|
|
Letter from the Chief Executive Officer
Many people have asked about Schwab’s “secret to success” as we posted incredible 2007 results during a tough time in the financial markets. But it’s really no secret.
All of us at Schwab come to work every day focused on our purpose: to help everyone be financially fit. That may seem like a simple statement, but it has a very powerful impact on how we do business, and on our potential for continued profitable growth.
To begin with, our purpose gives us a razor-sharp focus on the financial needs of individuals, whether we serve them directly through our brokerage and banking business, or indirectly through employers or independent investment advisors. For individual investors, we want to make Schwab the place where they feel comfortable investing their money. For independent advisors, we want to help them build high-performing businesses. And for companies of all sizes, we want to be the best resource for retirement and equity compensation plan services, investment products, and financial advice for their employees. Along the way, we plan to continue to treat every single client with high standards, just the way we’d want to be treated.
Our purpose is also our compass. It guides our actions and decisions, pointing us toward long-term success built on great service for our clients — not unsustainable and risky short-term financial bets. That has a tremendous impact on how we manage risk and manage our business.
Our purpose and our singular focus make Schwab different. Based on last year’s fantastic performance during a difficult market, we believe our purpose also makes us strong. In 2007, clients brought in $160 billion in net new assets to Schwab, up an incredible 92 percent over the prior year. Even when you exclude about $23 billion in assets we gained through last year’s acquisition of The 401(k) Company, we exceeded our goal of averaging $10 billion per month in net new assets. At year end 2007, total client assets reached $1.4 trillion, up 17 percent.
In other year-over-year comparisons, The Charles Schwab Corporation posted outstanding financial results.
Our businesses are strong and growing, with a strategic revenue mix of asset management and administration fees of $2.4 billion, net interest revenue of $1.6 billion, and trading revenue of $860 million. In the accompanying letter from Chief Financial Officer Joe Martinetto, you’ll find a more detailed explanation of our financial results and our capital restructuring, which contributed to a 55 percent return on stockholders’ equity. You may remember 2007 as the year of the credit and housing crises, but that was just the tip of this financial iceberg. Under the surface, many factors were in play — the most publicized being the liquidity crunch that followed problems in the sub-prime mortgage market.
Times of market turmoil naturally shake investor confidence. But I continue to believe that the stock market is the best place for long-term investment based on the time-tested theories of asset allocation and diversification.
When I look back on our 20 years as a publicly held company, the benefits of a long-term strategy are clear. Over that period, a $1,000 investment in the S&P 500 would have increased in value to $7,200, a 10 percent average annual compounded interest. This long-term approach is part of the asset allocation strategy we practice in Schwab advisory solutions, in which client assets increased 14 percent to $57 billion during 2007. The past 20 years have brought many changes in the markets and in our everyday lives.
Think back to 1987 and consider a typical 55-year-old worker, who may have worked for just one or two different employers in an entire career. That employee could plan to retire by age 62 to 65, with a company pension and Social Security benefits. The 401(k) plan was a relatively new idea — just five years old at the time.
Today, approximately four out of every 10 workers will change jobs in any given year. Increasingly, their employers are offering a defined contribution plan rather than a traditional pension. Social Security may not take effect until age 66 or later. And many retirees who thought they’d saved enough to last the rest of their lives are returning to the workforce to supplement their retirement income.
Increasingly, the responsibility for retirement has shifted from employers to employees. It’s now up to the individual to decide how much to put into a 401(k) plan and how to direct those investments — often with a few keystrokes on the computer.
With these changes in how we live, work, and invest, financial fitness has never been more important. That compels Schwab to take a broader view of both sides of the balance sheet as we help our clients navigate their many financial needs. I have always tried to focus on the impact we can have on people’s financial well-being. I’ve written books about it and built a business that is designed to help clients achieve good results with their money. So our purpose is nothing new to Schwab. It’s part of our sincere desire to help each and every client be in the best financial shape possible.
According to the Schwab Center for Financial Research, being financially fit encompasses five dimensions, including lifetime cash flow planning, investment planning, debt management, insurance, and estate planning. In the coming year, we’ll be providing more information to our clients to help educate them about how to improve their personal level of financial fitness.
Of course, we realize it’s not enough just to define financial fitness; we have to help more people take action. That’s exactly what our business segments did last year.
Through Schwab Investor Services, we made it easier for new investors to get started by reducing account minimums — and the minimum investment in our Schwab Funds® — to just $100. Another important launch came from Charles Schwab Bank, with our new High Yield Investor Checking, paying an interest rate well above the national average. For clients who prefer the direct access of our schwab.com website, we made it easier to manage brokerage, banking, and other Schwab accounts online.
Through Schwab Institutional®, we continued to help independent financial advisors serve their clients more effectively. We introduced services to streamline everything from hiring and retaining employees to opening an account with Schwab. We also launched two new trust services to help independent advisors sustain client relationships across generations. As a further sign of our leadership in this fast-growing industry segment, our annual IMPACT® conference drew nearly 4,000 attendees last year.
Through Schwab Corporate & Retirement Services, we helped more companies manage their 401(k) plans, making it as easy as a payroll deduction for employees to invest for their future. We also launched improved services for companies that provide equity compensation to their employees. In 2007, we more than doubled the number of full-service retirement plan participants we serve, up to 1.2 million at year end.
While I am pleased with our 2007 results, I am proud of our many programs to encourage financial sustainability — the greater good, if you will, of improving the financial health of all those whose lives we can touch. That’s why Charles Schwab Foundation is promoting financial literacy through our Schwab MoneyWise™ website and programs such as Money Matters: Make It Count in partnership with Boys & Girls Clubs of America. It’s also why, as the chairman of our foundation, I have committed to President Bush to chair a newly established President’s Advisory Council on Financial Literacy, made up of nearly 20 public service organizations devoted to financial education. Achieving our purpose requires a strong, growing company — one that takes care of its clients, stockholders, and employees. So we have set ambitious business goals for 2008 to improve our service and increase our value to clients. As a result, we plan to grow net new client assets at an average rate of $12 billion per month.
This is such an important time for our company. From so many perspectives, we have built a new model for the financial services firm of the 21st century — focused on the individual in every facet of our business.
We enter 2008 determined to continue growing our business, to improve the financial health of our clients, and to give more people access to the tools and information they need to manage their financial future. We will work for financial services that are simple, open, and transparent. We will give our clients consistent help and guidance, helping them achieve better outcomes that contribute to their financial fitness. And as our business prospers, we plan to reward our stockholders and give back to our communities.
The secret to our success is simple, and we believe that our compass points us toward continued growth — both for our clients and for our business.
Sincerely,
Charles R. Schwab Founder, Chairman, and Chief Executive Officer March 15, 2008
|
