now, of course, the brand is a lot more than the pretty pictures and the videos.

The brand, from a big picture point of view, is in a way the promise that we make to our clients, in a way that makes the brand different, better and even special versus other choices. And we've chosen to lead with that sense of differentiation, very explicitly by sharing a Schwab promise.

You may have seen this initially in Barron's or The Journal. And what this is a specific set of 5 promises that we're making to all of our clients, regardless of their size, by the way.

All of our clients. Now, i want to get to a question maybe on some of your minds right now, which is something along these lines.

Look, lots of brands make promises, lots of brands make commitments, there's performance this, performance that, ours is faster, bigger, we get close, wider that sort of thing. Why is this different?

How will this not get lost in the clutter. There are a couple of reasons for this.

First of all -- and I'll show the 5 in just a second. First of all, the promise are exactly our brand today.

We didn't sit down and write down 5 things we'd like to be in some distant future that we might aspire to. These are elements of the brand that exists today.

Second, in a firm like ours, this is very important. These 5 promises are extremely motivating to our people.

All of our people, maybe in Joe's organization, define these as motivating. They're answering the phones in the branch, highly motivating, because it's who we are as a firm.

And third, these are the 5 elements that, our research tells us very clearly, differentiate Schwab for Tobin from that full commission broker. So these are the 5.

I'm not going to read all the elements of these, but sort of partnering with you, getting to know you working with you on your terms. Second, access.

Access to commentary but in a way that's relevant, actual and even understanding. Not always the case in our industry.

Third promise, broad range of investment options, not just your own, but the very best of the best that's out there. Fourth, being open and honest, in all manner of the relationship.

But including, what's often a mystery in our business, what are you actually paying the firm that you're working with. And then lastly, a commitment to driving down cost so that, as an investor, you have more.

These 5, taken together and the way we deliver them, are done in a way that no other competitor could possibly do. Now there's a last element that's also different and we know that this will be sustainable, and that's because we measure and track.

We measure and track everything around here, especially as it relates to marketing. And we're certainly tracking the extent to which we're getting these messages across, around these elements of the brand.

But speaking of tracking, we don't do all the work that we've talked about here just because it's fun or interesting. We do it for business impact.

We do it for a couple of core reasons that we expect to see over time, right? So advertising and marketing the brand are important in accumulation of new households.

We expect to have an impact there. It's also important relative to driving client asset flows, current clients, as well as prospects.

We also, over the long-term, expect to see some of our brand metrics continue to become stronger. But what about the short term?

So I'm going to share with you some of the initial reaction that we've gotten from the campaign. I selected these 4 responses for 2 reasons.

First reason is they're representative of the feedback that we've gotten from prospects that are that target set that Tobin represents. And then secondly, because they exemplify that we are getting through to Tobin.

We're getting through to our target. So I liked the idea of creating our own future.

It should resonate with everyone that wants to feel accountable and responsible for themselves. It tells me, you can't sit back, you got to step up the plate and take ownership.

No games, a sincere across-the-table handshake with the founder. And then lastly, I feel like Schwab is setting itself apart from its competition.

So, for these reasons, we believe that we are on the right track to an enduring and sustainable and also uniquely Schwab brand platform. But, of course, the brand is also more than these sort of sentiments.

These are important sentiments in the minds eye, of people like Tobin, that's why we did the work. But the brand also, most critically, shows up every single day in how we work with clients.

And so, to discuss that, I'd like to invite Andy Gill up to the stage to cover how we've been evolving the affluent part of our offering. Andy?

Thanks, John. Hi.

My name's Andy Gill, and along with John Clendening, I cohead Investor Services. John just shared with you the large asset opportunity we have in serving affluent clients, like Tobin.

And he shared with you the brand platform that is already resonating with those clients. I believe with the changes that we've made in our affluent client offer over the last several years, that we are poised to accelerate growth among our affluent clients.

So I want to spend a bit of time drilling down into our affluent client offer and how we'll accelerate that growth. We've quietly built a large and growing affluent client business.

It's about 20% of our client base today. And our clients averagely have about $1.2 million with us, among those clients that have more than $250,000, and they're satisfied, a Client Promoter Score of 54 versus our 47 overall.

But what I want to talk about is drilling down into 3 critical components that deliver our unique value proposition: first, the relationship, extending the relationship on our clients' terms; second, financial planning, helping clients understand how to get to their goals, to their priorities; and then finally, for-fee advice, Schwab's point of view to help them achieve those goals. So let's dig into relationships.

The key to starting that relationship is really making accessible our experts, our financial consultants. And if you think about our target that John just talked about Tobin, in every single part of Tobin's life, people are trying to get to know him so they can serve him better.

They're trying to get to know him so they can design and offer for him and tell him how important he is. At Schwab, we start by offering a relationship to our affluent clients, on a one-on-one basis, a dedicated financial consultant.

But we don't stop there. That's really the old model.

In fact, what we do is recognize that Tobin, as John said, once interact with us across many, many channels. And that's why we have over 300 local branches.

That's why we have over 1,100 financial consultants. It's why we make available our specialists, whether it's portfolio consulting, fixed income, active trading, so that Tobin can interact and our targets and clients can interact with these specialists.

And it's why we have multiple ways to interact, whether it's in a local branch, whether it's over the phone, over the web or their mobile device or chatting online. The key is and what differentiates Schwab is that we'll interact with the client on their terms, when they want to interact with us and how they we want to interact with us.

So let's look a little deeper on relationships. I think the key metric in seeing how they appreciate that is our Client Promoter Score.

So if you look at the entire Investor Services business, Walt showed you the big transformation we've made since 2004, negative 34 CPS, all the way up to today, our new high, 47. But if you look a little deeper, at just our affluent clients, our CPS is 54.

And if you look even deeper at those affluent clients where we've extended a dedicated financial consultant and they have a relationship, our Client Promoter Score is 62. But we're not stopping with the ways to interact that we have today.

We continue to invest in meeting clients, where they want to work with us. In February, I talked to you about extending Saturday hours.

And in 18 branches, we now have Saturday hours, where a client can walk in and interact with us on a Saturday because 8 to 5 on a Monday really doesn't work for them. Or they've got something they want to sit down and take a little bit longer to do, maybe a financial plan, maybe updating some documents and having a consultation with their financial consultant.

We've expanded online chat. I know no one in this room would ever multitask during an important meeting.

But if they did, then they could, on their computer, get an answer to an important service question that they had on schwab.com, without ever having to not pay attention to the meeting they were in. We've also expanded our branch footprint, primarily through our Independent Branch Services, where, by the end of the year, I expect, we'll be between 22 and 24 branches in locations where we wouldn't have been able to extend that local presence without them.

And then finally, we've extended more planning conversations to really deeply get to know our clients' needs. So let's dig in to that second component around financial planning.

Foundational to building a relationship is really understanding deeply what our clients' priorities are. And what is unique about Schwab's approach to financial planning is it's not just about the metrics.

It's really about that open, honest conversation. It's important to think about what is not.

It's not that old model. It's not that one-size-fits-all, 100-page binder, where you walk into the -- you walk into the meeting and you're really trying hard to pay attention to it.

But there's page after page that really doesn't apply to you. And then you take it home and you swear you're going to open it up and update it, but what it really becomes is something that takes up room in your closet.

