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Letter from the Chief Executive Officer
In every way I look at it, 2006 was a spectacular year.
Our clients brought $87 billion in net new assets to Schwab Investor Services and Schwab Institutional® – an incredible 33 percent increase over 2005. Total client assets increased 18 percent and reached $1.24 trillion by year-end.
We also accomplished what we set out to do financially – and then some. First and foremost for me, we’re back on a growth path, with 2006 net revenues growing 19 percent to $4.3 billion. We also continued to manage costs carefully, enabling us to earn net income of more than $1 billion, a first for our company.
These strong client and financial results confirm our strategy is working extremely well.
Our success reflects a continuation of our 30-year history of focusing on clients. We succeed when we provide them with great value and great service, and when we help them achieve better financial outcomes. Last year proved the wisdom of that strategy. This annual report highlights our underlying sense of purpose, which we all share here at Schwab: to help everyone be financially fit. Today’s Schwab is better organized to help individuals achieve the confidence and comfort that come with financial fitness – whether they are seasoned investors, just starting to invest on their own, or turning to an independent investment advisor for help.
Schwab Investor Services, for example, is focused on the needs of the individual investor, targeting people who have $50,000 to $2 million in investable assets. Investor Services represents the largest segment of our company, contributing $3.2 billion in revenue in 2006.
Schwab Investor Services also includes our 401(k) plan services division, a key area for growth. With our planned acquisition of The 401(k) Company of Austin, Texas, we’re well-positioned to improve our capabilities in this vital area – particularly among America’s larger companies. Retirement is the number one reason why Americans invest, and the workplace is the first place most people experience investing, so expanding our capabilities in the 401(k) arena is crucial to our long-term growth.
Schwab Institutional is the industry leader in supporting independent investment advisors. These advisors serve individuals with larger and more complicated portfolios, including those who need custody, tax, and wealth management advice. Schwab Institutional saw strong growth in 2006 and is our highest-margin business, with a pre-tax profit margin over 40 percent in 2006. Independent investment advisors are the fastest-growing segment within financial services, and we will continue to serve their expanding needs.
Finally, Schwab Financial Products provides products and services these businesses can use to meet the needs of our clients, whether that is with mutual funds, money market funds, fixed income securities, or banking products.
In keeping with our greater strategic focus, late in 2006 we announced our decision to sell U.S. Trust®, a fundamentally different business that serves the narrower market of ultra-wealthy Americans. As this report goes to press, we are working to close the sale and are considering how we will use the proceeds, including possibilities for share repurchases, dividends, additional acquisitions, and investments in our other businesses. We’ve organized our business around client needs. But that’s just the beginning. We want to do a better job of reaching out to our existing clients to strengthen our relationships and increase their satisfaction and loyalty.
It’s not just about bringing in more assets, though we are pleased when that’s the case. We want individual investors to feel so good about their investing outcomes – and their entire experience with Schwab – that they recommend us to their friends and family. So we adopted a way to measure client loyalty that rates our performance, compares us to key competitors, and points us toward improvements that will make it easier to do business with us.
Our “client promoter score” is moving in the right direction, and we’ve taken several important steps to keep it climbing higher. For example, Schwab Investor Services has assigned many clients to a dedicated financial consultant, either at the local Schwab branch or through our phone-based Branch Extension Team. We’re also using our phone and web services more effectively, providing clients with complimentary portfolio consultations and personalized online tools, such as an enhanced retirement assessment and Schwab Portfolio Checkup.
When it comes to client loyalty among independent investment advisors, the scores for Schwab Institutional are at the top of the chart. That’s no surprise, since that business is built on rock-solid relationships. Schwab Institutional is the leader in this segment of the financial services industry, serving more client assets than our next three competitors combined.
As we continue to strengthen our relationships with individual investors and with independent investment advisors, many loyal clients will put their personal reputation on the line and recommend Schwab. We believe that’s one of the highest compliments we can receive – and one of the best ways to build our business. During the past year, we worked hard to improve our relationships with existing clients, but we also brought in new ones. We added 655,000 new brokerage accounts, up 15 percent from 2005.
Many new clients were responding to our very successful Talk to Chuck™ message. Since the campaign was launched nationally in 2005, monthly new-to-firm net new assets have increased 29 percent, and more investors now consider Schwab when shopping for financial services. But this is far more than an advertising campaign; it’s a philosophical approach. We are here to listen and to help more people do better at investing, regardless of their age, the extent of their wealth, or their sophistication as investors.
Today, the typical Schwab brokerage client is part of the Baby Boomer generation – a very important segment, with more people turning 50 this year than ever before. But I believe the best way to help these clients secure their financial future is to reach out to their entire family – including children and grandchildren – to promote financial fitness at every stage of life. We’re appealing to multiple generations in a number of ways.
Brokerage and banking are a powerful combination that allows us to take a broader view of client accounts, looking at both sides of their balance sheets so we can provide more complete financial advice and price our services more competitively. Through our award-winning website, clients can transfer funds between banking and brokerage, or check their account balances on a single web page. Continued online improvements will help schwab.com become the ultimate integrator, bringing together all that Schwab has to offer. We began this year with some important changes. I was very pleased to announce Walt Bettinger’s appointment as President and Chief Operating Officer of The Charles Schwab Corporation. Walt and I have worked closely together at Schwab for more than 10 years. He shares a deep passion for helping our clients achieve their goals and a track record of success, beginning with his early years as an entrepreneur building the business that is now Schwab Corporate & Retirement Services. Most recently, in his leadership roles within Schwab Investor Services, Walt led his team to tremendous improvements in the client experience and financial performance.
While I am pleased to welcome Walt to his new role, I would also like to acknowledge the 20-year career of our Chief Financial Officer Chris Dodds, who has decided to retire after the Annual Meeting this May. Chris has played a pivotal role helping to steer Schwab, and in particular helping me turn the company around and put it on its renewed trajectory of growth and profitability during the last three years. One of Chris’s great strengths has been building a team of executives around him, and we’re confident of a smooth transition for Joe Martinetto, a nine-year veteran at Schwab and a strong executive who will be assuming the CFO role.
In last year’s letter, I closed with the thought “the best is yet to come.” Even after the records we set in 2006, I still believe that’s true. When we put our clients’ needs first and help them succeed, then our growth will follow.
We have right-sized the company and restored our growth. We plan to use the proceeds from the sale of U.S. Trust to reinvest in our more focused company. In 2007, we plan to deliver double-digit revenue growth, coupled with strong financial discipline that will help us continue to improve net income and earnings per share.
We have reconnected with our clients. When we put clients first, we not only help them build their financial future, but we also build their trust in Schwab. In 2006, we averaged more than $7 billion in net new assets every month in Schwab Investor Services and Schwab Institutional. In 2007, we plan to attract more than $10 billion per month in net new assets across the entire firm.
We have broadened our reach to more of America. Of the 112 million U.S. households, about three million currently do business with Schwab. In 2007, we plan to grow that number, both in terms of new accounts and new households.
Our entire team – more than 12,000 strong – remains focused on my lifelong mission: to help more people start investing earlier in life and stick with it. That’s the path to financial fitness. Like physical fitness, it’s a lifelong quest. Fitness starts with a realistic plan. It grows with the personal discipline to take action over time. It improves through constant monitoring and occasional adjustment. Every step in the right direction brings better outcomes, plus the renewed strength and confidence that come with those results.
We believe that everyone can be financially fit, at any age or income level. That’s the purpose that drives us, and that’s our vision for the future.
Sincerely,
Charles R. Schwab Founder, Chairman, and Chief Executive Officer March 15, 2007 |
