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Letter from the Chief Executive Officer
To manage through the financial crisis of 2008, Schwab maintained a conservative approach to risk management, strict expense controls, and a relentless focus on serving our clients. As our 2008 results clearly show, that common-sense approach continued to make a difference for millions of Americans.
New and existing Schwab clients brought in $113 billion in net new assets for the year – a number that was certainly impacted by the financial crisis, but still averaged a very healthy $2 billion per week in net new assets coming to Schwab. Of that total, independent advisors accounted for more than half, or $60 billion in net new assets, including a record $13 billion from advisors who chose to leave established financial firms and set up shop as independent registered investment advisors. Another $18 billion in net new assets came from employers who work with Schwab to provide retirement services to their employees, with the balance of $35 billion in net new assets coming directly from individual investors.
As of December 31, 2008, total client assets stood at $1.14 trillion, down from $1.45 trillion at year-end 2007 as a result of the broad market declines that were upon us by the fourth quarter of the year.
But there were also bright spots during that difficult quarter. In October, during one of the worst months ever for the U.S. stock market, individual investors opened nearly 30,000 net new brokerage accounts at Schwab, up 88 percent over October 2007. For the full year, investors opened more than 889,000 new brokerage accounts, up 10 percent year-over-year, while total brokerage accounts rose 5 percent to 7.4 million.
Corporate and Retirement Services added a record 200,000 participants in 401(k) plans, boosting our total to 1.4 million participants – a 17 percent increase over the prior year.
Charles Schwab Bank also continued to grow as banking accounts increased 71 percent to 447,000 at year-end. The bank’s balance sheet assets of $25.4 billion were up 72 percent year-over-year.
It’s clear that people are voting with their pocketbooks. And for every vote of confidence in Schwab, we are grateful and profoundly aware of the responsibility that comes with it. 2008 FINANCIAL RESULTSBased on these strong client metrics, The Charles Schwab Corporation posted a second consecutive year of record financial operating results. For the 12 months ending December 31, 2008, results included the following:
KEYS TO SUCCESS So how did Schwab succeed when so many other companies failed or faltered? Four factors contributed to our success.
1. We started the year on a firm financial footing.
Schwab entered this shaky environment with pretax margins approaching 40 percent, a strong balance sheet, and limited exposure to the more “toxic” financial instruments that brought down so many competitors. We believe that’s the direct result of common-sense financial strategies and conservative risk management, which Chief Financial Officer Joe Martinetto describes in more detail in his accompanying letter.
Because we came into this crisis as a strong, solid, and secure firm, we were able to operate from a position of strength. So when the deadline approached to apply for funding from the federal Troubled Asset Relief Program, we declined to participate.
2. We were there for people when they needed us most.
During these tough times, millions of people turned to Schwab for help. Calls to our service representatives increased 5 percent to more than 10.3 million, while our automated systems handled an additional 16.8 million calls. New online accounts grew by more than 30 percent on schwab.com – nearly two-thirds from “new to firm” clients. Traffic increased at our branches, too, where we handled more than 5 million client interactions. In addition to offering guidance through regular publications, we invited more than 1.2 million households to a webcast or local event with Schwab experts.
We seized other opportunities to build stronger client relationships. When businesses failed or filed for bankruptcy, we helped their employees determine their options with their 401(k) investments. When many financial advisors decided to leave Wall Street, Schwab provided what they needed to start their own independent firms, or we matched them with an existing firm. And when extreme market volatility spurred investors to move their money from equities to federally insured products, we made it easy with Schwab CD OneSource®, a virtual marketplace of FDIC-insured CDs from banks across the country.
While serving clients remains our primary focus, we know there are millions more who need help, particularly with financial literacy and personal finance skills. We continued our popular education and scholarship program with Boys & Girls Clubs of America, and we expanded the information available through our schwabmoneywise.com website. Last year, Charles Schwab Foundation also awarded scholarships to 10 teens who received a perfect score on the National Financial Literacy Challenge test.
3. Our business model helped us weather the storm.
In keeping with our purpose to help everyone be financially fit, we’ve created a simple yet flexible business model that serves individual investors, independent investment advisors, and company benefit plan sponsors.