And too often, the recommendations in that big, 100-page, one-size-fits-all binder are proprietary products. No, the Schwab approach to financial planning is different.

And what makes it unique is that it's personalized. It starts with really clarifying through a conversation what's the clients' priorities are, what their goals are, what's most important to them and then offers practical actionable solutions to get started, to make progress against that goal in a very, very straightforward way.

And maybe the best way to -- really to mention that for you is to share a conversation I had with a couple in Austin, Texas just recently. And they've come up to me, it was a client event.

They've come up to be to brag on their financial consultant. And I said, "Well, what made her so good, in your mind?"

And they both answered almost in unison, "She took us through a financial planning conversation." They actually didn't say that.

They said, "We got a financial plan." Let me tell you little bit about them.

I mean, he's a pretty successful business executive. He takes a lot of risk in his business, and he takes a lot of risk in his investing.

She, very knowledgeable investor, is very conservative. I think he made a joke that she feel most comfortable if all the money was in the mattress.

So you can see that the dynamic there was creating a little friction when he mentioned that he'd like to retire soon, and she didn't think they had enough assets. The financial consultant took them through the planning conversation, took them through really understanding what their priorities were beyond just retirement to help them get to a place where they had a plan.

The net result was that they agreed he would work one more year. They agreed that they did have enough assets for retirement.

But the real result was that they had confidence in that decision, and they had confidence that Schwab was the right partner. This financial consultant was their right partner to not only help them get to retirement, but to manage through retirement.

And I think that's the #1 reason why we're doubling the number of planning conversations that we're having this year, to deeply get to know those clients' needs, build that long-term relationship. In those planning conversations, the majority of them are about retirement.

If you think about since 2008, lots have changed. The #1 thing that's changed for clients around retirement is the question they asked.

It's no longer, "What date can I retire," but too often, it's, "Can I retire?" Well, we help them with strategies around accumulating the assets they need to retire, and we help them with the strategies around, in retirement, how they create that income, how they live off those assets.

But we can also serve other priorities that clients may have, whether it's saving for college, a second home, taking care of elderly parents. The key is we'll sit down and identify those goals and put an actionable plan together, and those plans are driving growth.

Those relationships are driving growth. If you look at the slide, 5 big up arrows.

For those clients who go through a planning conversation versus those clients who we haven't yet taken through a planning conversation, we see NNA lift. We see an increase in our Client Promoter Score by 14 points, pretty significant, and deeper client retention.

But what's interesting is that when we go through those conversations, clients really want to know our point of view around investment management. They want Schwab's help, not only to identify their goals and identify a plan, but to help them manage it over time, and that's leading to increases in advice enrollment.

It's also leading to increases in our for-fee advice assets. So let's turn to that third component that I mentioned at the beginning, and that's for-fee advice.

John took you through the continuum of Schwab's evolution. Our advice evolution is a lot shorter.

It's only about 11 years. And if you think back to 2002, the needs of our clients have changed pretty dramatically, even over that last 11 years.

But back in 2002, to respond to clients who were really asking for help and asking us to help them manage their investments, we introduced Schwab Advisor Network, our network of registered investment advisors that we refer business to; and Schwab Private Client, our nondiscretionary advice offer. A little later in response to client need, we introduced Managed Account Select, giving our clients access to the best third-party money managers.

And then we introduced Schwab Managed Portfolios. Now this is our ETF wrap and our mutual fund wrap, where with as little as $25,000, investors can get started in a fully diversified portfolio that we manage through Schwab's experts.

And then Walt talked about, most recently we've added Windhaven and ThomasPartners. From a range, we charge between 50 basis points for Schwab Managed Portfolios all the way up to about 95 basis points, so accretive to our self-directed ROCA.

Clients are looking at, "How does -- how can you help me? How can your point of view help me achieve my goals?"

And the business results, and Walt shared this number earlier, they've been pretty strong, 17% growth in assets under management to $138 billion. And where is it coming from?

Well, if you look on the right-hand side of the slide, 5 big up arrows. Even our largest offers, Schwab Managed Portfolios and Schwab Advisor Network, saw double-digit growth.

And look up at the top, Windhaven, 62% growth in assets. And responding to a question we got earlier, it's coming from our affluent clients today.

23% of our of our affluent clients have some form of our fee-based advice. But adoption is even stronger among those clients.

The target that John talked about, among those clients who have been with us less than a year. They come to Schwab maybe thinking they're going to do a little bit more of it themselves or in conjunction with their financial consultant.

And when they're made aware of all the capabilities that we've added, they're adopting fee-based advice. 28% of them already have that.

So let's go back and talk about our target, talk about Tobin. What Tobin is really seeking is a partnership.

Not somebody that's going to do everything for him, but somebody where he can have a conversation. Someone that is interested in his priorities, in his ideas and how to incorporate those.

Tobin is interested in more choices, which is one of the reasons we've expanded our fee-based advice offer to take advantage of all the needs our clients have. And then finally, quality at a fair value.

So what I thought I'd do is spend just another minute or 2, talking about 3 of those fee-based advice offers in a little bit more detail to dimensionalize the choice to Tobin has. First is Schwab Private Client.

It is our oldest fee-based advice offer, it's also our largest. And you'll remember that we've talked about this one before, it's a nondiscretionary offer where a portfolio consultant, who's dedicated to that client, sits down, takes a look at the financial plan, takes a look at their investing ideas.

And together, together, they build that personalized portfolio. And the client's involved in all of the decision-making.

But it's through our recommendations and a consistent fact-based approach. The results, Schwab Private client assets were up 16% year-over-year.

This past year, up to $56 billion now, 7% increase in enrollments and a 73 Client Promoter Score. Quite high.

Let's look at Windhaven. You -- we've talked about Windhaven the last few updates.

But just as a reminder, this is our global diversification with proactive risk management. We look globally across 40 different markets to capture the upside and rising markets, while reducing exposure in down markets.

The results have been very strong this year, 62% total enrolled asset -- 62% increase in total enrolled assets in retail to now $12 billion. Now that's a retail-only number.

62% in total enrolled accounts, and you can't make this up, a Client Promoter Score of 62. And finally, ThomasPartners, our most recent acquisition.

ThomasPartners is all about growing a monthly income -- dividend income stream over time and have a 10-year track record of doing just that, delivering that consistent, monthly dividend income. And if you think back to our planning conversation, so many of our clients are interested in retirement that dividend income plays an important part there.

The results, so far, we introduced it nationally in May. They -- we've got $2.5 billion in total client assets today, about 3,800 accounts.

And in the first month that it was available across the United States in the retail network, we did $145 million of enrollments. ThomasPartners is already resonating with clients because of that dividend income stream, that income need that it addresses so well.

So let's come back to Tobin and our target market. Recall what I said that Tobin was looking for partnership.

Tobin was looking for choice. Tobin was looking for value.

I feel like, with the 3 components we talked about, relationship, being able to start with a deep understanding of their needs, a financial plan to help them take action and make progress towards their goals. And finally, our for-fee advice, that offers Schwab's point of view, Schwab's expertise, in helping reach those investment goals.

We're poised to accelerate growth among this affluent client base. So let me wrap this all up.

First, our strategy is working. We've quietly built a strong affluent client base.

And the opportunity that John laid out to capture assets from the full-commissioned brokers, we think is large and is there for us. We have the right strategy.

We have the right brand. We have the right offer, and we believe we'll continue to attract affluent clients at an accelerated pace.

