2017 Annual Report Through Clients’ Eyes Principles that will guide our actions for growth
1. Trust is everything. Earned over time. Lost in an instant. We will focus on anything we do or don’t do that builds or undermines trust and our relationship with clients.
2. Price matters. More than ever. And in our industry more than most. We will leverage our scale to deliver industry-leading pricing without prospects or clients having to ask or negotiate.
3. Clients deserve efficient experiences. Every time. We will respect our clients’ time by ensuring that every interaction a client has with us is simple and easy.
4. Every prospective or existing client is critical to our future growth. No matter how large or small. We will value and delight them at each possible opportunity.
5. Actions matter more than words. Clients, press, influencers, and employees will give credit to what we do vs. what we say. We will challenge everything we do to ensure it is consistent with what we believe and say about ourselves.
The Charles Schwab Corporation (NYSE: SCHW) is an investing services firm with a history of innovating and advocating for individual investors and the advisors and institutions who serve them. In addition to historical information, this Annual Report to Stockholders contains “forward-looking statements,” which are identified by words such as “believe,” “expect,” “will,” “may,” “would,” “should,” “growth,” “build,” “deliver,” “continue,” “remain,” “can,” “improve,” “drive,” “potential,” “scenario,” “lead,” “plan,” “future,” “position,” “optimize,” “target,” “record,” “investment,” “opportunity,” “intend,” “objective,” and other similar expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements, which reflect management’s beliefs, objectives, and expectations as of the date hereof, are estimates based on the best judgment of the company’s senior management. These statements relate to, among other things: growth in the company’s client base, accounts, assets, market share, revenues, earnings and profits; and investments to fuel and support growth, serve clients, and drive scale and efficiency (See “Letter from the Chief Executive Officer” and “Letter from the Chief Financial Officer”); disruptive actions; stockholder value; operating efficiency; and optimizing earnings power (See “Letter from the Chief Executive Officer”); expenses; Tier 1 Leverage Ratio objective; FHLB borrowing; bulk transfers; target dividend payout ratio; optimizing the spread earned on sweep balances; deposit pricing; balance sheet growth; timing for crossing the $250 billion assets threshold; the impact of fluctuations in the S&P 500® index, interest rates, and trading activity on revenue growth, the gap between revenue and expense growth, and pre-tax profit margin; balancing near-term profitability with investments for long-term growth; increasing revenues faster than expenses; and 2018 effective tax rate (See “Letter from the Chief Financial Officer”). Achievement of the expressed beliefs, objectives, and expectations described in these statements is subject to risks and uncertainties that could cause actual results to differ materially from the expressed beliefs, objectives, and expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of March 2, 2018 (or such earlier date as may be specified herein). See “Forward-Looking Statements” in Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 19 in the Form 10-K for a discussion of important factors that may cause such differences. Letter From the CEO 2 Employer of Choice & Industry Recognition 8 Letter From the CFO 10 Financial Highlights 16 Growth in Client Assets and Accounts 17 Executive Management 18 Form 10-K 19 Board of Directors i Corporate Information ii Route review PDF as reader spreads
No trade-offs
Walt Bettinger President and Chief Executive Officer
To my fellow stockholders, We are committed to continuing to build the type of company that treats all constituencies–our clients, our stockholders, Thank you. Yes, thank you to our valued clients, and thank our employees, our vendors and partners, our regulators, and you to our long-term stockholders. our communities–with honor and respect. Why begin my annual opportunity to speak directly with This is my tenth opportunity to have the honor of writing to stockholders with a thank you? It’s simple. Every success you. As in the past, my goal is to keep this letter clear, direct, we achieved in 2017 is just a reflection of the trust millions and free of jargon, corporate speak, and trendy buzzwords. of clients and stockholders have in us. And their trust led to The litmus test for my letter is whether it reads as if I were records in virtually every key area of measurement in 2017: corresponding with a business partner who has been out of • Active brokerage accounts • Revenue touch for the past year. And as always, please let me know if • Net new assets • Net income I’ve achieved this goal. • Client assets • Stock price
Are we proud? Yes, of course. But far more, we are grateful A changing world and humbled. We are grateful for the trust our clients and stockholders place in us. We are humbled by your response The world we operate in is changing faster than ever before. to our “Through Clients’ Eyes” strategy and the execution The traditional expectations for price versus quality trade- of our “Virtuous Cycle” approach to building the business. offs are breaking down all across our economy. Again, thank you! On a recent Saturday, in fact, I ordered a jacket online for a lower price than it was offered for at a local mall. The
