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We live in a new financial reality.
Fewer than half of all Americans working today will collect a pension. Retirement income is more likely to come from a defined contribution plan, like a 401(k) or an individual retirement account (IRA). And it’s not just about retirement. It’s about everyday life, with more options, financial decisions, and responsibility resting squarely on each individual.
We believe this new reality demands a new model for financial services.
In 2007, Schwab continued to forge a new, client-focused business model. We restructured our business, found new ways to make financial services easier and more affordable, and continued to build client relationships based on a high level of trust.
Fulfilling our purpose — to help everyone be financially fit — starts with a more disciplined and efficient organization. That allows us to scale our products, services, and advice to serve a wider spectrum of clients, from the most affluent to those with only modest resources. Then, by serving more people in more relevant ways, we see enormous potential to grow our business, and to reinvest in our people and our communities.
Today’s Schwab serves individuals — both directly and indirectly — through our three primary business enterprises.
- Schwab Investor Services, our traditional retail business, works directly with individuals who manage their own investments or turn to us for help and guidance.
- Schwab Institutional, a business-to-business model, serves approximately 5,500 Registered Investment Advisors — independent, fee-based investment advisors who work with individuals and families, often with more complex needs.
- Schwab Corporate & Retirement Services, also a business-to-business model, works with companies to manage their retirement and equity compensation plans and serve the employees covered by these plans.
Through the combination of these business units, at year end 2007, we served more than 7 million active brokerage accounts, 260,000 banking accounts, and 1.2 million retirement plan participants.
In addition, many other Schwab units — including Charles Schwab Bank, solution services, investment management, marketing, human resources, and technology — provide centralized support for the entire corporation, allowing us to integrate many processes for greater efficiency.
WE ARE REACHING INDIVIDUALS AT EVERY STAGE OF LIFE
While our average client continues to be a mid-50s Baby Boomer, we are reaching out to younger investors, making it easier to be financially fit at any stage of life. Of more than 11 million individuals aged 25 to 40, many are making life decisions with huge financial implications — paying off college loans, starting a family, buying a home, or beginning to save for retirement. Last year, we helped these younger investors get an early start with Schwab Bank High Yield Investor Checking™ and a lower, $100 minimum requirement for investing and brokerage accounts.
Moving with our clients through their investing career, we continued to see strong demand for Schwab Managed Portfolios™, which provides professional portfolio management for those with $25,000 or more to invest. This diversified mutual fund program, which was introduced in mid-2006, reached $4.5 billion in client assets at year end 2007. And we enhanced our commitment to helping everyone achieve financial fitness by offering complimentary portfolio consultations to each and every client — no matter how large or small their assets.
Innovation was also key to several new mutual fund offerings, including three new Fundamental Index* funds and the first Schwab Global Real Estate Fund™. At year end 2007, total client assets held in mutual funds rose 24 percent to $730 billion, including $242 billion invested in Schwab Funds and Laudus Funds®.
WE ARE HELPING INDIVIDUALS INVEST FOR THE FUTURE
For most individuals, retirement is the number one reason why they invest. Although we refer to Schwab Corporate & Retirement Services as “our retirement business,” every part of Schwab helps individuals save for retirement.
Through Schwab Investor Services, we launched the “15-minute IRA” to make it easier for clients to fund an individual retirement account. For those already in retirement, the Schwab Retirement Income Fund helps generate retirement income while preserving opportunities for equity growth.
In addition to robust, ongoing investment in our servicing technology and platform, Schwab Institutional introduced two trust services to help advisors sustain relationships across generations. Through an alliance with TriNet, we also announced programs to help independent advisors manage their businesses more efficiently, including lower group rates for health and life insurance, payroll services, and company retirement and employee incentive plans.
WE ARE BUILDING STRONGER CLIENT RELATIONSHIPS
Across our company, we strive to create an environment where individuals choose to do more business with Schwab — and that means strengthening client relationships.
Through our “client promoter score,” we measure our clients’ likelihood to recommend Schwab to their friends and family. Clients are asked to rank Schwab on a scale of 0 to 10. Those who rate us a 9 or 10 are “promoters.” Those who rate us a 6 or lower are considered “detractors.” Our total client promoter score is calculated by subtracting the percentage of detractors from the percentage of promoters. Not only are we pleased with our progress — with scores ranging from the mid-20s to the mid-70s and climbing — but we place a personal call to clients who rate us on the lower end of the scale, always seeking ways to improve their Schwab experience.
Our client promoter score is just one sign of our commitment to serve our clients in the way they want to be served. In 2007, Schwab Investor Services continued to match many clients with a dedicated financial advisor, and by year end client assets enrolled in Schwab advisory solutions were up 14 percent to $57 billion. We also enhanced our schwab.com website and consolidated our active investor services into the StreetSmartPro® advanced trading platform and StreetSmart.com™.
WE PLAN TO CONTINUE THE MOMENTUM
In 2007, we continued to build an organization that’s strong, secure, and relevant to our clients’ needs. The results are clear: We increased net revenues at a double-digit pace for the second consecutive year, achieved a pre-tax margin of 37.1 percent, and strengthened client relationships.
In 2008 and beyond, our efforts will focus on several key areas.
Growth: We expect to grow net new client assets as we attract new-to-firm households, new employers and retirement plan participants, and new independent investment advisor clients.
Discipline: We plan to drive revenue and margin growth, while ensuring the financial and risk-based discipline essential to being financially fit as a company.
Simplification: We will create common platforms, processes, and capabilities to make it easier to do business with Schwab.
Talent: We will invest in our employees, developing the skills and aptitudes needed to build even stronger relationships with our clients.
Executing well in these areas will make us stronger as a company united by a single purpose as we contribute to the financial fitness of our clients, our stockholders, and our employees.
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