The Charles Schwab Corporation (NYSE:SCHW) 2020 Fall Business Update Conference Call October 29, 2020 11:00 AM ET
Rich Fowler – Head-Investor Relations
Walt Bettinger – President & Chief Executive Officer
Joe Martinetto – Senior Executive Vice President & Chief Operating Officer
Peter Crawford – Chief Financial Officer
Conference Call Participants
Dan Fannon – Jefferies
Will Nance – Goldman Sachs
Mike Carrier – Bank of America
Steven Chubak – Wolfe Research
Brian Bedell – Deutsche Bank
Devin Ryan – JMP Securities
Chris Sadler – William Blair
Brennan Hawken – UBS
Craig Siegenthaler – Credit Suisse.
Chris Harris – Wells Fargo
Kyle Voigt – KBW
Michael Cypryss – Morgan Stanley
And we are live. Good morning everyone, welcome to Schwab’s Fall 2020 Business Update. This is Rich Fowler, Head of Investor Relations coming to you from a still sparsely populated 211 Main Street in San Francisco. Well I want to extend a particular welcome to those of you attending this session as new owners or followers of Schwab, due to our recent acquisition of TD Ameritrade, we certainly hope everyone on the call and your families remain safe and well in this environment. And we thank you for spending time with us today. There’s a full lineup of earnings reports for many of you to deal with. And we certainly have a full agenda here.
So we’re going to get things underway quickly. Joining me today, both virtually and literally are Walt Bettinger, our President and CEO; Joe Martinetto, Senior EVP and COO, and Chief Financial Officer Peter Crawford. Now those of you experienced with our interim updates will immediately recognize that Joe’s participation signals, that we’re not following traditional practice today. And we are indeed planning to spend a longer than normal session, say around an hour and a quarter with these three, bringing you up to date on life at Schwab right now, starting off with some prepared comments and following up with Q&A until it’s time to wrap up.
Our goal is always is to keep you current regarding management’s thinking as efficiently as possible. We will follow tradition on questions. So we’ll do so via the webcast console, as well as the dial in and as always, to help us get to as many folks as possible, we very much appreciate your sticking to one plus follow on in the approach to questions. Walt will start us off today to discuss our strategic picture, which includes both the continuing story of the company’s performance during the pandemic and the implications of closing the Ameritrade acquisition. And then Joe is here to share an update on the integration process as we dig in on this front. Peter will review the recent financial performance of both firms on a standalone basis and then move to discussing the current outlook for the combined company before taking us into Q&A.
Before that, let’s spend a second on the wonderful wall of words, holding steady at a single riveting page, the main point of which is to remind everyone that outcomes can differ from expectations. So please keep an eye on our disclosures. Finally, the slides will be posted on the IR side during Peters prepared remarks. I think that’s it administratively.
So Walt, I think we’re ready to get going over to you.
Thank you, Rich and good morning, everyone. Thanks for joining us. During certainly what continues to be extraordinary times we all recognize that we’re living in a unique and challenging time for everyone. And my best wishes for good health and safety go out to all of you who are joining us on the call. It’s really times to like these that have focused and consistent strategy means more than ever, the noise around us from a struggling economy a record low interest rates, a degree of political turmoil can shake those less committed to a sound long term approach.
At Schwab, we remain as committed as ever to our two client side strategy and our key strategic initiatives, scale monetization and segmentation. Our approach is winning in the market. And we believe that our combination with TD Ameritrade will deliver outstanding financial results along with furthering our competitive position in key client segments. As I’ve said before, we are on offense. And the response from our clients with record and near record metrics supports the efforts that we’re making to offer world class value service advice and transparency.
Now as of October 6, we have successfully completed the four acquisitions that were announced in the past 15 months. Each of these transactions are strategically important for us, but of course in different ways and each slots in perfectly with those key strategic initiatives I mentioned previously of scale monetization and segmentation. USAA adds to our scale of existing clients. And our exclusive Wealth Management referral arrangement that we have with USAA continues, adding scale for us and should be effective for years to come.
Motive delivers highly talented technologists along with a platform that is helping accelerate our efforts to deliver thematic investing, as well as direct indexing to investors and advisors. And of course, that will in time contribute to our efforts around monetization. That is good for clients. Wasmer, Schroeder accomplishes a similar goal, monetization that’s good for our clients, but with maybe a more traditional approach to investment solutions in the fixed income area, and of course their expertise in tax smart fixed income investing is likely to prove especially valuable, as tax rates potentially become an increasingly important consideration for investors after the election.
Of course, the TD Ameritrade acquisition not only builds tremendous scale, but it also delivers outstanding capabilities that serve our segmentation objective. We know that they had a best in class platform for traders, several capabilities that are highly valued within the investment advisor community also.
This slide graphically illustrates the scale impact of the TD Ameritrade acquisition. Also it shows the powerful combination of our firm’s with net new assets in excess of $75 billion, and almost 1.5 million new brokerage accounts in the third quarter alone, keeping in mind that that third quarter included tax payments, unlike in most years. Now, Peters going to speak a little bit later regarding the near term and longer term financial benefits of our transaction. But for now, I will simply say that they are significant.
Now as strong as our asset gathering and overall financial performance has been we see many untapped opportunities to drive significant asset and revenue growth by leveraging our scale, better monetizing assets in ways that are good for clients, and developing leading offers for key segments of our client base. The M&A has played an important role in pursuing these initiatives. But M&A activity is only one way that will drive these efforts forward with all three key initiatives contributing to our strong growth.
Through the first three quarters of 2020, and of course, this is looking exclusively at Schwab results, clients and trusted us with core net new assets in excess of $160 billion, a 5% organic growth rate, which is consistent with our long term results. Included in there is an all-time monthly record for the month of September with $20 billion in core net new assets. I remember when we reached $2 trillion in firm wide assets, the number one question I received was always could Schwab continue to capture an organic net new asset growth rate in that 5% to 7% range even on such a large base.
Of course, we were confident that we could back down and we remain equally confident today. That’d be sure we talk about a range because as we all recognize that there will be some variability driven by market conditions, as well as employment conditions and those contribute to either accelerating or decelerating money in motion, and therefore, new assets in our category. I think what’s clear, though, is what won’t change is our ability to keep winning assets, and continue gaining market share, regardless of whatever the environment is around us.
