First the basics. Schwab, which reported its earnings last week, saw a net income of $206 billion for the first quarter, or 15 cents per share, up 6 percent from the $195 million, and 15 cents per share, reported a year ago.
Net revenue was up 8 percent from a year ago to $1.29 billion.
Most notable, perhaps, was the new assets total for the quarter, $43.4 billion, representing the highest first quarter core flows since 2000.
At least three important themes can be noted from the business update conference.
They are:
POINT 1: Schwab Has Been Taking Asset Gathering Seriously POINT 2: ETF OneSource Is Becoming Kind of a Big Deal POINT 3: Advisors Like Solutions to Their Problems
Now to drill down on these points.
POINT 1: Schwab Has Been Taking Asset Gathering Seriously
During the business update, president and chief executive Walt Bettinger had this to say on the subject of gathering in assets.
Now as the slide illustrates, clients remain actively engaged with their investment portfolios and largely invested. You can see that cash levels are very close to long-term traditional levels. That said, clients have uncertainty. They're increasingly turning to their trust in Schwab for help with their investment strategies and, as Joe referenced and this slide illustrates, you can see that our net dollar-based enrollments into fee-oriented advisory solutions are up over 70% year-over-year. Now this is a critical part of our retail strategy because it builds our asset management revenue, it diversifies our revenue stream away from net interest margins or volatile trading revenue. Yes, it had a modest negative impact on our expenses in Q1 but, as Joe stated, we would like to have that challenge on an ongoing basis because of the significant revenue stream that these conversions create. Now maybe even more important from the client lens is that our research shows that when clients who are enrolled in these advisory solutions, when we look at their performance, they tend to either have better performance with similar volatility or equal performance with lower volatility levels than our clients who are purely self-directed. In other words, better outcomes for the client.
And of course, these are only metrics and metrics are only metrics if they don't produce revenue. In our business, there are many ways to generate asset-related metrics without revenue growth but, as you can see in this chart, our outsized asset growth also converts into outsized revenue growth relative to our publicly traded competitors.
A key indicator of Schwab's commitment to this lies in their willingness to invest a lot of money to this initiative. Chief financial officer Joseph Martinetto had this to say on these investments.
In February, just walking back to the last time we were all together, we talked about stepping up our spending on client-related investments. At the same time, we also said that if the environment weakened, we were in a position to manage our expenses to deliver on results that would be consistent with the baseline scenario that we shared with you at that point. Given what we've experienced in trading and the interest rate environment, we've made a number of adjustments to our expenses to ensure that we'll be able to demonstrate the financial leverage in our business model for the remainder of 2013.
Even having trimmed our spending plans, we're still making significant investments and, over the course of the past few years, we've closed the gap between the more severe reductions we enacted during the worst of the financial crisis and more normal levels of spending. That means you should expect to see a widening of the gap between revenue growth and expense growth going forward, with more of our success at driving revenue growth falling to the bottom line.
So why have we been talking about spending more aggressively? Because we saw and continue to see an opportunity to drive growth, and it's hard to argue with the results. We put up some of the strongest net new asset numbers in the history of the company, bringing in $91 billion of core net new assets in the last half year. Clearly, we're winning in the competitive environment.
Even in the face of a weak trading environment and an interest rate environment that softened over the course of the quarter, we managed to turn the growth in client assets into an 8.5% increase in revenues. Asset management and net interest revenues were able to more than offset the softness that we saw in the trading line, which was down year-over-year. Asset management continues -- the asset management fees continue to be a bright spot. Net enrollments of $4.7 billion in advice solutions in Q1 was up more than 70% over Q1 of last year.
Finally, if we look quarter-over-quarter, all 3 of our major revenue lines contributed to sequential growth.
POINT 2: ETF OneSource Is Becoming Kind of a Big Deal
Bettinger had this to say on their young ETF platform.
A couple of months ago, we introduced Schwab ETF OneSource. It's another first in the industry, another Schwab innovation. It's the first broad-based, no-commission platform of ETFs from major ETF managers that includes compensation paid to the builder of the platform so that we can offset some of the lost commission revenue. Client response to the program has been outstanding. The net flows to it have exceeded our early expectations. It's probably a little bit early to share detailed metrics on this effort but it does appear that flows into ETFs at Schwab are increasingly moving to the ETFs that are available without a commission and away from ETFs that still require a commission to buy or sell, the exact outcome that we were striving for in the development of this program for our clients.