I am very optimistic that we've already seen strong growth in this area among that engaged affluent, those folks who want to have one hand on the wheel, and we'll continue to see that accelerated growth. Thank you very much.

Now I'd like to invite John up on the stage, and we'll take a few questions.

We have several from the web. Can you speak to how market share trends have evolved since the crisis for Schwab versus the large wirehouses?

In recent years, organic growth metrics have improved dramatically at the wirehouses, suggesting incremental gains may be difficult to realize.

So big picture, if you look to our point to point post crisis to now, we gained well over 0.5 of a point of share, which is pretty good off a 5.5%-or-so sort of base, depending on what sort of definition you're using. We've continued to gain share.

I mean, it's through this guys have recovered. I think Walt and Joe may have both covered that up front in their remarks.

But there's still plenty of opportunity. And when you think about 3/4 of $1 trillion of money in motion, when you think about how those firms are regarded, they're not as wounded as they may have been immediately post crisis from a brand point of view, but there's still plenty of opportunity to grow and gain share.

Question in the back here.

The question is about the opportunity, $11 trillion [indiscernible] opportunity and the 300 branches [indiscernible] 22 to 24 [indiscernible] branches and 1,100 consultants. What do you think you'll build out [indiscernible] to fully optimize to get [indiscernible]?

Okay. So the question was, for those who can't hear his question, the -- how big does the branch network need to be?

How many financial consultants do we need? I think, given where we are in the cycle right now, we're probably at the size and at the growth pace that we want to be at.

As the economic environment changes, as interest rates rise, we will likely expand that. I can't imagine a scenario where we don't have more branches, or we don't have more financial consultants to be able to serve those affluent clients.

That said, we haven't picked a number. What we know is that extending relationships, extending planning, extending our for-fee-based advice is the #1 way that we'll attract and gain share among that target audience.

Chelsea?

Who is serving most of who you would deem affluent clients today?

So it seems like the question is around who has the largest share potentially of affluent clients. The usual suspects are the same folks that showed up on the list that Walt mentioned have the largest number of these folks, right?

So Morgan Stanley, Merrill Lynch, Wells and their new configuration, UBS. The interesting thing, though, is you've really got to pick apart the affluent market.

And so in the spectrum of folks who are being served by this full-commissioned brokers, you have everybody ranging from, "I would like somebody to fawn over me and walk my dog and do those sorts of things. Do all that stuff for me," to even this sort of almost incidental active trader who finds himself in a historic relationship with somebody at the firm.

That's why we talk so much around that slice of the market, that Tobin part of the market, where we believe that no one in that space is well serving the investor like Tobin. And so it's 2 out of almost 11, it's not the majority of that market, but it's a big, big nugget that we feel like we can go after.

It's not properly served anybody in that space.

You focused much for your discussion on the affluent, but can you update us on what's going on with the younger Schwab customer formation and retention, what we used to call the nursery?

The nursery, yes. So we still continue to do well with the nursery.

And one of the things we find interesting about the Own your tomorrow platform is, not only does it extend across the different businesses of Schwab, it also plays very well across different demographics and age groups. Why is that?

Primarily because it's an attitudinal or a mindset sort of segmentation. So if you're young, I'll put you in mobile, if you are an entrepreneur who's young.

I think about all those people in this part of the country as an example of that, you respond very well to message along those lines. Now for us, a young investor is somebody that's probably going to be in the late 30s, even early 40s.

Why is that? Because they've now got to a point where they've accumulated some assets.

And so again, we feel like we're doing very well with that segment. We don't know of another firm doing better with that segment.

You may have seen some of the startups that have come to try to take over that segment or play in that segment, one of which [indiscernible] today. So we're doing well.

What are your -- these are a couple of product questions. What are your future plans for Schwab ETFs?

Well, we're very pleased the performance of Schwab ETFs today and, in addition, our Schwab OneSource ETF platform, where we have over 100 -- where we have 107 ETFs on the platform today. So we feel between that, our Fundamental Index ETFs, and the Schwab OneSource, we can meet all of the clients' needs for that diversified index product.

There's a question in the room up front.

Just a follow-up on the nursery or the younger population. What trends have you seen?

If you look over time, just given the history, like their interaction with Schwab, just given the volatility in the markets, given what they've been experienced that they've been investing for the past 10 years. Just curious if the trends have been more depressed versus the high net worth or the affluent area.

Depressed in what way, Mike [ph]?

Relative to like historical trends, meaning the amount of money that they're committing to Schwab or bringing in the door or the amount that they're investing to the market versus...

We don't see a big difference there, and we don't see a big difference, very, very little change in terms of the diversification of the assets they are bringing. There was a speculation, I think, 2 meetings ago around, is it all cash, and our cash position really hasn't changed.

So we see them acting like they have in the past. And we're attracting them through new channels.

Things like chat are going to help. Things like mobile, they're going to help.

That's the way they live their lives. And so we've continued to enhance our ability to meet them on their terms.

Chelsea?

Another product question. A secular trend going on right now is clients seeking alpha through products like alternative products.

With some of the private equity players starting to target the affluent retail investor, do you have any plans here to leverage their offerings?

We're studying that. We have an offering along those lines today.

It's relatively small. We've been studying, is there an opportunity there, how -- what's the size of that opportunity as it relates to other things we may do to invest in the business.

There's certainly elements or parts of our country that are most keenly interested in alternatives: New York; SoCal, another example of that. On the other hand, it's not the case that there's a large perception of a gap in the offer that we have today for high net worth clients, affluent clients, even ultra-high net worth across that spectrum of alternative investments.

As we study, we look primarily at liquid alternatives, that sort of thing, and our clients can -- certainly can consume some of those product today on our platform in the form of mutual funds.

As you push more into the affluent space, how do you manage the increasing risk of alienating RIAs that compete for affluent clients?

So the reality is we both have about -- a little less than 7% of all the investable assets. So if you add this up together, we still don't get to 14%.

There's a lot of assets out there. But we primarily play in the space that is -- that getting started, that nursery that we talked about all the way up to $1 million.

And in affluent, it's really $250 million to about $1 million of investable assets, where clients are getting started with us. And when I -- when you look at the differences between why we have a Schwab Advisor Network, which continue -- we continue to refer about $4 billion a year in assets to Schwab Advisor Network.

When you look at the differences, ours is scalable advice. It's fact-based.

It takes Schwab's point of view. But at the end of the day, it's scalable advice.

And if you look at Bernie's business, and he'll talk a lot more about this, those registered investor -- investment advisors are able to provide highly customized, highly sophisticated for those more affluent clients, who are likely $1 million and up. So we don't think there's -- we really don't think there's a conflict.

And in a lot of ways, it's very complementary. In fact, it always is complementary.

We can see on the surface, it may look like there's a conflict there. But boy, the client differences are stark between those who choose an RIA versus those that end up at Schwab.

On top of that, we've got very strict guidelines that prohibit our people from poaching into or reaching into the client base of our RIA clients. So there's not an issue there that's created.

On the trading front, can you comment on how much of our trading volume comes from mobile, the mobile channel and then also from options?

Both continue to grow. Both of them have seen good growth even over the last 12 months.

I don't think we've shared the exact percentages, but both of those continue to be important parts. Our acquisition of optionsXpress has allowed us to continue to accelerate our options growth due to their very innovative tools, tools like Walk Limit, where, just in the last quarter, our clients were able to save about $1 million in execution by using that automated Walk Limit tool.