Our organic efforts around scale are also paying dividends in terms of operating efficiency, with almost two thirds of our client households now digitally active, over half of the arrays we serve are leveraging our digital service capabilities. And over three fourths of our client base is now enrolled in paperless reporting. Here is an example of where the pandemic that we’re dealing with has actually contributed to more rapid adoption of digital capabilities. And of course, digital adoption and digital initiatives are what I like to refer to as triple wins. And by that I mean that they result in a better experience for our clients through both faster processing as well as a richer overall experience. They contribute to lowering error rates, and also lowering costs for Schwab. And, of course, that in turn benefits both our stockholders as well as our employees as our employees are able to engage in more value added interactions with our clients.
Let me emphasize though, that adoption of digital does not mean that people and specifically our branches in our service centers don’t matter. In fact, arguably, they matter as much or more than ever. What digital adoption does mean is that employees can focus on relationships, more than simply processing transactions. And of course, that’s exactly what we want, what our clients want, and what we mean when we talk about bringing together really the best of people and technology to our no tradeoffs value proposition. We’ve demonstrated that when we offer clients and this is both on the retail side and on the RA side, when we offer them high quality solutions at very competitive prices, they vote with their fee [ph].
Use above Schwab managed ETFs is growing again, after a slow down earlier in 2020, largely due to tax last harvesting. Clients continue to enroll in our retail advisory programs, we now have assets they’re exceeding $360 billion and clients are increasingly turning to Schwab bank for their lending needs, with loans up over 30% from one year ago.
Our success with our asset management and lending products also fuels our confidence in continuing to extend our capabilities. And part of that is ensuring that third party managers provide appropriate compensation for the many services that we provide them and the investors who invest in their products through our platform. These types of efforts will further diversify our model and decrease our reliance on spread based revenue. Whether it’s from ongoing negotiations with fund complexes that rely on Schwab to provide shareholder servicing, without helping us cover those costs, to substantial opportunities in thematic investing and direct indexing, to the growth opportunity in the area of retail advisory services and last but not least to the opportunity to deliver premier fixed income advisory to clients at a great value through in house Wasmer Schroeder.
At the same time, we’re working hard to build and deliver increasingly segmented capabilities to delight clients of all sizes and types. Whether they are targeted at newer younger investors, which certainly gets a lot of press today, new and creative ways to invest in a more customized or personalized manner through themes and direct indexing, better serving the fastest growing segment of our retail business, which is high net worth and ultra high net worth investors. And creating new and more streamlined experiences for independent investment advisors that we serve and of course, we serve all sides, investment advisors large, small, and in between.
As I’ve said for a number of years, the future in our industry, in our view belongs to the organizations that deliver a no tradeoffs approach to investing, great value, transparency and trust, omni channel service, a single place to meet all of it investors needs all of this from a company that is both a challenger to the rest of the industry, as well as a beacon of confidence due to our size and scale. In our words, it’s no tradeoffs, no limits and all done through client size. At Schwab, we call that modern wealth management. And we think that uniquely define Schwab and is only achievable by a firm with our size, scale, and importantly our focus.
In our view, our capabilities, our rather simple strategy, our enormous scale, our culture of service, and our commitment as a challenger company, to continue disrupting to benefit investors and advisors is a combination that no one else in the market can match. In our transfer of account or asset figures tell the story better than I ever could, attracting $2 from core competitors for every dollar they take from us. Strong results versus the global banks and warehouses at 2.2 to one. Strong results versus the independent broker dealers at 1.8 to one an exceptionally strong results versus the mono line fin-tech companies that were asked about so frequently at a ratio of over 200 to one.
All contributing to a firm wide TOA [ph] ratio of two to one and as successful as both TD Ameritrade and Schwab have been in taking share for the past four decades the reality is we still collectively have a very small share of an enormous wealth management market in the US.
So just in closing, we know that we are dealing with record low interest rates, and those create short term headwinds. Eventually we’ll have relief from this pandemic. Eventually, the economy will get fully back on its feet. Eventually, our belief is that interest rates won’t remain at all-time record lows. But in the meantime, we won’t be here off course. We won’t deviate from our through client side strategy. We won’t stop being on offense with our key strategic initiatives of scale monetization and segmentation. And we surely won’t stop pursuing disruptive actions that benefit clients, the very soul of a challenger. For those of you who know Schwab, well, you know that we don’t measure our progress in quarters, and generally not even in years, but rather in decades. And I’ve never been more optimistic about what the future decades hold for Schwab.
So I want to transition over to Joe Martinetto, I’m pleased that we’re now in a position to begin the process that actually unleashes the potential from combining Schwab and TD Ameritrade as all of you know, Joe is leading that effort. And I know he’s looking forward to sharing an initial update on our integration efforts.
So Joe, let me turn it over to you.
Great, thanks Walt and good morning, everybody. So today, I would characterize my presentation as more of a cameo than a full update. I’d remind everybody that we just closed the transaction a couple of weeks ago. And we were able to do a fair amount of integration planning prior to close. But there are a lot of details that we’ve just recently been able to share, while we feel very good about the work we’ve done, and what we’re seeing, we’re going to need a little time to firm up the executional plans and financial implications before we can provide you with that fuller update. That said, we’ve already made a number of decisions about platforms and client experience that we’ll share today. And we’ve also moved quickly to recognize some of the closer in synergies; I’ll update you on those activities as well.
So let’s start with the expense synergies first. Just a reminder, our targets at the time of announcement called for us to realize between $1.8 billion and $2 billion in expense reduction synergies. We spent the last 10 plus months developing plans to achieve this level of savings. And by close we had high level plans at the business unit level to achieve it. We still believe it will take 18 to 36 months to get through broker dealer consolidation, account conversion, and the shutdown of all the redundant systems and functions that are necessary to achieve this level of savings. I’ll have more to say about the timeline in a couple of slides.
I’m also focused today on expense synergies as those are likely to occur in a more material way more quickly than revenue synergies. As we’ve discussed before, the bigger revenue synergies come from the repatriation of the BDA balances, but we do expect that there will also be revenue synergies that are tied to the account conversion, when we’ll be able to offer the best of both companies products and services to the combined client base. Those outcomes will be a little longer coming as we’re still operating as two separate broker dealers today.
With respect to the expense actions, we’ve already taken steps to achieve between $250 million and $300 million in expense reductions. We’ve aligned the management structure, and across management in the branch network eliminated over about 1000 roles. We moved aggressively to rationalize the branch network; there was a significant amount of overlap across our footprints which we’re eliminating. Of their roughly 260 branches, we’re retaining about 55; the majority of the rest will co locate into nearby Schwab branches, where we’ll have both Schwab and TD Ameritrade employees.