I think that the -- what we try to design with the ETF OneSource program, first, we did build through the lens of the client, that it's going to attract clients to Schwab because of the quality of the lineup and the fact that there is compensation paid to Schwab, it's a sustainable approach as opposed to simply a marketing strategy. The revenue level that we receive compensates us fairly for the forgone commissions that we would otherwise have collected if we did not have the no-fee program. What we're seeing in -- again, very early days but what we're seeing is that the flows into the ETF OneSource program are coming out of commission-oriented ETFs or commission equities, but we're seeing a fairly significant amount of those flows come from the commission-oriented ETFs, which I guess you would expect. It's not like there are any major asset classes missing in our ETF OneSource program. It's not like there are not competitive operating expenses or spreads available in the ETFs in the OneSource program relative to the commission ones. So clients are making.
A rational decision and saying I'd much rather buy in the ETF OneSource program than commission-oriented ETFs. And of course I guess I'd throw out one other comment. The I think misguided notion that some commentators have made that offering ETF OneSource would result in higher cost to investors ignores the fact that, unlike mutual funds, ETFs are available for purchase through open markets and, therefore, all ETF managers have to maintain competitive operating expenses lest they no longer be chosen in the broader world for investing. So we are very confident the program will have no negative impact to consumers and actually will only create value for consumers. The last point, Bill, is that the strategic importance of a distributor like Schwab now being involved in the economics traditionally retained 100% by manufacturers may, over the long-term, be the most important aspect of ETF OneSource. But that will play itself out over time.
POINT 3: Advisors Like Solutions to Their Problems
Schwab has been launching a number of products and services to gather assets. Bettinger had this to say during the conference.
Now as the slide illustrates, clients remain actively engaged with their investment portfolios and largely invested. You can see that cash levels are very close to long-term traditional levels. That said, clients have uncertainty. They're increasingly turning to their trust in Schwab for help with their investment strategies and, as Joe referenced and this slide illustrates, you can see that our net dollar-based enrollments into fee-oriented advisory solutions are up over 70% year-over-year. Now this is a critical part of our retail strategy because it builds our asset management revenue, it diversifies our revenue stream away from net interest margins or volatile trading revenue. Yes, it had a modest negative impact on our expenses in Q1 but, as Joe stated, we would like to have that challenge on an ongoing basis because of the significant revenue stream that these conversions create. Now maybe even more important from the client lens is that our research shows that when clients who are enrolled in these advisory solutions, when we look at their performance, they tend to either have better performance with similar volatility or equal performance with lower volatility levels than our clients who are purely self-directed. In other words, better outcomes for the client.
He also drilled down a bit on the kinds of investment solutions Schwab has been promoting to garner better ties with advisors.
So Windhaven continues to have a strong reception in the marketplace. I believe we're up over $16 billion as of the last report I saw on that. Of course it fluctuates a little bit with the equity markets but continues to have exceptional results. ThomasPartners will be available nationally next month. We believe there is a fair amount of pent-up demand and interest in ThomasPartners. So we expect that program offering for our clients to be very, very well-received, again create better outcomes for our clients while generating additional investment management fees for us, further diversifying our revenue stream. Independent branch model continues to go well. We continue to go slow, as we've reiterated at each opportunity. The early independent branches that have now been open for a year or more have had strong results. You may recall our goal was for them to do about $10 billion of net new assets over the course of a year and the number that they seem to be coming in at is more in the $20 million to $30 million. I did say million, not billion, didn't I? $10 million a year and they're coming in more like $20 million to $30 million. That said, we'll continue to go slow because we understand the implications of this strategy and the risks inherent in it. Our index-only 401(k) is very, very well-received, particularly at this point among our existing clients. The interesting aspect of the index 401(k), as we have talked about previously, is that consultants who often control the decision-making aspect of 401(k) and whose business model is based on selecting active managed funds, hiring and firing funds, as you might expect, are threatened by the index program because it removes the need for that selection, periodic hiring and firing of active managers. So I think this is one of those issues that creates a speedbump as opposed to a long-term dilemma for this program because it is in the best interests of participants and employers, in our view, and ultimately they will see through the consultants' views who are trying to block employer access to this program. But the reception among our existing clients is outstanding and, in the marketplace, it's gathering momentum also. And then you asked about the annuity. The annuity is -- it's fairly new. We're pleased with early results but, again, we're talking about modest numbers because it's only been out for a couple of months. But we're pleased with the quality of the product and we think, over time, it will have success in meeting needs of our clients.
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