2 LETTER FROM THE CHIEF EXECUTIVE OFFICER Schwab’s Virtuous Cycle continues to deliver strong business momentum
lenge the stat hal us q C nefit in uo 11% to be vesto rs $198.6B Expense Growth , Core Net New Assets ts … w o I n t it n e s h v $380M* m n m e t o s s i o t $3.4T t o e c r in Annualized Cost v e r a s n i o r Client Assets
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15% O u t $8.6B s Return on Equity t a n d Revenue d r v in o a c ,… lu g re s e st o lt 23% , oc t u an kh ing es 42.4% d… old ead l r Earnings Per er L cia inan Pre-Tax Profit Margin Share Growth f
Note: All growth metrics are 2017 vs. 2016. *Estimated annualized cost savings for clients from strategic pricing moves announced in February 2017 and October 2017. package containing my new jacket was sitting in my driveway Beating the market by dinner that evening—a dinner from an outstanding local steakhouse that was also delivered as fresh and warm as if For many years, experienced investors have understood my family had been sitting in the actual restaurant. just how difficult it is to “beat” or “outperform” the market This is the business environment that Schwab operates on a consistent basis. Most industry studies show that very in…and is succeeding in. At Schwab, we have embraced— few professionals can generate market-beating returns and even championed—the concept of “no trade-offs” for over time, and it’s almost impossible for any investor to investors—an approach that contributed to our record- identify who those professionals might be in advance. breaking results. Today, many wise investors put their emphasis on proper Let’s discuss three of the factors changing the world of planning, asset allocation, tax efficiency, and keeping investing today and how our strategy positions Schwab to costs as low as possible—all factors that have driven lead the change and win in the market as a result. success over time and all within every investor’s control. In my opinion, no firm in the industry is doing more to The concept of “beating the market” has given way to a 1 support these essential ingredients of smart investing client focus on financial planning, asset allocation, tax than Schwab. efficiency, and low-cost investing. 2 Fiduciary-standard advice, fee transparency, and low In 2017, we completed 142,000 financial planning fees are a fundamental expectation for most clients. conversations with clients. Along with the independent investment advisors we serve, we provided asset allocation Scale is playing an increasingly large role in determining 3 and advisory services to clients with $1.7 trillion in assets, the “winners,” as costs related to cybersecurity, com- and we did so at a value and cost that left more money in pliance, and regulatory oversight challenge sub-scale the pockets of those clients. After all, it is the investors’ firms’ ability to compete effectively.
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money to begin with, and the less we take in fees, the more remains to grow and compound. Net Income (IN MILLIONS AT YEAR-END) Who would have thought over 40 years ago that one day Schwab would be recognized by J.D. Power as “Highest in Investor Satisfaction With Full Service Brokerage Firms” in both 2016 and 2017? 1 And who would have thought that our comparable advisory services and index funds would often have lower fees than a firm like Vanguard?
That is no trade-offs! $1,071 $1,321 $1,447 $1,889 $2,354 Advice, transparency, and low fees 2013 2014 2015 2016 2017
The word “fiduciary” sounds complex…but it really isn’t. A fiduciary assesses what’s best for another and puts that Total Client Assets person’s interests ahead of its own. (IN BILLIONS AT YEAR-END)
This is no different from when you visit a physician, and you expect advice tailored to your health needs and not influenced by the last medical equipment salesperson who spoke to your doctor. Similarly, when you speak with an attorney, you expect advice offered exclusively in your best interest.
And when you retain Schwab for fee-based investment $2,249 $2,464 $2,514 $2,780 $3,362 advice, or one of the thousands of independent registered 2013 2014 2015 2016 2017 investment advisors who custody their client assets at Schwab, you should be able to count on the same level of objectivity, transparency, and professionalism. S&P 500® Index Fund A simple fact is: when you pay Schwab a fee for our Net Expense Ratios advisory services, we provide that advice in a fiduciary Schwab Fidelity Vanguard capacity, placing your interests ahead of ours. $5,000 Why does this matter so much? Because investors have 0.030% 0.090% 0.140% Investment realized that: $100,000 “Receiving advice in their interest” is very different 0.030% 0.035% 0.040% • Investment from “being sold a product,” and Understanding the exact fees and expenses being $1,000,000 • 0.030% 0.035% 0.040% paid is not only critical to minimizing those fees and Investment expenses, but the easiest way to keep more of their Source: https://www.schwabfunds.com/public/file/P-10043741 money invested.