Our combined branch footprint after the consolidation will be larger with over 400 branches a 140 of which will be shared through conversion, and 90% of our clients will have a branch within 25 miles up from 80% before the transaction. We’ve also closed the number of previously open management positions, as well as reduced our anticipated marketing spend. While it’ll take some time to recognize the full level of synergies, we expect to see additional reductions over the course of the next 36 months. And with the meaningful reductions that I just noted along with other actions that we plan to take, we’re thinking we’ll exit the first year after the transaction with between one quarter and one third of the expense synergy total in the run rate.
Moving on to some of the platform decisions as we’ve said all along we expect to realize the best of both when it comes to customer facing platforms. Both companies have well regarded and recognized platforms with very complementary strengths. We expect to leverage the existing Schwab’s websites mobile applications for investor’s independent advisors in automated investing solutions. We’ll be adding the thinkorswim web and mobile experiences for traders and supplementing the advisor experience with the trading and rebalancing capabilities from TD Ameritrade advisor platform.
That said, we expect that there’ll be changes to all of these platforms that we’ll need to make for a seamless experience for our combined clients. For example, the trading experience on schwab.com will evolve a bit to serve the more active traders from TD Ameritrade who prefer to use the web. The Schwab Advisor Center will incorporate more integrations with third party platforms to accommodate the advisors who use services where we don’t currently have an easy to use integration.
I promised I’d have more to say about the timeline for integration earlier and I’d like to remind folks that this is an extraordinarily complex integration. Both firms are large in their own rights and when you combine them and look to add the headroom that’s necessary to handle potential spikes in activity, there’s a geometric effect on the capacity necessary to run the firm safely. While we’re availing ourselves of our own recent experience with integration, as well as the expertise available to us as part of the team is joining from TD Ameritrade and we’re eager to get to full synergy recognition, we of course have to balance that with the client experience considerations. We want this to be an incredibly smooth experience for all of our clients, both the retail investors and advisors and we expect to continue to serve the vast majority of them long past integration.
At this point, I’ll turn the mic over to Peter, and he’ll give you details on how all of this works into the financial picture.
All right. Well, thank you very much, Joe. It’s certainly great to have you back here at the business update. Well, even if it is in your words, a cameo appearance. So Walt and Joe talked about the excitement we feel about the TD Ameritrade acquisition and our confidence in how it will benefit clients, stockholders and our combined team of employees. They talked about the strong momentum we continue to enjoy in the marketplace in spite of the challenging conditions in which we operate, and the progress we’re making in executing on our strategy around leveraging our scale, capturing monetization opportunities to benefit clients and creating leading experiences for key segments of our client base.
In my time today, I’ll talk about how that momentum helped to partially offset the current challenging market environment and especially the pressure from low interest rates. I’ll also share with you the operating and financial results for TD Ameritrade for the quarter ended September 30, which demonstrate that we are joining forces with a very, very healthy business, whose continued momentum in this environment leads both to stronger financial performance and an even more resilient business model. And finally, I’ll provide an update on our Q4 outlook, incorporating TD Ameritrade for the first time and I’ll also provide some initial thoughts on 2021.
I think the overall message you’ll hear is that we’re clearly well-aware of the environmental challenges we face, some of which are clearly impacting our financial results. And we recognize there may be some difficult weeks and months ahead. But at the same time, we couldn’t be more optimistic and more confident about the future for this company. And feel like we have crossed a bit of an inflection point, given our strong momentum in the market, our early experience and successes with TD Ameritrade acquisition and integration and finally the progress we’re making both organically and via M&A around our strategic priorities.
We’ll talk a lot around here about focusing on what we can control. We can’t control the equity markets whose recent performances has become a tailwind for us and we cannot control the interest rate environment — clearly a very formidable headwind. But what we can control is that no trade-offs positioning that Walt talked about, which when coupled with high investor engagement have led to enormous year over year increases in new to firm retail households. And in a business built on trust, we also work really hard to maintain that trust giving our clients confidence in entrusting their assets with us, including their uninvested cash, which is up over 50% year-over-year.
Given that mix of some tailwinds and some strong interest rate headwinds, it’s not surprising that our revenue was down 10% year-over-year in the third quarter. This was entirely due to an 18% decline in net interest revenue. Average interest earning assets rose at remarkable 45% year-over-year, but that wasn’t enough to overcome a 105 basis point reduction in our net interest margin due to Fed cuts, an increase in premium amortization and the impact of investing nearly $100 billion of new cash at rates lower than our average portfolio yield.
Asset management and admin fees were up 4% year-over-year, despite the return this year of money fund waivers, which totaled $44 million in the quarter. And trading was down 12% despite a more than doubling of trading activity due of course, to last year’s commission reductions.
Now expenses were up roughly 6%, but that would have been only about 2% without the acquisition and integration expenses for TD Ameritrade and the incremental acquired intangible amortization related to the USA transaction, Motif and Wasmer acquisitions. And even that modest adjusted expense growth includes the ongoing expenses of those three new businesses, which together contributed a little more than two percentage points of growth.
Put it all together, and we delivered a 36% pretax margin and a 39% adjusted pretax margin. A 10% return on equity and a 12% return on tangible common equity, which continues to be adversely impacted by a now $5.7 billion net unrealized gain within our available for sale portfolio.
Our balance sheet continues to grow due both to our substantial organic growth and client allocation decisions. As we said previously, we typically see client cash on the balance sheet increase more quickly when interest rates are low. As clients see less benefit and utilizing purchase money funds, CDs and other fixed income instruments leaving more cash in their account and a greater portion of that cash in our bank and broker dealers sweep options.
Following a huge surge in client cash at the end of the first quarter, we’ve seen somewhat slower but still quite robust growth and sweep cash balances during the last two quarters, including a 6% sequential increase in Q3. That balance sheet growth reduced our Tier 1 leverage ratio to 5.7% for the third quarter. While that’s below our operating objective of 6.75% to 7%, it’s still well above the regulatory minimum. And as I’ll discuss in a moment, the TD Ameritrade acquisition is quite helpful in enabling us to rebuild our capital ratios more quickly than we would be able to do otherwise.
Now the concern whenever you buy a business and have an extended timeframe between signing and close, is what is the state of that business when you finally take over? Judging by the operating and financial results for TD Ameritrade and the quarter ended September 30, it’s clear we’re bringing onboard a very, very healthy business and one that is performing exceptionally well in the current environment. And for that, we certainly should thank the thousands of TD Ameritrade employees who’ve been working so hard over the last 10 to 12 months.
Now before I run through the few highlights from the TD Ameritrade seller quarter, a public service announcement or promotional announcement. As Rich noted at the outset, there are additional standalone operating and financial information for TD Ameritrade has been posted to the financial report section of Schwab’s Investor Relations site. Now you can see the strong operating metrics here highlighted by a significant momentum in the market, 20% increase in net new assets, and a greater than 300% increase in net new funded accounts and positive indicators of course of investor engagement with a 355% increase in trading activity and a 23% increase in average margin balances.
