Schwab sees lower new assets following Ameritrade merger

Ameritrade merger weighs on Schwab's net new assets

October 16, 2023 3:41 PM

Still working through its merger with TD Ameritrade in September, Charles Schwab saw a 67% year-over-year decline in its net new custodied assets in the third quarter.

The Westlake, Texas-based brokerage and banking firm reported Monday that it brought in $19.6 billion in net new advisory assets for its custody business, Schwab Advisory Services, in the three months leading up to the end of September. That was down substantially from the $59.5 billion in new advisory assets it reported for the third quarter of 2022.

Schwab has seen its net new asset totals fall following the completion of its merger with Ameritrade over Labor Day weekend. Roughly $1.3 trillion in assets and 7,000 advisory firms were then moved from Ameritrade to Schwab.

Schwab CEO Walt Bettinger said in an earnings statement that Schwab has now taken on 3.6 million retail client accounts and roughly 7,000 RIAs, or about 80% of the former Ameritrade's business. Some customers, though, have left and taken their assets with them.

Bettinger said the rate of attrition has actually not been as bad as initially expected. And there are signs that things are starting to turn around,

"In addition to these favorable retention trends, engagement levels across recently converted clients has also picked up — including positive new account formation and net asset flows across both retail and RIA clients," Bettinger said in a statement.

Schwab meanwhile reported that its net income fell by 44% year over year to just over $1.1 billion in the third quarter. Much of the decline was attributed to clients' "cash sorting" — or moving their money out of low-interest-bearing bank accounts and into higher-yielding money markets and similar products.

Schwab Chief Financial Officer Peter Crawford noted that the firm's net interest revenue — the difference between money made on its loans and money it pays to depositors — was down 24% year over year to $2.2 billion.

"However, cash realignment activity decelerated further during the quarter — even with the brief uptick in August and an increase in long-term interest rates," Crawford said in a statement.

Schwab's stock price has been pummeled in recent months. Shares in the firm are down about 28% for the year, although they rose on the news that clients' cash sorting had shown signs of slowing.

Some of Schwab's struggles result from the complexities of offering a retail brokerage business, corporate retirement plan services, custodial services for financial advisors and banking. Still, clients remain largely happy with the firm. Schwab managed to come in at the No. 2 spot in a recent J.D. Power survey of customer satisfaction with 401(k) providers.

For a look at the key takeaways for financial advisors from Schwab's third-quarter earnings, scroll down the slideshow. To read about its second quarter, click here. For the first quarter, follow this link.

Revenue and earnings

Schwab's net revenue fell nearly 20% to $4.6 billion in the third quarter from $5.5 billion in the same period a year ago. Its net income of $1.1 billion came out to 56 cents a share. That was down from $1.88 billion, or 99 cents a share, year over year.

Schwab's adjusted earnings per share of 77 cents beat the FactSet consensus of 74 cents.

Interest revenue

Thanks to higher interest rates, Schwab saw its interest revenue rise by nearly 20% year over year to just over $4 billion. But interest expenses more than quadrupled from $431 million to nearly $1.8 billion.

Here, cash sorting was the main culprit. All told, Schwab saw its net revenue from interest fall by 24% to a little over $2.2 billion.

Client assets

Schwab reported roughly $7.8 trillion in total client assets in 34.5 million accounts. That figure was up 18% from the third quarter of 2022 but down 2% from the second quarter of this year.

Of the $7.8 trillion, nearly $3.7 trillion was held in custody as advisory assets and $4.1 trillion was being managed for investors. Bettinger said $27 billion in new assets have flowed into Schwab following the merger with Ameritrade.

Crawford said fee revenue from asset management and administration hit a record high in the quarter, rising 17% year over year to $1.2 billion.

Client cash

Schwab customers continued to pour money into money market funds in the third quarter. Schwab reported holding more than $414 billion in money markets at the end of September, up from $184.8 billion year over year.

Clients meanwhile held $485.5 billion in Schwab equity and bond funds, exchange-traded funds and collective trust funds. That was up from $422.7 billion in the third quarter of 2022.

Remarks

Along with its earnings, Schwab also announced Monday that its clients can now use an advanced trading system known as thinkorswim, which it inherited through the Ameritrade acquisition. Bettinger said thinkorswim and related services are intended mainly for highly engaged clients whose asset holdings at Schwab are roughly four times as large as the average for retail households.

"Continuing to invest in our platform allows us to meet the evolving needs of investors, while keeping us positioned for sustained growth over time," he said.