So we're very bullish in terms of the -- our ability to continue to grow in the option space, and mobile will be a part of that. One more in the room.

I think under the new disclosure, the retirement business falls under your group, but I just wanted any update just on the passive strategy. There used to be like a pipeline just in terms of some of the clients that were signing up from that.

So I don't know if there's -- that you guys are going to be broader.

Walt's going to take that one for us. Thank you, Walt.

Sure. We continue to have pretty good success with our Schwab Index Advantage program, recognizing that you have a whole infrastructure within the 401(k) industry that wants anything but it being successful because it's so unique and so differentiated.

We have about 100 clients who are either already operating under Schwab Index Advantage or in the process of converting, and we have about 200 people who are in some form of the process of consideration to the program. So we're pleased with that progress.

And as I've said at each one of the meetings, we expect that's a long-term play because of how dramatically different that program is than the traditional way that, that industry has operated.

All right. Any other questions?

Chelsea?

What are your priorities from a regulatory perspective?

That sounds like great question. I was waiting for that one.

Some of the biggest changes that we've had to deal with from a regulatory standpoint have been in our for-fee advice space. And that's why over the last 3 years, we moved Schwab Private Client to its own investment advisory to deal with the regulatory requirements.

Our Schwab Managed Portfolios and Schwab -- our Schwab Managed Portfolios are managed in a separate fiduciary and obviously, ThomasPartners and Windhaven are. Schwab operates as a dual broker-dealer and RIA so that we can make referrals to those and also to Schwab Advisor Network.

That's some of the regulatory component that we've had to operate under. The other big change that from a retail standpoint that we've had to deal with is the suitability rules.

So we've had to get much more specific around documenting when we make a strategy recommendation, even if we're not making recommendations of individual securities. So let me give you an example.

We come out of a financial planning conversation. The client truly is more self-directed, and they want to try it a little bit on their own.

And we recommend a moderate risk portfolio based on a deep understanding of their needs and their risk tolerance. We would now need to document that we recommended a moderate risk portfolio and then what those pie slices look like.

That's a change in the suitability rules. And so we've put automation in place to do that.

And as Walt said, we put supervision in control. We can really make sure that, that's happening on an ongoing basis.

All right. I think we're at time.

Let me thank you for giving us your attention. And I think we're going to go to a break.

There are lunches in the back for those in the room. It's going to be a working lunch.

So I believe, Rich, we get 10 minutes? 10-or-so minutes, and then we'll see you back here.

Thank you very much. [Break]

It's a great opportunity to be here with all of you. Thanks for giving me that opportunity.

And I almost feel like I could ignore my presentation and address the questions that have been asked already in the room because they're so interesting as you go forward. And one of the things I would take the opportunity to talk about, and I think you'll see it in the things we'll be addressing as we go forward here, is this whole concept of "is the trend slowing?"

I love when people say that it is the trend slowing, whether it's on ATIs or independents in general. And it just reminds me that so many of our competitors in this space have looked at this as a micro trend phenomena, a market trend phenomena and not a macro trend.

And I'm reminded that over the decade-plus that I've worked in this industry, how many times our direct competitors in the purpose-built space have had their businesses up for sale because they didn't like the micro trend they we're in, but they hadn't looked at the macro trend and the significance of everything that's going on in the marketplace. So what I wanted to do today is start really by talking to you a little bit about what's going on with advisors, specifically, within their businesses in using that.

I want to certainly talk to you about the firm, how we're helping to serve advisors and the things that we're doing and our strategies going forward. And then get quite specific with you about some of the things that we said we were going to do when we talked to you a short while back, and certainly we are doing them.

So here's a macro trend for you. As you think about advisors, we've just recently launched our benchmarking study.

We started in 2006 with this study. It has become the cornerstone, I would say, for most of the strategy that we work on now and the things that we do because, by and large, we bring our insights, we bring our intellect of the industry.

But really what we do is we bring forth the advisors' ideas on what they need to do to grow in the marketplace. And the benchmarking study, which touched about 1,000 clients, $0.5 trillion in assets this year.

We probably touched 2,500 unique clients over the life of the study itself, cannot be replicated anywhere else. It's -- nobody else has access to this number of clients, to this number of assets and the ability to understand the trends.

And as we do it in the information that we asked our clients to go through and providing us, it's not a quick survey. It's a very detailed, deep survey.

It talks about their economics, it talks about their acquisition, talks about the strength of their firm, it talks about their employees, it talks about their demographics, their geographies and their strategies. And in effect, we take that information to color our large strategies, but we also take that information and our relationship managers go out and have deep dive strategic conversations with their clients and help them think through some of the things that are going on.

And as you can see, on the trend here, over the last 4 years, there's been an 11% CAGR in the growth of advisors over that period of time. It doesn't feel like it's slowing down to me.

And as you think about that 11% and you juxtapose that against what's going on in the traditional models, there's probably about a 5% growth in the traditional models over that exact same period of time. As importantly, revenue has grown on the medium firm to $3.4 million for medium-sized firm within this class.

Significant increase over the last 4 years. And arguably, as we've all talked about, these have been trying and complex times.

But with that, as they've enjoyed that growth, I will tell you, they're also enjoying a tremendous amount of retention. They've taken their clients, I think as you've heard us talk about planning, the detail, getting involved with their clients' lives to some degree and partnering with them as they're thinking about and modifying their plans over this period of time, they have retained 98% of their assets.

97% of their clients, 98% of their assets. And that's up from a wild dip of about 3 years ago when that dropped to 96.9%.

They are holding on to the assess, they are growing their assets. And in effect, they have created an extended sales force within their client base.

Their client base is so loyal and so happy with the service that they're getting, as witnessed by their retention, that they're out selling into their colleagues, their friends, their associates and telling them of the great experience that they're having, and hence, their organic growth has been extremely strong over that period of time. At the same time we launched our benchmarking study, we also launched an advisor outlook study, along with a high net worth study.

And these are pulse check-ins. These are quick surveys.

Tell us what's going on, tell us about the emotions of your firm, your business, your clients. Give us a little bit of insight as to what you're thinking you'll be investing in, in the future, what's been your product choice and what will be over the next 6 months.

And we've been doing this for about the same period of time. We do it every 6 months.

It's giving us an invaluable amount of trends. We even ask questions about the government, international perspective that they've had.

But one of the things I called out from this because I just thought it was particularly interesting to look at the advisor and to look at the high net worth individual as we looked -- and advisors, not surprisingly because of their expertise, they're far more bullish in the marketplace than their clients are about what's going to go on in the future markets going forward. Not a surprise.

If you move over to the other side of the slide, however, they are -- their clients are saying when asked, will it be easy or hard to meet my objectives -- my investment objectives, their clients are -- or more than 1/2 of them are saying, it's going to be easy for my advisor to meet that objective. They have great confidence, their retention.

They know their client's working hard for them, and they're willing to make sure that they're given the latitude to do what they need to do. Advisors, only 17% of the time, are saying it's hard and it's almost inverse.

As they're saying, it's going to be difficult to meet my client's objectives. And I personally love that tension that's in the system, that the advisor knows they have to work incredibly hard to earn the business of their client and they know they have to be there, educating their client on what's going on, and their client is trusting them to what's going on.