That’s substantial business growth and higher investor engagement translated into robust financial performance. Revenue up 5% as a surgeon trading and margin balances more than offset the impact of lower interest rates. Operating expenses down 2% and operating margin above 50% and a 16% increase in earnings per share to $1.16.
While both firms have been performing quite well independently, the combination creates an even more resilient and potent company. Merging our financial results for the third quarter would suggest a company with over $4 billion in revenue, a pretax margin of 45% plus and approximately $53 billion in stockholders equity. And the mix of revenue of course is different than what Schwab has experienced in the recent past. With just over 50% coming from spread-based revenue, net interest revenue and what you see on the pie chart as the BDA fees, 24% coming from asset management and admin fees, and now 21% coming from trading.
Now those of you who followed the company for a long time have heard many of us, myself included, talk about our lack of reliance of trading as being a good thing. But that was when trading was facing secular headwinds in the form of ever-decreasing equity commissions. But that pricing erosion now largely off the table, the greater exposure to trading is clearly a benefit as it increases our diversification, add less capital intensive revenue streams, and create an even more all-weather business model as is being demonstrated in the current environment.
Now this year has clearly unfolded differently than the way any of us anticipated several quarters ago and even relative to the scenario we share back in April. The equity markets have continued to rise much more quickly, interest rates both short and long term remain at historically low levels. Trading activity on the other hand is provided nice lift and our balance sheet growth has already surpassed the upper end of the range we’ve communicated.
Our performance to date reflects that mix of tailwinds and one very stiff headwind. Revenue has been tracking a little bit on the lower end of the range. Despite key drivers of our workload, all increasing sharply, new accounts, trade calls, et cetera, we’ve managed to limit adjusted expense growth to the lower end of the range. And in doing so have produced an adjusted pretax margin just above 40% year-to-date.
Of course the scenarios we share previously excluded the impact of TD Ameritrade. But with the closing now behind us we’re in a position to communicate a scenario for the fourth quarter, which reflects the combination. So for the full year, we now expect year-over-year revenue growth to be positive 7.5% to 8%. Now that assumes modest market appreciation from levels of late last week earlier this week, continue to elevated trading and stabilizing prepayment speeds [ph]. It has also based off an expectation that net interest margin for the fourth quarter should be in the 150 basis point range plus or minus, but perhaps 10 basis points or more above where our average for Q3. A function of absorbing TD Ameritrade non-BDA related to interest earning assets, [indiscernible] margin book onto our balance sheet. And for those of you familiar with the way that TD Ameritrade historically report NIM, I know that our measure of NIM excludes those BDA balances.
We’d anticipate full year adjusted total expense growth to be 15.5% to 16.5%. That includes roughly 4% year-over-year growth for the Schwab standalone business consistent with a scenario we discussed back in July. It also reflects the initial synergy realization that Joe described earlier in his update, but of course exclude the acquisition integration costs and as a reminder, we currently anticipate roughly 30% to 35% of the total integration spend to occur in the first 12 months post-closing. Those numbers also exclude any amortization of acquired intangibles which we expect will be roughly $445 million in the fourth quarter. So putting it all together, the scenario would result in a 25% to 35% accretion in adjusted EPS, relative to our Q3 results.
Turning our attention to the balance sheet. We’d expect our balance sheet to grow by a bit over 70% driven by the addition of TD Ameritrade’s $70 billion balance sheet and continued growth and client cash balances which typically see even higher flows in the fourth quarter. Now the acquisition not only is immediately and significantly additive to EPS, it’s also immediately accretive to our capital ratios as well. I mentioned earlier that our Q3 Tier 1 leverage ratio is 5.7% based off of average assets and the spot ratio given the fact that the balance has grown over the quarter, based off the end of period assets was probably 10 to 15 basis points lower.
But the acquisition of TD Ameritrade immediately boost that spot Tier 1 leverage ratio to nearly 6%. And the capital benefit from the acquisition extends beyond the closing date. Given our desire to keep the ratio preferred to Tier 1 capital below 25% and the absence of preferred equity and TD Ameritrade’s capital stack, the acquisition creates additional preferred capacity, which we’d expect to access in the coming quarters. And by adding incremental earnings, the acquisition increases our organic capital formation as well.
Despite the interest rate environment, we’re feeling very excited and very confident as we look ahead to 2021. We expect the momentum that both firms have enjoyed to lay the foundation for continued success next year. And the financial benefits that we that we expect to reveal themselves in our Q4 results should continue to build as we capture more of the expense and revenue synergies. And while we’ll share our scenarios for 2021 at the February business update as we always do, we hope you can appreciate the potent firm we’ve created here. $6 trillion in client assets, 29 million brokerage accounts, and $6.5 billion to $7 billion of adjusted pretax income, just analyzing our combined third quarter and potential fourth quarter results.
And importantly with interest rates and prepayment speeds appearing to stabilize, we can see after several quarterly declines in net interest revenue the potential for sequential increases in NIR, assuming we continue to see organic growth and clients we’ve cashed balances consistent with recent months, as well as similar levels of margin balances. And even as we work hard to integrate TD Ameritrade as quickly and as effectively as possible, we’ll also further advanced our strategies around scale, monetization and segmentation. And finally, we’re ever mindful of our capital position, ensuring that we have adequate capital to support the organic growth of our balance sheet, as well as the transfers from the IDA, which can begin as early as July 1 of next year.
Now let me close with a few thoughts. We have spent a lot of time discussing the acquisition of TD Ameritrade and clearly with good reason. We couldn’t be more excited about what it means for this company, for our clients and for our stockholders. But while it’s true that the acquisition marks the new chapter in Schwab’s history, it’s also only a piece of the story. We’re still pushing forward aggressively on multiple other fronts that Walt described, capturing opportunities to better serve our clients, confronting our competition head on, and doubling down on our efforts to drive greater efficiency and productivity throughout our business.
And while it’s also true that the acquisition is transformative, increasing our scale, broadening our capabilities, it won’t fundamentally change who we are or how we operate, our focus on clients, the discipline with which we manage the business, our fundamental financial formula, and our long term orientation. This is what has made us successful for over four decades and we’re confident [indiscernible] successful in the next decades to come.
With that, let me turn it to Rich for some questions.
All right. Thank you all. We’ll go to Q&A now, Operator. Would like to start us off on how to pose questions?
