Charles Schwab hits record Q3 earnings on interest rates

Amid record earnings, Schwab to move 98% of TD accounts in 2023

October 28, 2022 12:28 PM

The final stages of Charles Schwab's absorption of TD Ameritrade are in sight, roughly two years after the $22-billion transaction.

Registered investment advisors using TD Ameritrade's custodian will move to Schwab over Labor Day weekend next year. Nearly all retail brokerage and trading accounts will make the transition during three waves in 2023, on Memorial Day, next September and a weekend in early November, according to a schedule released by Schwab on Oct. 27. Because of delays primarily related to Russia's invasion of Ukraine, the last 2% or so won't migrate until the "first part" of 2024, CEO Walt Bettinger said in a business update call with analysts on the firm's third-quarter results. Clients will receive notifications at least three months in advance.

"We have built tremendous scale and capacity far greater than we anticipated when we announced this acquisition," Bettinger said in prepared remarks. "We've worked diligently to make the actual conversion process streamlined and simple for our combined clients, along with retaining key high-quality employees. And, of course, we've done all this, as you know, in the middle of a global pandemic. When we complete this integration, we think we will be offering the industry's top overall investing experience."

The Westlake, Texas-based custodian, retail brokerage and asset management firm filled in the timing details of the TD Ameritrade integration after reaping record profits from earnings tied to interest rates. TD Ameritrade's operations with Russian retail investors were curbed earlier this year after the Treasury Department placed financial sanctions on Russian entities over Moscow's invasion.

For a look at the key takeaways for financial advisors from Schwab's third-quarter earnings, scroll down the slideshow. For insights on the ongoing TD Ameritrade integration from an interview with the head of digital advisor solutions of Schwab Advisor Services, click here.

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Note: The company only discloses certain metrics relating to its direct retail Investor Services segment and its custodial and retirement planning businesses under the Advisor Services unit.

Client assets

Slumping stocks took a bite out of client assets in the third quarter, with the combined number across Investor Services and Advisor Services falling by 13% from the same time a year ago to $6.64 trillion. Assets in the Advisor Services division slipped 10% to $3.14 trillion. The number of corporate retirement plan participants ticked up 4% to 2.3 million.

Net new assets

Asset flows tumbled year over year in the third quarter as the stock volatility spooked many investors, although the numbers jumped significantly from the second three months of the year. Schwab added $114.6 billion in net new assets across Advisor and Investor Services in the third quarter, compared to just $43.4 billion in the second quarter. The flows tapered off by 18% compared to the same time a year ago. For Advisor Services, net new assets fell 27% to $59.5 billion.

Client cash

Cash as a percentage of client assets soared by 210 basis points year over year to 12.9% as investors flocked out of stocks in an effort to tap into the rising interest rates. The firm's money market funds surged by 43% to $211.1 billion, compared to a 15% dip in its other proprietary mutual fund products. Net interest revenue grew 44% to $2.9 billion.

TD Ameritrade integration costs

The cost of integrating TD Ameritrade's businesses into Schwab has increased around 10% from the expected amount 18 months ago to between $2.4 billion and $2.5 billion, according to the firm. By the end of 2024, Schwab aims to slash its overall expenses by $1.8 billion to $2 billion each year through savings in the consolidation of TD Ameritrade's business. Inflation has pushed up costs in the integration such as technology and compensation.

However, Bettinger said "the largest reason for these higher costs" stems from the Russian invasion of Ukraine. After the beginning of the war earlier this year, Schwab dropped the software developers and engineers previously managing TD Ameritrade's self-directed "thinkorswim" trading platform out of Russia. That change forced the company to train "dozens and dozens" of new engineers in addition to removing the operations from Russia, he noted.

"This was very costly, but it was the right thing to do," Bettinger said. "And I know that anyone listening to this call would've made the exact same decision."

Revenue and earnings

The earnings tied to higher interest rates pushed up the company's profits. For the third quarter, Schwab generated record net income of $2 billion on net revenue of $5.5 billion with a pretax profit margin of 48.7%. Net income jumped 32% from the year-ago period, while revenue climbed 20% and the pretax margin rose by 470 basis points.

Remark

An analyst asked Bettinger whether the TD Ameritrade integration is having any impact on the flow of new RIAs launched by breakaway teams. Bettinger said he doesn't expect the ongoing transition to affect breakaway RIAs as much as the stock volatility of this year, although that hasn't been slowing the independent moves either.

"That's what I was interested in when I actually asked this exact question myself a week or so ago, to see whether the equity market decline had made it less apt for RIAs to consider moving [to] independence," he said. "And the fact that the pipeline was comparable to what it's been over recent quarters actually was very encouraging to me."