Schwab Poised to 'Navigate This Pain': CEO Bettinger

A trio of top Charles Schwab executives said Wednesday that they had no doubts about the firm’s long-term safety, stability and security, despite its widely reported revenue challenges and lingering questions about its ability to take full advantage of its $22 billion purchase of  former rival TD Ameritrade.

“We are going to navigate this pain,” Co-Chairman and CEO Walt Bettinger said.

The Schwab leaders made their case at the firm’s annual Impact conference for RIAs, which is taking place this week in Philadelphia. Among the several thousand guests in attendance this year are some advisors formerly aligned with TD Ameritrade — a fact that the executives returned to repeatedly.

“There is no doubt that 2023 has brought a lot of challenges, but what remains is the safety, stability and security of the company,” Bettinger said. “We just wrapped our 12th consecutive quarter with adjusted pretax margins above 40%.

“I say ‘adjusted’ because the merger with Ameritrade did have an impact, but we continue to have exceptionally strong liquidity and capital. From a risk-adjusted basis, we remain at the top compared with any peer institution of a similar size,” explained Bettinger, who was joined onstage by Bernie Clark, head of Advisor Services, and Rick Wurster, Schwab’s president.

Their presentations came about a week after an earnings call in which leaders acknowledged the firm’s full-year revenues could be 8% to 9% lower in 2023 than in 2022. At the same time, they warned Schwab’s expenses could grow about 9% overall.

Schwab’s stock price, which was down nearly 1% Wednesday morning at $49.37, has dropped close to 40% so far this year.

Bettinger said the leadership team doesn’t shy away from these numbers, but he added that Schwab “doesn’t measure our year by the stock price.”

“In the long run, all of these issues around stock price will take care of themselves if we get the job done and continue to support you, our advisors,” he said. “We feel really good about the future.”

Cash Sweep Accounts

In response to a pre-selected audience question, Clark took time to address the issue of client cash movement from transactional cash holdings to higher yielding investments like money market funds — a trend that has hurt its bank results and overall revenues.

Clark said this is a natural result of the firm’s open architecture approach, which he characterized as a lasting advantage despite some short-term headwinds.

He also said the firm doesn’t plan to increase the yield on its federally insured sweep accounts in an attempt to stem such flows, noting that after a more difficult summer the firm is now seeing “essentially neutral flows.”

“It is important for people to understand our cash strategy,” Clark said. “When the client has cash on our platform, we want to make sure it is protected and liquid. We want you, as the advisor, to understand the purpose of that cash.

“If it is actually ‘investment cash’ to be held for the long term, we are encouraging you to move that cash into something that is higher yielding … ,” the executive added. “Billions have come off our sweep program and into such products, and that’s exactly what we would have wanted.”

These flows represent independent advisors living up to their fiduciary duties and ensuring their clients are invested in the right funds in accordance with their investment horizons and risk tolerance, Clark said. Simply put, higher rates means holding cash in sweep accounts is not very attractive at the moment. That fact could (and will) change again in the future when markets evolve.

Other Issues

Fielding another audience query, Bettinger spoke in greater depth about the firm’s overall balance sheet, positing that, like any financial institution navigating the current interest rate environment, Schwab is going to continue to have sizable unrealized losses on the balance sheet.

“That’s a given, but it is also a complete misnomer to say that we had gotten caught off guard because we had extended duration because rates were low,” Bettinger said. “That’s just flatly wrong.

“Our duration has been around 2.5 years on average for the last two or three decades, and we aren’t trying to guess and time interest rate movements,” he explained. “We were at 2.5 years when rates began to rise. When you have a 500 basis-point increase in rates in a year or so, you’re going to have paper losses.”

Bettinger continued: “We’re going to hold these assets and ride this out to maturity, and we will accept some pain along the way. That’s the factual story and we’re telling it over and over.

“We have 88% of all deposits covered by FDIC,” he said. “That is the inverse of many firms that ran into real trouble last year. We’re in a very solid position, and I have no concerns about our stability whatsoever.”

Pictured: Walt Bettinger