Thank you. We will now begin the question and answer session. [Operator Instructions] Our first question comes from Dan Fannon with Jefferies. Your line is open. You may ask your question.
Thanks. Good morning. So a lot of factors have changed since the deal was announced or you think about rates, client engagement, asset levels, things like you’re reiterating the expense, synergies that you’ve outlined or originally outlined, but I assume some of the areas of potential revenue and/or expense reduction have changed given all given the external factors that have that have happened between announcement and close. So if you could talk about that, and ultimately, accretion from how you originally stated it to where it sits now.
Dan, so let me take that. This is Peter. Let me take that in a couple ways. First, the near term accretion math has gotten better, frankly in the last year given the relative earnings trajectory of both TD Ameritrade and Schwab. In terms of the synergy realization, I would say that if anything, the synergy opportunity has increased. On the cost synergy side, despite the environmental changes, if you will, I don’t think our thinking around the cost synergy opportunity has fundamentally shifted. We still think that those numbers are very achievable and largely are to be derived in the similar places that we had expected a year ago. On the revenue side, Joe mentioned that a large portion of the revenue synergies are coming from rebanking the balances in the IDA. Those balances at the time of the acquisition were I think roughly $115 billion. And today they’re over $150 billion. So that benefits us in a couple of ways: one, as you may recall, we got a 10 basis point improvement in the net fee there. So that’s now applied over a larger base of balances immediately; and then second is that more cash that we can bring onto the balance sheet and every time we do that, we’re picking up incremental spread revenue as we do so. So I think that has been at the positive as well. I also think that as we’ve dug in and spent more time looking at the business and understanding more about the business, we see other — other opportunities, others or maybe smaller revenue opportunities where we can — we can leverage both firms being together to capture incremental revenue, probably more to talk about those in the future. But we — but I would say anything, our confidence, our excitement, our enthusiasm about this is only increasing last year.
Thank you. Our next question comes from Will Nance with Goldman Sachs, you may ask your question.
Hi, everyone. Good morning. Maybe I could start off with a quick question on balance sheet growth from here. If I think about pro forma for Ameritrade, and this is rough math, but it seems like the percentage of your client cash that is now on balance sheet is in kind of the 50%. ballpark, and that’s kind of in the backdrop of that being below the long term average, all time low rate, loss of liquidity, money markets being kind of flat to even shrinking. So when we think about the tailwind of BDA sweeps going forward, as well as what you could call reverse sorting and the lower rate environment, do you think we could be talking about something like double digit balance sheet growth for the next couple of years, as we kind of rebase the allocation of cash between on and off balance sheet?
It sounds like repeated question,
That does sound like repeated question. So, Will, the two things that tend – or the three — I guess the three dynamics that tend to drive the balance sheet growth organically, and I’ll — we’ll be looking at Legacy Schwab. One is the interest rate environment and then a lower interest rate environment as I mentioned, our clients are less apt to avail themselves of the purchase money funds and CDs, there’s just not as much of a yield pickup and not as much of a benefit for them to do that. So they’re more likely to leave that cash sitting in their account on our balance sheet. Second, of course is organic growth, because a certain portion of the net new assets we bring every — every quarter, every year comes in the form of cash.
And then third is client relative sentiment about the equity markets, whether they are buying more equities or selling equities. Of course, that is, you know, that’s harder to predict, going forward than perhaps those first two items.
So, you know, you can imagine, certainly in this low interest rate environment, you can imagine, as we’ve seen, our balance sheet has grown at a sequence — at a pace post the end of the first quarter, when we obviously saw that huge surge, at an annualized pace and in the double digit, you certainly can imagine a scenario where that would continue into the next — as long as those interest rates remain low.
Now, if interest rates were increased, one would expect at that pace, a balance sheet growth would — would come down, and if clients get more bullish on the equity markets that would on the margin tend to slow the pace of balance sheet growth as well.
Got it. That’s very helpful. And then, secondly, kind of on the same topic, I’ll keep asking few other questions. As we think about the continued growth in the securities portfolio, you’ve had a big opportunity over the past year or so to continue to shift the mix towards fixed rate securities and away from the floating rate allocations, just maybe looking for an update on how long that can kind of continue, when you would kind of need to start keeping that balance in line and what the rates on those sorts of securities look like in today’s environments, I guess, from a credit perspective.
So we’re at about — we’re about at 85/15 now fixed to floating on our investment portfolio. And we feel like that’s probably about the — about the right place to be. So I would say that you’d see us look to probably maintain that pretty close. That leads us to a duration in the upper threes. In terms of the rates, reinvestment rates on the fixed portion are in the 90 to 105 basis point range today, and of course that varies on a daily — weekly if not daily basis, but sort of in that — in that general range.
That’s helpful. Thanks for taking my questions.
Thank you. Your question comes from Mike Carrier with Bank of America, you may ask your question.
Good morning, thanks for taking the questions. What — it seems like you guys offer great value in many areas, and you’ve been innovative in the different offerings. But one of the things you mentioned is kind of on the higher wall side, the RIAs, and when you think about the more holistic and full service types of offerings, how do you think about Schwab offering you say lending, insurance, or other offerings that can be increasingly in demand meaning, you think about that on a proprietary basis, third parties, but wanted to get your thoughts there?
You’re referring on the retail side or on the RIA side or both?
Yeah, both, but I would say probably you’re going to see more demand through the RIAs.
Yeah. So we — we certainly see growth on both sides. Of course, the RIA business continues to have exceptional organic growth. But also on the retail side, as I mentioned, the fastest growing segment of clients for us is high net worth and ultra high net worth clients. Now, they tend to be a little bit of a different kind of client, if you were trying to categorize them, in that the ones who come to us on the retail side tend to maybe be a bit more self-directed, maybe — they come from the financial world and they’re accustomed to managing money or managing their own money whereas on the RIA side, they tend to be more of relying on a professional investment advisor to help them manage their money. But both are growing fairly rapidly.
And our plan is to continue to add the services and capabilities that the high net worth and ultra high net worth investor wants even with, again, the different approach to managing money that generally occurs on the retail side and RIA side. Segment services, dedicated relationship capabilities, access to the type of products that both of those types of high net worth and ultra high net worth investors want.
Interestingly enough, when we talk to the ones on the retail side, they made a specific decision to come to Schwab. And they would like to stay at Schwab and consolidate assets at Schwab. But we have to make sure that we can deliver for them the type of service experience that they expect, given their significant level of asset. So we will continue to expand those capabilities to meet their needs, the retails ones that are at Schwab, because they want to be at Schwab. The ones served by RIAs are there because that’s the best fit for them.