So it's created a great tension around that. Also in the study, what we asked was, so what are you worried about, what are you thinking about, what's the competition look like within the marketplace.

And branding has started to come up again. That hadn't been around for a while.

But firms are worried about their brand, how are they looking in the marketplace, which naturally leads you to the point of 3/4 of them thinking about differentiation, how are they differentiating. And differentiation used to always be a factor of how am I differentiating from a traditional model, I'm fee-only, I'm transparent, I may not engage at all in commission, those kinds of things.

They're now thinking a little bit more about how are they differentiating themselves within their own class, against other advisors that are growing up in their communities or coming out in that advisor turning independent way from a traditional model and joining the competitive set. So they feel that they're feeling half the time the advisor sit, they're feeling a lot of pressure from within their own industry and what they're doing.

And then, of course, consolidation. And this is just an interesting topic in and of itself because since 1998, in the papers that have been written over that time, I think, JPMorgan was one of the first that came out in Hurley, somebody has worked in our industry for quite sometime and undiscovered managers talked about the idea that this is going to be a mass consolidation industry.

We've talked about it time and time again. I don't believe that to be the case.

But there is some consolidation happening. Some of it, I think, is beneficial to the marketplace.

Smaller firms looking for opportunities to come together with larger firms; 2 small firms coming together, creating better critical mass. But in some cases, I also think that there are firms that need consolidation to fill gaps that they have within their offerings.

So we can address a couple more of those issues as well. So what are they thinking about by way of growth in advisors?

#1 on their mind is growth. And to an earlier question that had come up, 9 out of 10 advisors in the service we talk about talk about having won a client within the period of time of that survey, and they said that client has come from the traditional wirehouse models.

So they feel like they're competing and winning against the models. But they also know that their growth is going to come from somewhere different in the future.

It's an aging group of clients. In fact, in some cases, it's an aging group of advisors which need to be addressed as well.

And they think -- 65% of them think that their growth is going to come from gen X, gen Y. It's going to come from women, it's going to come from demographics that they haven't necessarily been expert in.

And they know that this next-generation is going to want to be extremely active in their investment decisions. They're going to want to be involved, engaged.

We know that the next-generation is often surveyed to say that they're going to want to have multiple advisors, they're going to use multiple sources. They're probably going to use social media in a way that helps them to gain advice and direction in how they take their portfolios.

And they equally are concerned that this next-generation, which is very likely to be the children of their existing clients, they think it's going to be really hard to serve that generation. They don't know that they understand that generation as much as they don't know that they have the business models for that generation.

In fact, one of the things that they recognize is they don't look like that generation. So interestingly enough, only 19% of advisers are under the age 40.

Well, I'm not sure that a young investor comes in and has to work with someone who's the same age, but they're going to want to walk into an office and see people that look like them. They're going to want to know that they can enjoy a lifetime relationship maybe as their parents have.

Equally so, I think women and ethnicities are going to walk into offices not needing to work with someone who looks like them, but needing to know that the office represents who they are in the community. And so advisors are going to have to get about changing the makeup of their offices.

They're going to have make sure that the succession within their offices is incorporating more growth within those younger ranks. I think there's some $16 trillion as estimated by Cerulli that by 2015, we'll move into what we're calling the young category, something under 50 or towards 40, roughly.

That's a significant opportunity. There's $5.3 trillion in that space already.

And women as a whole other demographic, it's just so underserved and underrepresented, actually, within our entire industry, quite honestly, within the advisor community. And we have been having tremendous conversations, we've created an advisory board of something for best women advisors in thinking about how we might continue to advance, how we might create interest all the way down to the university levels, and we'll talk a little bit about universities in a minute as well.

So what else is on their mind? They're worried about competition, they're thinking about growth.

They want to make sure that they're building their businesses to be the kind of businesses that are legacy firms and growing into the future, where regulation is something that weighs extremely heavy on them. There's been a lot of change.

Dodd-Frank has made a lot of recommendations. We talk about regulation within our business, and that's rather complex.

They're feeling the impacts of that regulation as well. And they're by and large small firms.

They certainly have grown up. This is a big industry now, $3.2 trillion.

But they can't grow and they can't scale to some of the requirements that they're seeing. In fact, I think that some of the reason you see a little bit more activity in the M&A front because regulation is crowding that space, and sharing some of those lower valuated services that aren't client-facing becomes an economy of scale for them.

But recently, the SEC has asked us to help give them some information on something that Dodd-Frank called for. It called for a single or harmonization of a fiduciary standard.

And so we went out to our clients and we talked to them about that in a survey. In fact, one of the things that happened through this harmonization process is somewhat along the lines took harmonization of a single fiduciary standard, which is interesting and I think we could all find ourselves getting behind, and they linked it with the harmonization of rules, which we think is incredibly complicated.

And the idea of overlaying a broker-dealer rules base system onto a 100-year-old advisory act of principle-based ruling around fiduciaries is something that doesn't make a whole lot of sense. So we went out and we surveyed our clients.

Very quickly, we had 800 respondents come back, and they talked about the overlay of cost, the complexity of them adding this into their models, the lack of benefit really for their clients. And we have furthered that onto the SEC.

We spent a today in June in Washington advocating on behalf of advisors with the Investment Adviser Association, meeting with our legislators and talking to them about why this really wouldn't make a whole lot of sense. Interestingly enough, I would say that those who do think it make sense are predominantly the traditional models and the people who represent the tradition models because wouldn't they like to draw the new faster growing segment of the industry back into the old toolbox.

And I think that's a lot of the motivation on how we ended up where we ended up. So let's talk a little bit about what we're doing here at Schwab.

You've seen all these numbers. We have 7,000-plus advisors that we're serving.

We're now at $900 billion in assets, which is just unbelievable to me, this industry has grown and how the success has manifested itself within the 2 million clients. We've recently, within the last year, brought in our retirement business services, which is more the TPA small plan businesses and aligned it along with the advisory business.

We think that's important because we're starting to see a lot of synergies between high net worth, serving the high net worth market and what's going on within the small plan retirement space, the TPA space. So we have 150 record keepers.

We have 1,000 advisors that consider themselves retirement advisors in that. And we're 26% of the market.

And we stay at 2x what our next closest competitor is in market share. It is still a highly fragmented market as you think about half of the market is not worth purpose built providers, and that represents an, again, additional opportunity to freeing up assets from the more traditional models, but we continue to look at opportunities to do that.

As we talked about the mix of growth, this is consistent and representative of, I think, about what you see across the industry. So not a slowing but a continuous growth at a rate where 80%, roughly, of all of our growth is coming from organically through our clients.

And I have to point back, they come to us organically through our clients because the most important thing we do is to serve our clients. Our custodial platform is paramount within the relationship.

Being the best provider wins the next dollar. We know that advisors are growing at a double-digit rate.

In fact, we can see within our fastest-growing advisors that they're growing at almost 20% a year, and we also can see that our advisors grow at a rate slightly faster than the industry. So the importance of making sure that we're, if you will, delighting them, serving them, protecting their assets, protecting their clients' assets is critical to making sure that we're continuing to win all that organic growth.

And if you move into the ATI space, as you can see, which is running roughly at about 20% of the mix on an annual basis and where we're really looking at something -- our half year number was $29 billion, which equates to about a $60 billion number. So you can do the math and understand the mix of assets that we're bringing in.