4 LETTER FROM THE CHIEF EXECUTIVE OFFICER It is no surprise that two of the fastest growing parts of Schwab are the advisory services we provide directly to Assets Receiving Ongoing investors, and the custody and related services we provide Advisory Services to support the growth of independent investment advisors. (IN BILLIONS AT YEAR-END) Quality advice from a professional putting your interests ahead of their own…transparency as to exactly what you Investor Services are paying for this advice...and a goal of keeping those costs as low as possible. And our unique Satisfaction Guarantee, which ensures that if for any reason, any client, no matter how large or small, is dissatisfied with the service they receive from Schwab, we will return any eligible commissions, fees, or advisory program fees. 2 That is no trade-offs! +24% The power of scale YEAR-OVER- $217.1 $268.7 YEAR GROWTH 2016 2017 The world we operate in is not only changing rapidly, it is increasingly complex. It is fraught with the threat of cyberattack, and it demands risk management and oversight as never before. Advisor Services And yet, at the same time, investors expect and deserve outstanding service and world-class value. How can investment services firms deliver on these seemingly conflicting objectives? One critical factor is scale. With client assets approaching $3.5 trillion, Schwab has enormous economies of scale advantages that we leverage for the benefit of investors. Spreading these important costs over almost $3.5 trillion +21% in assets allows us to deliver on our commitments, and to YEAR-OVER- do so while operating with more efficiency than any of our $1,184.3 $1,431.1 YEAR GROWTH publicly traded competitors—by a wide margin. Operating 2016 2017 with greater efficiency means that we can deliver on our commitments, charge our clients less, and yet still achieve outstanding results for our stockholders.
In 2017, we chose to share further scale benefits with back in the pockets of our clients—that’s between 4% and our clients by aggressively reducing pricing in a variety 5% of our total revenue. In the “Virtuous Cycle,” we share of areas ranging from online equity commissions to index the benefits of our growth with our valued clients! mutual funds to purchased money market funds. The annual value of fees we reduced put nearly $400 million That is no trade-offs!
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Expenses as a Percentage of Average Client Assets
0.56% 0.52% 0.42% 0.27% 0.16% Morgan Stanley WM Bank of America GWIM E*TRADE TD Ameritrade Schwab
Source: Company earnings releases.
Core Net New Assets (IN BILLIONS AT YEAR-END)
$140.8 $124.8 $134.7 $125.5 $198.6 2013 2014 2015 2016 2017
The future for Schwab And as we transition into 2018 and strive to pursue this growth, we will operate with several clear priorities:
We believe investable wealth in the United States exceeds • Ensuring we continue to build client trust by making $30 trillion. So even though we are now serving almost every decision “Through Clients’ Eyes,” $3.5 trillion in client assets, we are far from maximizing • Optimizing our earnings power while continuing to our growth potential. The opportunities to serve millions invest in our clients and our people, and more investors and gain their trust to invest with Schwab Investing in the business for the long haul, with a focus are enormous. • on growth, infrastructure, and risk management. Today, we are better positioned than ever to capture a We believe your company has reached a point where we growing share of the market by continuing to build on our should be investing not only to support the growth we are “no trade-offs” approach–delivering quality service and achieving now, but also to “clear the path” for the growth advice, offering transparent and low prices, and leveraging we’re going to achieve over the next decade and beyond. our scale to operate efficiently and profitably. You’ll see us working on both those fronts in 2018.
6 LETTER FROM THE CHIEF EXECUTIVE OFFICER “Today, we are better positioned than ever to capture a growing share of the market by continuing to build on our ‘no trade-offs’ approach— delivering quality service and advice, offering transparent and low prices, and leveraging our scale to operate efficiently and profitably.”
Conclusion allowed us to share the benefits of that increasing scale with our clients in the form of great service, expanded investing solutions, and lower pricing. As I mentioned in the opening of this letter, this is my tenth opportunity to share with you my thoughts, dreams, So I will close where I started—with a sincere thank you. challenges, and ambitions for your company. Thank you to our valued clients, and thank you to our long- term stockholders. Your trust and confidence in Schwab The past decade has been a remarkable one. From have helped us build a remarkable company, one whose the depths of the financial crisis and the resulting zero future has never been brighter! interest rate policies enacted by the Federal Reserve, to the highs of record stock market levels and consumer Warmly, confidence—one thing has remained unchanged: our “Through Clients’ Eyes” strategy.
Every day we ask ourselves how we can use our intimate knowledge of investing, saving, and the markets to better serve our clients, to offer them better value…to serve them the way we would want to be served. Walt Bettinger This simple approach consistent with the Golden Rule March 2, 2018 comes to life in our “Virtuous Cycle.” Treating clients as linkedin.com/in/waltbettinger we would want to be treated has fueled our tremendous twitter.com/waltbettinger growth in recent years. That growth has helped us build scale and grow profits, and, importantly, it has also
1 Charles Schwab received the highest numerical score in the J.D. Power 2016–2017 Full Service Investor Satisfaction Study. 2017 study based on 6,579 total responses from 20 firms measuring opinions of investors who used full service investment institutions, surveyed January 2017. Your experiences may vary. Visit jdpower.com
2 If you are not completely satisfied for any reason, at your request Charles Schwab & Co., Inc. or Charles Schwab Bank will refund any eligible fee. See schwab.com/satisfaction.
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Admired as an employer of choice
Schwab ranked as a top place to work in many of the places we call home