Great. Okay. And then, Peter, just one clarification. I think that you mentioned that the NIM for the fourth quarter around the 150, and I don’t know if you had to break out between Schwab and Ameritrade and not looking for that going forward, but just given the moving pieces this quarter. I don’t know if you can provide some context, you know, on the moving pieces. Thanks.
Yeah, so we did on that page, you’ll see the incremental benefit on NIM of the TD Ameritrade acquisition. I think we said it’s [indiscernible] 19 basis points. So I would imply kind of low 130s for the legacy Schwab business. Again, that’s a — that’s a function — if you look — if you — if you think back to the factors that have impacted NIM over the last couple of quarters, it’s been the declining short term rates, it’s been an increase in premium and amortization. It’s been declining credit spreads, and then it’s been a huge, huge increase in cash balances that we’ve reinvested at rates that are lower than our average portfolio yield. Those credit spreads have largely stabilized, short term rates of course have stabilized, less — right now there’s less cash to invest in the spread on between — the difference between the rates we’re investing at versus what were the average portfolio yield that — that delta has come down. And we wouldn’t expect from here a further big step increase in premium amortization.
So we think that NIM while it may come down from Q3 to Q4, it seems unlikely to be as big, again, I’m just talking about the legacy Schwab business, not likely to be nearly as big as what it was from Q2 to Q3.
That makes sense. Thanks.
Thank you. Your next question comes from Steven Chubak with Wolfe research. You may ask your question.
Hi, good morning. So I wanted to start with a question just on the election impact. There’s some speculation that blue wave could drive steeper yield curve, which will certainly be beneficial, but also could come with the cost of either increase in tax rates and tougher regulation, whether it’s DOL, transaction tax, higher capital requirements for banks, which will clearly present some headwinds. And I was hoping you can just provide some perspective on how you’re thinking about the different election scenarios and what the potential implications could be?
Okay, maybe, Walt would you like to start us off on that? And then maybe Peter can pick up after?
Sure. I think — I think most of our emphasis right now is on making sure that we’re here for our clients during — during what could prove to be a volatile election period. It’s — I would say that our capability to speculate on the outcome of this election is no better than anyone else’s, and, so I don’t think we are planning on strategic changes at this point in time. I think all the things that you mentioned, are accurate if in fact, you get the outcome for the election that you referenced. And we would at that point in time have to figure out how the interplay between a steeper yield curve as well as some of the less favorable things for our business that you mentioned, if they end up occurring. But right now all the emphasis is really around making sure that we have system availability, capacity, service for our clients, as we go into a period that could be very volatile. And it may be an extended period before we know the outcome of the election, at least, for some offices. Peter, I don’t know if you have anything you want to add to that?
I think you answered it well, Walt. I’ll just say that I think we have shown our ability to prosper in different environments and different administrations over our 40-something years. And as long as we continue to focus on clients, folks at home can do the math on what changes in corporate tax rates might do or changes in the long end of the curve. That’s not really any mystery. But for the long term and the way that we manage this business, it’s as Walt says, it’s really continuing to focus on our clients, continue to execute on our strategy. And we think we will benefit from a lot of the secular trends that are taking shape in our industry. And so we think that’ll continue to benefit us, regardless of the administration in the political environment.
Thank you both for that perspective. And just for my follow up, I wanted to ask on capital. Following the deal use or at least with the completion of the deal you spoke to the capital accretion, Peter, and the additional preferred capacity getting you back well above 6%, but just given your target of 6.75% to 7% coupled with the fact that you continue to see really strong organic cash growth, it looks like by the time you can onboard the BDA in July of next year, that you’re still going to be below that target level and was hoping you could speak to how you’re managing to those capital constraints, how it might impact the decision making to onboard the BDA as quickly and how you’re just balancing that pace with a commensurate capital drags?
Yes certainly our intention is to onbring those balances onto our balance sheet, starting in July 1 of next year. We do have various levers at our disposal around capital, we want to make sure we have enough capital to support the organic growth of our balance sheet. I think that’s why I think it’s reasonable to expect us to access the periphery markets. But I don’t think you should assume that if we’re not at, , let’s say 6.75% and tier one leverage in July 1 of next year, that means we’re not going to bring on those balances. We certainly could do that, even if we’re short of — we certainly expect we could do that if we’re short of that level.
Thanks for clarifying that Peter, much appreciated.
Thank you. Our next question comes from Brian Bedell with Deutsche Bank, you may ask your question.
Great. Thanks. Good morning, folks. Let me just start with the interest rate, headwind dynamic. Peter, you mentioned the 90 to 105 basis points, fixed reinvestment rates, maybe you could share the floating reinvestment rates if you continue to keep that at 15%. And then any commentary on money market fee waivers into 4Q, given the exit run rate was higher than the entry run rate and tricky.
So on the money find fee waivers, it wouldn’t surprise us to see a little — a bit of a pickup between Q3 and Q4, as you said, we’re exiting a little bit of a higher pace. Of course, it depends on how much — what the balances are in money fund. And as we continue to see balances, the balances into most purchase money funds go down. That would obviously reduce the amount of fee waivers. But I think an increase between Q3 and Q4 is reasonably expected. That’s based — that’s built into that full year revenue outlook that we provided earlier. In terms of floating rate yields, it’s somewhere to say it’s in the 40 somewhere in that range right now. For what we’re buying, of course that depends on whether it’s — a lot of the credit that we tend to purchase is floating rate and so the yields there tend to be a lot higher, of course, than when we’re buying some agencies. So we’re doing a pretty wide spread there.
Okay, got it. And then a question for Walt. Longer term on the interest rate dynamic, if we are in a lower rate environment for much longer than anyone thinks, what are your thoughts on globally migrating the revenue mix away from interest rate sensitive types of areas? And how would you — how are you thinking it’s possible to build those more sustainable fee revenue areas and maybe that weaves into some of the revenue synergies that I’m sure we’ll talk about more in February? But how are you thinking about trying to change that mix, if at all?
I think we do have a longer term goal of striving for a balance between spread income and other forms of revenue. And of course, that plays out in two of our three strategic initiatives, very clearly in monetization and segmentation. And the thing that I would just emphasize is that all of our monetization efforts are — we want to ensure are done in terms of them being good for clients. But you can see them unfolding before you whether it’s the acquisition of the technology and the talent from Motif, the acquisition of Wasmer, Schroeder, the negotiations that we are having with firms, who effectively capitalize on our platform and we provide services that they would otherwise have to provide, but yet don’t provide any offsetting compensation for those services. These are all in line with actions that we’re taking as well as continue to build our advisory solution. But again, the overriding in all of those moves will be to ensure that anything we do is the right thing for our clients. But we are confident that we can drive toward a more balanced scenario in the world you described, where rates stay lower for longer. Of course, if rates do turn and go up with the yield curve steepens, our spread income can increase quite dramatically, quite quickly. And of course, that would make it more challenging. But we’re fairly confident in our plans to get to a more balanced approach within a reasonable period of time and are taking all prudent actions to get there.