Investor Services, our traditional retail investing and brokerage unit, helps make financial services more accessible, affordable, and understandable for individual investors. Last year, Investor Services generated about two-thirds of our total revenue and profits, and it accounted for total client assets of $482.6 billion at year-end.
We also generated strong results through our “business-to-business” segment, which has been reorganized into Institutional Services. We consolidated support capabilities for our institutional clients, including independent, fee-based advisors and company retirement plan sponsors, to deliver the best of Schwab’s institutional services across our client base. The combined units represented $654.4 billion in total assets under management at year-end.
Serving different types of clients generates different sources of revenue. That, in turn, helps provide more stability for our performance during up and down market cycles.
4. We were disciplined and diligent in managing expenses.
Over the course of the year, the Federal Reserve cut interest rates repeatedly in a series of moves to promote capital liquidity in the markets. Rates eventually came down to less than one-quarter of 1 percent, putting additional pressure on our net interest income, which accounted for roughly 30 percent of revenue in 2008. In addition, the steep decline in market valuations took its toll on client portfolios, and that will continue to impact our asset management fees, which contributed about 45 percent of revenue last year.
In response to this extraordinary environment, our sustained expense discipline enabled us to finish the year with a record 39.4 percent pre-tax profit margin as well as a 31 percent return on equity. Expense discipline is not simply an exercise for challenging times; it is an imperative in every environment. After all, our stockholders count on us to treat every dollar as if it were our very own. MAKING A DIFFERENCETo every Schwab employee who made our 2008 results possible, I extend my deep, personal gratitude. Your commitment to both great client service and careful expense management boosted our income and earnings per share to new highs.
So many Schwab employees have been on the front lines – and supported the front lines – during this financial crisis, and our clients have noticed your hard work. Time and again, we’ve heard positive client comments such as: “In troubling times like these, the representative I spoke to acknowledged what was going on from my point of view and was completely calm and professional. I appreciate that very much."
When times got tougher during the fourth quarter, our Schwab employees continued to go the extra mile for our clients. As just one example, many San Francisco-based employees volunteered to serve on a special “Flex Force” team to answer client phone calls during times of peak volume. In other cases, our teams continued to work on priority projects, such as the relaunch of schwab.com and the introduction of The Schwab Bank Invest First™ Visa Signature® credit card, which offers best-in-class 2 percent cash back on all purchases.
One of the hardest things I’ve had to do as President and CEO is to authorize job cuts, but we must right-size the company for current conditions and then move forward together, building an even stronger Schwab brand. To those former Schwab employees we had to let go, you have my heartfelt gratitude and admiration for your many contributions. SOUND FOOTINGSchwab is in solid financial shape, and we finished 2008 strong. But we face stiff headwinds as we move into 2009. It would be hard to top two consecutive years of record operating results even in the best of times. And, as we know, these are far from the best of times.
We believe that our strategy and our business model are sound. Our balance sheet is healthy, simple, and straightforward. Our capital position is strong, and we have multiple sources of liquidity. When the financial environment turns around, our sound approach to financial management will help propel our competitive momentum. A DIFFERENT KIND OF FIRMAs I close my first letter to our valued stockholders, I’d like to emphasize the things that remain true to Schwab, no matter how stormy the external environment may be.
Our Commitment to Clients: We pledge to deliver premier service, build trusting client relationships, offer competitive pricing, and continue the great Schwab legacy of innovation – both in products and in technology.
Our Commitment to Stockholders: We pledge to be vigilant in terms of risk management and expense controls – treating every dollar of expense as if it came from our own wallet – as we work to enhance stockholder value.
Our Commitment to Employees: We pledge to invest in our people and the resources needed to grow this company for years to come.
These fundamental commitments are deeply rooted in our purpose of helping everyone be financially fit. Our values ensure that we manage this firm ethically and responsibly as we continually strive to do the right thing for our clients, our stockholders, and our employees. That has been Chuck Schwab’s philosophy in creating the kind of company he’d want to do business with. It’s my privilege to lead an experienced and passionate team that has taken up that banner, as the advocate for savers and investors.
Walt Bettinger March 12, 2009
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