But as you move into the ATI space, advisors turning independent, you can see that the mix is shifting, but I would also highlight to you again, I don't think this is a permanent shift by any means. We see the first quarter of this year was a little slower, the second quarter accelerated greatly.

We have almost exactly the same number of teams that have gone independent year-over-year, but were about -- the size of the deals that we're doing is about 30% larger this year than it was last year. You can see that the trend is slipping a little away from the wirehouses.

At this point in time, IBDs have been extremely strong, where clients tend to leave wirehouse environments for some form of independence, certainly not independence, but some form of independence. And then as they grow up and gain their confidence, they go fully independent.

So we win about 1/3 of our deals there. And then you could see the other space, capturing a little bit more of the share in this analysis, and that will be your trust banks, that's your Northern Trust.

It's BONY, New York Mellon. It's providers and banks like that.

And so I think you'll see that continue to shift over time. And I would project that we will end this year in a situation where we tend to see that advisors turning independent have contributed 175 to 200 teams something like $12 billion to $15 billion in net new assets.

And that would be extremely consistent to what I've seen over the past 5 or 7 years, which will be interesting enough if we had been in a very stable environment. But as we all know, we've had a lot of ups and downs over that period of time, and yet, the trend has not significantly changed over that period of time.

One other thing that has changed, though, is the interest in this marketplace. Just about everybody would like to be part of this, and so there's been a lot of new venture capital.

There's something called a strategic acquirer, not necessarily a name they've put on themselves, but there's venture capital money coming in and starting to draw businesses out and actually create either consolidated advisory firms or small broker-dealers in and of themselves. There's a couple of examples of these.

High Tower is an example of one of those, Stratus is an example. There's United Capital on the West Coast, but now really going national, as well.

Focus Financial participates in this space. And so it's important to understand that there's new influencers, and what they do basically is they go out and they draw teams in from the wirehouses.

They create attractive propositions for them to perhaps join your broker-dealer or to join an existing RIA that they've acquired at a different point in time. The good news about that is they become a client of ours.

So these strategic acquirers, in effect, are custodial clients of George Schwab, as are the RIAs that are forming underneath them. So we've done 7 deals with those in the first half of this year, and we'll continue to make sure we're maturing that relationship.

Again, I couldn't stress enough if we didn't do it well, then our competitors would be right behind us. I believe, and I've seen evidence of this, that our competitors really are chasing our custodial platform.

And that's important when I start to talk to you about some of the things we're doing in the future. And they're trying to emulate the client -- level of client service, protection and custodial activities that we do.

And you could see that our Client Promoter Score is really at nice levels, I mean, approaching highs, as you think about it approaching 60. So that's when we survey our clients directly about whether they would recommend us and are we doing a good job for them.

And I will tell you that there are detractors within there, and every comment that we receive, we follow up directly on that with the advisory and we talk about what's going on. And it becomes quite easy to understand the things that are getting in our way or the perceptions that are getting in our way.

If you move over to the other chart, though, this is an independent study that's done, where we go out using a third-party and talk to 1,000 RIAs who say they custody with one of the top competitors in the space, ourselves are one of the top competitors, and who would they recommend in that mix. And as you can see, we fare quite well, we have for a long period of time, and 37%, we've attained more than what our market share is at 26%.

So we feel quite comfortable that we're outperforming what our competitors are still delivering in what I consider to be important and really this price of entry into the marketplace that you have to be good at. So in talking about where I think we can go forward in some of the things I mentioned to you to make sure you can see the progress that we're making, it's incredibly important to continue to advance our platform.

That's part of the deal. That's part of the custodial work, client experience, getting into the point where it's better and better and better, while still being one of the safest places to protect client assets and be the custodian that we need to be.

I want to talk to you about Schwab Intelligent Integration, obviously, because it's become such a large part of our platform and something that we've talked about at the break with several of you as well. But leading the way becomes a really interesting place where we can start to advance ourselves in a way around our consulting programs, in a way around our advocacy, in a way around our intellectual capability that our clients or competitors have not even been -- begun to think they can enter into, while they're still chasing the custodial platform.

And we're not here because we think it's just a smart place to be. We're here because our clients told us we need to be here.

We're here because our clients, through benchmarking or conversations or relationships or some of the means we have around the country have said, "This is a need I have, and I don't know how to fulfill it. Can you help us with it?"

So let's start with the platform. This year, we launched -- or we've been working on and we've just recently launched enhancements to our web trading applet, incredibly important part of an advisor's office, one of the most used aspects of our business, something that we felt we really needed to spend some time on, to spend some money on and to advance the capabilities, something we had to great better scale in doing so.

And so what we did is we brought 150 advisors together, 150 advisors together to start to build the specs about what we would do. What were their needs, what was most important to them, how would we construct the changes that we were making.

And from that 150 advisors, we started creating opportunities, like real balances after trade, a trading cockpit that made more sense to them, scalability within their trading platforms, easier user capability from those. And all along the way, these 150 participated.

Sometimes in tests, but sometimes in real move, in helping to understand how this would work. And the feedback, we acted on.

Feedback has been great over that period of time. We now have 1,000 people that technically were alive.

But we had 1,000 that began, becoming part of the pilot along the way. So the confidence in what we were delivering was strong, and yet the need to make sure we were getting more inputs were strong as well in building it the way advisors really needed it.

And we'll spend more money going into next year, we'll continue to enhance what's going on there. On the client experience front, this is tricky.

Regulation has gotten in our way. It is become more complex to do business, and sometimes, we can be viewed as hard to do business while we're trying to protect assets.

And so what we're trying to do is create opportunities here. Some of it is fun.

The mobile experience is fun. The advisors are embracing that in a big way.

We think we have some opportunities there to incorporate some protections into mobile in the workflow. We think there's some scale we can bring to that.

We think we can bring more capability to the advisor and their client by developing things that the advisor can use with their client, which I think they'll greatly appreciate and again don't have the wherewithal to create on their own. More to follow on that.

We'll probably talk about that in the next meeting. But we know that, that's being actively embraced.

We know that we had to become more secure, safer to do business through things like secure file deliveries that we can do. But e-signature and e-authorization also became a very big part of what we're doing because the fraudsters are active.

They're active in the money movement space. They're active in the wire space.

And we think e-signature and e-authorization gives us a way to create better scale, more efficiency with our clients, so the workflow behaves in a better way, but also additional protections through doing those. And those will link up quite nicely also with mobile technology and PAD technology on a going forward basis.

So this will be, again, a cornerstone of what we're working forward to in 2014 as well in continuing to advance those things, eliminating paper, creating better workflow between us and our advisors and integrating that also with our technologies. And as you speak about technologies, Schwab Intelligent Integration is something I've talked so much about, I'm often accused of kind of bypassing it almost.

It's a major initiative. This is really the core of our new platform, as I've said many times, for the next decade to come.

And it all started -- remember when we announced it 2 years ago, it all started us saying, "Hey, what we're going to do is we're going to use the relationship management system at the center of everything an advisor does." And boy, if you sat around in a study group of advisors and you ask them what common technologies they were using, I would tell you they were -- Microsoft Word was like the only common technology they used.

And they were together for like 20 years in this study group. So you think, what were you doing, what were you thinking, right?

And so really, Schwab Intelligent Integration is not meant to replace their offices and their technologies, it's modular. It was meant to say, "Let's complement what you have, but let's run it all through a single source.