Okay, thanks for your color. Thank you.
Thank you. Our next question comes from Devin Ryan with JMP Securities, you may ask your question.
Great. Good morning. First question here just on expenses. And I know we’re going to find our point on this. But if we think beyond the immediate $250 million to $300 million synergies here, if you can just help us maybe bridge a bit to the to $1.8 billion to $2 billion, and just remind us of some of the key milestones that are going to be required to hit those types of levels. And just also, if you can, whether you’re feeling the same around the timing here because obviously, the range is the same, but a lot has changed. It was previously stated to just try to think about the timing of expense synergies relative to what you guys were thinking when the deal was announced.
Sure, this is Joe again. So I’d say there’s very little that’s changed in our thinking around how to recognize the synergies and clearly the company’s continued to operate and to the extent that we’ve had some very active service level requirements and those kinds of things this year, both companies have added some staff to take advantage of that. But those kinds of changes haven’t had a material impact on the way we’ve been thinking about actually achieving the synergies. So the first pass through was dominantly focused on senior and executive level management and branches. Over the nearer term, there will be a series of other functions as we look to continue to consolidate predominantly in headquarters types of roles, as you get through things like converting to a single HR platform, there’s savings both on the technology and on the people side that they come with those kinds of activities. And those will occur over the course of the next couple of years. A little further out is when you actually get another opportunity to get a bigger bang and expense synergies when you get to that point or we get to that point of being able to do the account conversion. There are a lot of synergies tied up in moving to a single broker dealer from two broker dealers. And there’s a material amount of reduction, summon staff to support for a lot across things like technology platforms, real estate footprint that come down once we get to the place where we can really get to a single broker-dealer and run on a single platform. Then I would say there’s a little bit of cleanup that goes on past that big bang date as we move to full retirement of some of those platforms and systems and just the cleanup work that doesn’t come immediately upon conversion. You get a couple of big events in there that will drive some bigger reductions so we do expect over the course of the next 36 months that you will see continuous recognition of synergies over time, maybe not completely evenly over that window but you should see.
[Technical Difficulty] through some of the account growth metrics and just terrific momentum here in the business. I’m curious, just with the deal closing, whether there’s been any change in trajectory within either business in the retail side or institutional side. Also just with the RA custody, whether or I guess more what you’re telling advisors, especially your advisors that have assets and accounts custody on both platforms, and just some curious kind of whether it’s just business as usual, or if there’s anything else that’s going to change just with the deal formally closing here.
Thanks, I’ll step in there on that one. I think we’ve seen business as usual with maybe one adjustment, and that is that there are a number of TD Ameritrade service advisors who would like to go ahead and make this switch over to the Schwab platform at this point in time rather than wait for us to do that as part of the integration. But the notion that there is some significant movement, if you’re getting it that of RA’s unhappy with the combination and therefore making moves elsewhere is simply not being backed up by the facts. If they were they would have shown up in the TOA metrics that I shared with you. So that was part of why I showed you those numbers. The clients are excited. They know that we are committed to ending up with a winning platform for them that integrates the best of Schwab and the best of Ameritrade as Bernie Clarke likes to say that it’s not going to be one platform or another winning, it’s going to be a new platform that combines the best of all. The RA that we talk with are really excited about being a part of that, being part of an organization with our scale and size, the ability to help them grow and as well as protect their clients’ assets. So it’s been all business as usual to positive if I were to try to summarize it.
Okay, terrific. Thank you very much.
Thank you. The next question comes from Chris Sadler with William Blair. You may ask your question.
Good morning. Any early update on the revenue synergies which you would outline particularly payment for overflow? I’m sure you’ve had a chance to kind of at least get an early look at the extent to which Ameritrade’s greater order routing revenues due to product mix technology or just different philosophies.
I’d say that’s one of those areas where we weren’t able to get into a lot of detail prior to close for competitive purposes. So we are parsing that data today. If anything, I’d say we probably feel a little bit more optimistic about our ability to maintain the majority of that revenue than we did prior to close. But it’s still a little early for us to get into a lot of detail on exactly how that’s going to play out.
Okay, thanks, Joe. Then just one other one on the pricing landscape or marketing landscape. Well, you noted a few quarters ago that you had seen some increased competition around some of the offers that some larger banks were offering to try to drive client acquisition. Just any update on that front will be great.
Sure. It remains a highly competitive market and there is some activity around paying cash in order to get balances so that is still an activity that exists and continues to be an activity that we have questions about its long term logic for companies that intend to be independent and staying in the market over time. I would just say that I guess I would add, I remain optimistic that rational business leadership moves to rational and economically rational decision making over time.
Okay, thank you.
Thank you. Next question comes from Brennan Hawken with UBS. You may ask your question.
Hey, good afternoon now, I guess. Thanks for taking my question. At least good afternoon on the east coast. So it seems as though near term accretion from the deal is better but it didn’t sound like you were changing the long term. In fact, it sounded like from an expense perspective, you specifically didn’t change the long term. But is it right for us to assume that the experience that you’re having here in the early days is clickable and that the better than expected accretion off the bat, therefore, would also translate into better accretion in total? Or is it just that things are happening maybe a little sooner than expected and it’s just timing? Sorry, if you touched on it, that just wasn’t completely clear to me.
I’ll try to answer that and maybe Joe would be ready to add on to that. I guess, I would say is we are very, very excited about this deal. We’re excited about this deal from an accretion standpoint. But I think even more importantly than that, we’re excited about this deal, what this means for us long term, and our ability, or the position we have in the market, and the way that we can serve clients. Certainly, the math is compelling again, in the near term because of the accretion and over the longer term because of the revenue and expense synergies that Joe has talked about and I’ve talked about on previous calls. I think those numbers have on the revenue side, as I mentioned, have gotten bigger on the cost side probably similar, but it’s really nothing to suggest they’ve gotten any smaller, and maybe over time, perhaps we’ll discover more there. But I think also one of the things we’ve discovered is just the compatibility between the two organizations and over the last several months and bringing these two teams together and the alignment that we have around our focus on clients and that cultural compatibility is so very, very important on a complex integration like this. So that’s also made us very, very enthusiastic and excited about the future as well. So I think on every dimension, we’re feeling very, very enthusiastic about the acquisition.
