Past CFO Commentary

In our January SMART report released today, we noted a $7.2 billion outflow from a mutual fund clearing services ("clearing") client. Since we expect several additional large clearing outflows in early 2018, I wanted to share some context on the business and discuss the potential effect on our reported client asset flows (noticeable) and revenues (immaterial).

Our clearing business leverages the mutual fund processing capabilities that we make available to our individual investor and RIA clients so that banks, brokerage firms, and trust companies can offer a mutual fund lineup to their own retail and institutional clients. We provide settlement, custody, recordkeeping, and trading services for $265.4 billion in clearing assets under management, as of December 2017, generating revenue per asset dollar ("ROCA") in the low single-digit basis point range. Since 1997, our scale has allowed us to create a valued clearing offering that is low-cost to our clients and profitable for Schwab.

Typically, when clearing clients come onto or leave Schwab's platform, they are moving an existing "supermarket" of mutual funds representing a sizeable amount of their clients' assets, so their flows can be somewhat "chunky." To provide some clarity into this, each month, we footnote reported net new assets for any single flow from a clearing client of $5 billion or more; we also calculate our core net new assets ("core NNA") to exclude flows of at least $10 billion from any one clearing client (which can occur all at once or over a period of time). Core NNA also omits any extraordinary flows from clients in other businesses, as well as assets gained or lost through M&A activity. Our purpose in sharing both total and core NNA is to help you understand the key drivers of growth in our overall client asset base, as well as develop a feel for the underlying "run rate" of our ongoing asset gathering efforts.

The $7.2 billion clearing outflow in January was the first of several transfers scheduled for that client. Over the course of the next few months, we expect additional outflows from a couple of other clients as well, which, in combination with the January outflow, could reach approximately $100 billion. Based on our methodology, all of these outflows would be excluded from core NNA and footnoted accordingly. As I mentioned, clearing is a low-ROCA endeavor for us, so the revenue impact is minimal; that impact is baked into the baseline financial scenario we discussed at our Winter Business Update last week. 

While flows of this magnitude are unusual, they are not unprecedented. If you look across our NNA over time in the chart below, you can see that in 2013, we had $99 billion excluded from core NNA, of which the majority was due to large clearing outflows.

Finally, with all of this talk about outflows, I should close by noting that our overall January results demonstrated strong client engagement and momentum, with 165,000 new accounts, the highest month since 2000, and record daily average revenue trades up nearly 50% from last January. Our core NNA rose 68% from a year ago to $18.7 billion and represents the largest January in our company's history. As Walt and I mentioned at the Update last week, our goal for 2018 and beyond is to sustain the growth we've achieved and lay the foundation for ongoing success in expanding our client base. With one month under our belts, we are off to a promising start.

Forward-looking statements

This commentary contains forward-looking statements relating to the company's expected mutual fund clearing outflows and their impact on client asset flows and revenues; sustaining growth; and expanding the company's client base. Achievement of these expectations and objectives is subject to risks and uncertainties that could cause actual results to differ materially from the expressed expectations.

Important factors that may cause such differences include, but are not limited to, competitive pressures on pricing; general market conditions, including the level of interest rates, equity valuations and trading activity; and the company's ability to develop, launch and implement new products, services, infrastructure and capabilities in a timely and successful manner.