Let's run it through your relationship management system. Let's make sure you start to eliminate redundancies, create better efficiencies, better workflows within your offices."

And by the way, if you want to replace other components on your desktops, you can do that, too, right? And what we're going to do is we're going to build it around the providers you tell us about.

So the very first phase of this, what we did is we went out on the website, we asked them, who's most important to you in the CRM space, who would you use. And they voted on the website that we created and they came back, and fortunately, they came back with the answers we wanted them to come back with.

And we ended up with Juncture and Salesforce and Microsoft. And that was the beginning.

But then we also recognized the other components on their desktops. And we went out and we asked them, so what do you think about rebalancing, what do think about trading.

And they continued to tell us what they're using most often, and we continued to go out and to find those providers. All the way through to the most recent additions of MoneyGuidePro and [indiscernible] even in the planning space.

But these are all directed by advisors. They told us these were the places to go.

We did put a level of review on them. We went out and then we looked at the providers, and we made sure -- and some of those providers actually had to make changes in their software.

Some of them had to put in additional securities to make sure they were what we wanted them to be. And I highlight that because it's easy to be open API.

It's easy to have open architecture platform around technology. But we don't think that's necessarily the best solution.

We don't want advisors becoming dependent on technology solutions that may or may not be around or may or may not be updated to the highest standards. That's not what we're about.

And we also don't want to be about making sure that they do exactly what we tell them to, and hence, our open architecture approach. But with the modular approach, we also launched an integrated approach.

And so you can, if you want to, replace your entire desktop. Now you would think logically that this will be most appealing to the ATI coming out, hasn't started yet, hasn't built a platform.

So we have 75 firms now that have adopted the integrated approach, which is start to finish, what you see on your screen, one component from each one of these categories. But of the 75, half of them were existing clients who abandoned their platform.

So we feel good that we're kind of on the right track there. We also initiated a workflow system that enables advisors to go out and post their workflows.

It's a very generous group, the RIA space. They're posting their workflows for the benefit of all their other fellow advisors.

And they're going out through, we have some 12,000 workflows that exists out there. Then advisors, they just go out and they can see and they can draw them into their offices, if they want to, they can use the modular approaches or the integrated approach to benefit them in doing so.

And the most recent launch was something we call MarketSquare, and that's going to be and is a zagged-style review system where advisors can go out and say, "Hey, I found a new entrant in the marketplace, really interesting, satisfies this need that nobody else could." And they can dialogue about that, and we can monitor that dialogue.

And then we can figure out who's going to be our next participant in Schwab Intelligent Integration and add them. A personal passion of mine and also because advisors have asked us and the survey has told us.

In effect, I had an advisor ask me very directly at dinner one evening is, how do we help advisors mature their businesses? There's only 19% of advisors under the age of 40 right now, right?

Over 50% -- these are statistics and it came to my mind as well, but over 50% of them are over 50. So there's a high population in the 40 to 50 range.

But they said, I don't know that I have the wherewithal within my office to have a successor, to know who my successor is, to develop my successor. And 80% of firms have said, the way forward for my firm is succession.

10 years ago, the way forward in everybody's mind seemed to be sale, monetization of their practices. That has changed dramatically.

And we have preached succession for this past decade and being prepared for what was the inevitable and having a plan and having it in writing. And so many firms have followed that strategy.

But naming someone now has become a challenge, having someone ready, not just ready to be someone who can manage the assets, not just ready for someone who can work within the office, someone who can be the principal, the entrepreneur, the leader within all of those. So this year, we're launching an executive leadership program, really excited about it.

It appears that it's being embraced aggressively by the market. We'll see how that goes.

And what we did is we went out and created a year-long guided learning system, really. We'll put 25 or so successors into the program.

It will be a cohort. They'll work together.

It will be online. We'll bring them together 3x a year.

In fact, there's 2 advisory board members we've had that are the founding principals who said, my business grew faster than I ever thought it could, I want to be the person who's in this program. I need more skills and capabilities to manage the business on a going forward basis.

So we're really excited about this. We think it has legs.

We're using, as you can see, major, major universities, guided most around leadership. We'll incorporate our Insight to Action programs and some of our consultative capabilities.

We will be the proctor, if you will, and actively engage in this. And I believe we're starting a cohort that will be an ongoing study group into the future.

In addition, we launched the 10-person intern program this year in Phoenix, going quite well. Students in their junior year from around the country, we're running them through all the paces of what goes on within an advisory firm from our viewpoint.

Their last rotation will be in an advisor's office, and our full expectation is that these people will be hired by advisors, not by Charles Schwab, and hence, will be benefiting them. And really, the last and certainly, one of the most important areas is advocacy.

They expect us to be their advocate. They want us to be their advocate.

They need us to be their advocate. They're very fragmented in how they do things.

They're small. They don't have a voice, they don't have a voice in Washington, as I talked about our efforts there on harmonization.

But they need to be known. They want us to help educate.

They love for us to advertise, but we don't think that's the most effective way. So we launched RIA Stands for You.

Digital media, getting out in front of people. We started with vignettes of advisors, then vignettes of clients and advisors.

We had Chuck do a video for us that talked to the meaning of what this industry potentially could be. And then they asked us as they draw that website into their website what happens when people find this information and are interested and they asked us if we would create a directory for them.

And we created a directory so that someone who's out there looking at this information, learning and understanding about advisors needs to find one, they can simply now go in and put their zip code in and they'll get a list of 5or 6 or 7 advisors that are in their local area. And they'll be able to click on that advisor and go directly into their website and begin to gain insights into what that advisor might provide for them.

In the first 4 weeks after launch, which is just recently, we've already had 600 advisory firms sign up for this service. There's no charge.

In fact, around much of the stuff, it's a value-added services that we continue to extend our lead and grow ourselves, I think, past where our competition can find themselves. So we've been in a position of leadership.

I think that is not only an opportunity. I think in many cases it's a responsibility.

There are things we have to do to continue to grow this industry. I feel, and it is my opinion, but it is one that is based on a lot of information, I really feel we're in the early innings here.

I think it's very, very early in this game in the independent space, and it's a macro trend. It's not something we should be measuring on quarters, perhaps not even measuring on years.

I think the trend will continue. I think independent investors are saying, this is the kind of model I want versus what I've seen.

I think you see the participants within the traditional models, the brokers, the advisors within those models say, this is of interest to me. I think you see the independent broker-dealers ceding a lot of activity into the same space as well.

And so I'm very optimistic. But I think it's early days.

And I think there's a lot of leadership, but we have to play in the space to continue to extend our lead. And we have to be great at the servicing of what we're doing as well.

And then we'll continue to be rewarded by our clients with their growth and the additional growth of dollars coming out of that 750 that John had mentioned that continues to churn around the wirehouses each year. So I'd love to take some questions.

Just on the competitive side, I'm just curious over the, call it, the past year or so, just given the pickup in the equity market, like IPOs, even alternative offerings, do you sense more competition? How are you guys kind of stacked up versus whether it's the wirehouses, the other IRA providers?

It's a different environment than we've seen over the past 4 years.

Yes, it's a very different environment. And I think the advisors -- statistically you can see that the advisors are winning in this game because people want more, they need more.

In fact, the #1 reason they cite when they come to an advisor is, it's not return, it's typically they knew someone who's getting a better experience and they needed more themselves and then usually, third starts to address what return is. So their model -- and they're winning, and they're winning in their centers of influence.