Thank you. Next question comes from Craig Siegenthaler with Credit Suisse, you may ask your question.
Thank you hope you’re all doing well. Just following your June acquisition of motif, we wanted to see if we get an update on the timing behind it direct indexing launch and also, do you have plans to launch the capability first to the RAA channel or potentially both to return advisors at the same time?
Craig, I’ll take that. Unfortunately, this is going to be one of those questions. So I’ll just say upfront, I’m not going to answer to your satisfaction. We’re not going to discuss timing on the introduction for competitive reasons nor are we going to discuss which organizations might go first, but we certainly have every intention of making it available to both. That’ll be used slightly differently by retail and by the RAA and so the determinant will be not trying to benefit one segment of our business over another, it’ll just be which one we can get it to quicker because of the way they’ll utilize the product.
Thank you. Next question comes from Chris Harris with Wells Fargo. You may ask your question.
Just a couple of clarifying questions on the synergies. Should we be assuming the account conversion is a year to event? Then the $250 million to $300 million you guys are unveiling today, are those going to be realized very quickly, like in a few months or is that more of a gradual thing to be realized to the year?
Is it $250 million to $300 million we talked about today or already accomplished? They will show up in the run rate beginning in Q4. A little bit of timing there and that some of the staff reductions here have happened through October, but they will start to show in Q4 before embedded in Q1, those are done and executed on. And we’re not, at this point, providing target dates for account conversion, but you start thinking to some of the other comments here around the 18 to 36 months and you got to get the accounts conversion in that window, with the time to be able to do some of the clean-up at the back end, to be able to get to the full synergy number. Then you can start to back into what some of our thinking is probably around the conversion date.
Okay, thank you.
Thank you. Next question comes from Kyle Voigt with KBW. You may ask your question.
Hi, thank you. Wondering if you can give us an update on the strategy around pricing at clearing conversion? And specifically, I think Joe mentioned that there will be some revenue synergies realized at the conversion date. I just want to get some more details on those. And then secondly, I’m wondering whether Ameritrade margin book [ph] which is much higher yielding right now, will that migrate towards Schwab’s blended rate after conversion? Or will pricing be maintained for that book thereafter? Thank you.
So my guess is, we will be in a position at that winter business update to write more details on all of these components. From a revenue perspective, I would echo some of Peter’s earlier comments to say that we were pretty enthusiastic about what we’re finding. And today thinking through some of the pricing and recognition, implications of decisions that we’re going to have to face around how we bring these organizations together. But I would say, we’re feeling optimistic about what we’re seeing and what some of the recognition opportunities might look like.
As you look forward to post conversion, I’d say that a couple of big buckets that we’re going to have to dimensionalize here are around being able to provide some of the better trading opportunity in the systems, the TD Ameritrade has built to the Schwab client base, as well as being able to provide some of the more extensive wealth management capabilities the Schwab has built, as the TD Ameritrade existing client base. And if I had to guess a little bit today, I would say, we might see those trading benefits happen a little bit faster than wealth management. Wealth management has to be more of a relationship-type activity that we expect to build over time. We do think that those opportunities are significant, that may take a little longer recognize post conversion.
That’s great color. Thank you very much.
Thank you. And this question comes from Michael Cypryss with Morgan Stanley, you may ask your question.
Hey, good afternoon. Thanks for taking the question. I was just hoping for a little bit more color on the net new assets and new customers that are coming over to Schwab here. What portion would you say are new households coming over to Schwab for the first time, versus a wallet share from existing customers? And then, for those new customers that are coming in the door, where would you say they’re coming from? And as others are also reporting growth and seeing growth in accounts and customers, how do you think about the profile and where those customers are coming from and the profile of them? Thank you.
Walt, do you want to start us off on new customers?
Sure. So there’s no question there are new entrants into the space. And that is leading to some of the new household formation, it’s probably why we tried to share both net new assets figures, which of course, are a very broad definition, right? That net number is made up of new-to-firm households, as well as existing clients, as well as transfers from other financial services or investment services providers. So I don’t know that we historically want to break down the components of that net new assets, but we try to give you enough metrics to give you a solid understanding.
We report the total net new assets. We give you the new-to-firm household growth, which I think was on one of the pages that Peter shared. And of course, we give you the transfer numbers, which gives you an idea of whether we are winning or losing on a net basis relative to competitors with existing clients who may be residing at Schwab and residing at our competitor. I think we’re having success with all three of those, as evidenced by our net new assets, including the record September, and the TOA numbers speak for themselves.
And just maybe a follow up on the lending side, just hoping you could just give a little bit more color around some of the initiatives there, and how meaningful could this be as you look out over the next couple of years? On the lending side, more pledged asset lines among other lending products that you have, that you’re prioritizing or even thinking about bringing to the marketplace?
Peter, do you want to draw to that, and then you can close this out?
Yes, I can take that. We’re quite pleased with the momentum we have on the lending side, if you look at — I think our overall bank loans are up 30% year over year. Of course, that’s during obviously a refinancing wave. But with our investor advantage pricing, that has been a huge win with our clients and our client-facing employees and just exceptional, exceptional pricing, while still offering an attractive economic benefit to us and helping us to cement those relationships with our key clients.
Some of them was other firms that would like to do business with them at bay. I think there’s certainly more opportunity there. And there’s also more opportunity with the pledged asset line and having greater penetration there. If you look at where we are with pals [ph], we’re certainly underpenetrated relative to what you see at the wirehouse firms. And I would say that’s true both of our legacy Schwab clients and even more true with the TD Ameritrade clients, and the opportunity there is very, very fertile. So we’re very, very excited, very enthusiastic about our ability to continue to grow that in a way that is very consistent with our strategy.
I think we’re out a time and I just thought I should just close with that. And just thank all of you for your questions today. I just want to close with a couple of thoughts and really reinforce something Walt said earlier, clearly we know that interest rates move in cycles, and this low rate environment will end at some point in the future. And we’ll see the return to more normalized rates. But we’re certainly not just waiting around for that to happen. And I’ll say, while we’re quite pleased by the near-term EPS benefit, and the acquisition supports that 25% to 35% number I referenced earlier. It’s really the long term prospects that make us even more excited. And that’s why we’re really pressing ahead very, very aggressively, but in a way that’s entirely consistent with our strategy, our purpose and our DNA. As those actions begin to bear fruit, in some cases quickly and other cases more gradually over time, it just reinforces our confidence and our enthusiasm. We’ll look forward to seeing all of you virtually most likely, possibly some in person at the February business update. Stay safe everyone and thank you for your time today.
Thank you, that does conclude today’s call.