And they're winning through referrals, most of their growth tends to come through referrals. I think as we look at it is, we're winning because of the retention of those assets and the quality of service that we're giving them.

But I think a point you're making is, it becomes a little harder for people to change the underlying relationship of a client while things are so good. And so I think that might be what we heard references a little bit of the slowing trend.

But because it becomes so easy to access through other platforms, products, alternatives as a great example, there are multiple platforms out there. We're the custodian.

We've greatly enhanced our custodial capabilities around alternative. There's very little you couldn't do with Charles Schwab in that aspect, so the assets tend to flow through.

Most around liquid and registered, we like that market a lot better. IPOs, we do participate in IPOs on some level and the distribution of it.

That's not proven to be a high demand item for advisors. So certainly, that hasn't been something either, and so I think the model's working, I think even in the upmarket, we're not seeing things are changing the downmarket.

There was a little bit of a favor towards changing and moving into something different.

You had that interesting chart up there about how the advisors were fairly optimistic about the market, but not so much about clients meeting their longer-term objective when they get some kind of advise for a [indiscernible]. Is that more a product -- I think clients probably feel more comfortable going to an advisor and having someone to work with, but is it a product of the advisors maybe not having the right tools to get the clients to where they need, given that they have a good outlook on the market?

Is it something you guys are working on? Or how do you kind of bridge the gap between the 2, between what the clients feel and the advisors see?

I think the advisors have spent the last 5 years educating their clients, cautioning their clients, bringing their clients, in some cases, into a new form of reality. Let's face it, 5, 6, 7 years ago, one of the biggest problems we had in the country is we thought that we were losing an entire workforce to retirement because 2007 was a high, and that didn't happen and retirement plans had to change and advisors had to sit down and redo plans, not once, probably more than once with their clients in creating the realities of where they wanted to be.

And the other thing is, 80% of the boomers want to make sure that they not only have wealth to survive them, but they want to leave a lot to the next generation. That's a very different phenomena than the last generation.

I don't know about you guys, but I don't think anybody is worrying about leaving me a lot of money. And now, that's something that we're starting to see.

And so I think what it is for the advisors is it's a responsibility factor. I don't know that it is necessarily a capability.

It's a responsibility factor and making sure that they're guiding clients who have stayed with them through this hard period of time to a place where they can accomplish what that long-term objective is. Because arguably, we've seen a doubling in purpose built providers around technologies, softwares, product providers.

There, really, the capability is, I don't want to say it's limitless because obviously that's not the case, but it's not restrictive. The open architectural model now gives advisors really a wide array of almost any market that they want to find themselves into.

Chelsea?

What do you attribute to the shift from less ATIs coming out of wirehouses and more coming from that other category you talked about?

Yes, I tend to think it's a trend, as Walt said. I don't think that's a micro, if you will.

We know within the wirehouses, we can update on this. But there's always deals that have been signed within the wirehouse deals, forgivable loans, their cycles that they go through, people tend to find their way out, they begin planning.

I can't tell you that there's periods of times when people begin thinking about. This a very long sales cycle to bring someone out of a traditional model into an independent model.

And we have some $30-plus billion in our sales funnel, where we begin talking to people, sometimes 2 years before they're ready to do something. They're thinking about it at that point in time.

We talked with people who are in their fifth year of employment and they're already planning, they started with the idea that they wanted to be independent, but knew they needed to start and gain a resume and grow a book of business and understand their clients and get credibility in the marketplace. There's an array of things.

So I think we happen to find our way into the trust base a little bit. We happen to find our way into the banking space where team slot and the capabilities were a little bit better.

When we do talk about teams, I do want to remind you, there's 6 people on a team, we still count that as 1. When I talk about 175 teams going independent, that may be 300 individuals, sometimes our competitors count individuals versus teams.

I think it's important that you kind of understand that nuance. More teams come out now than individuals.

We still find that more teams come out and join firms than they ever did before. So about 1/3 come out and join somebody, whether it's one of these strategic acquirers or perhaps a firm that they know.

We found firms that are now building succession plans or, if you will, sophisticated buy/sell agreements for some of the smaller firms, where they can sign up with an option, perhaps to join the firm in case the unforeseeable happens within their firms. So we have a nice sophistication, it's why I say it's early innings because you're seeing a lot of entrepreneurial spirit around trying to create what will ultimately, I think, become one day a very, very sophisticated engine.

While you win much more new business than you lose, what did the detractors say?

It's interesting because we follow this extremely closely. And detractors, I'm going to say flat out, sometimes people say we're hard to do business with because regulation has become such, fraud has become such.

And we still feel that our #1 priority is making sure we're protecting the assets. And we have to be in that position.

It's just that we have to bring new tools, new capabilities, e-authorizations and e-signatures, bring things along the lines that will make it somewhat easier for them. I didn't even talk about some of the work we've been doing around our Alliance website to improve it.

And Alliance is actually a service that serves clients of advisors. Nobody else has that in the industry.

But we're actually creating an online outsourcing for some of that low value-added service that they can then send directly to us, which helps them enormously. I highlight it now because it also adds additional security to what we're doing because we have a point of contact with the client that leads us down a path where sometimes we can validate directly with that client if we so need to, and we can do it electronically.

So those are some of the [indiscernible]. But I think hard to do business is one of those things that will stand out, and we have to stand in front of that one, we have to try and understand how to be better.

But we don't want to be the place that's easy to do business and then ends up in a mess later on, on behalf of our clients, the advisors and their clients who are our clients. Okay.

Well, I hope everybody enjoys the weekend if you're staying, and thank you very much. I'm going to bring up Joe to wrap us up.

Thank you, Bernie. So the beauty of the Internet is you get to read your reviews during the course of the day and top up anything where you might have been a little bit wrong as you get to the close session.

So nice to be able to have that opportunity. So let me attempt to, in very clear and unambiguous terms, tell you what I'm hoping you're taking away from the day.

First, nothing we said was intended to talk down expectations. What we were looking to do was make sure that your expectations and our expectations stay aligned as we take advantage of an environment where the financial headwinds are definitely starting to abate.

So it's making sure that we stay in sync and one side doesn't run away from the other. But it wasn't a talking down of expectations.

Second, we're winning in the marketplace. We continue to take share.

How are we doing that? We have a set of strategies that are already developed, things that we have been working on in some cases for many years they're working in a marketplace and we are delivering on share growth and continuing to grow the franchise.

It's a little bit frustrating, in fact, it is really frustrating that some folks continue to look at the comparison of Q2 versus Q2 last year, focusing on the headline GAAP number. We had a one-time gain in the second quarter of last year that was truly a one-timer.

It was related to the settlement of a vendor dispute. It wasn't a trading book or investment banking benefit, it's not a business line that we're in.

You really need to strip it out when you look at comparisons on the financials and focus on the fact that while GAAP was down 7%, earnings were up 11%. We're putting up better financial numbers, and we are not disappointed with what we did in the second quarter.

In fact, we're pretty pleased and think they're strong results. We're poised to be able to continue to deliver better results from here as the financial leverage and the model should become more and more clear as we continue to work our way out of this environment.

And we're prepared to deliver substantially better financial results as we see interest rates start to move up. I thank you for your time and attention.

I hope everybody has a great weekend.