This is my eleventh opportunity to have the honor of crafting our Annual Report letter. As always, my goal is to keep this letter clear, direct, and free of jargon, corporate speak, and trendy buzzwords. The litmus test for my letter is whether it reads as if I were corresponding with a business partner who has been out of touch for the past year. As always, please let me know if I’ve achieved this goal.

The year 2018 created a dichotomy, both for your company—The Charles Schwab Corporation—and for the markets and economy. Merriam-Webster’s dictionary defines dichotomy as “a division into two…contradictory groups or entities.”

In 2018, we saw just such a contradiction—between our business performance and our stockholders’ returns. From a client growth and metric standpoint, 2018 was our strongest year in history. By virtually every measure, our clients’ trust and confidence in us helped lead to record growth:

• Record new-to-retail households, up 20%;
• Record daily average trades, up 26%;
• Record new brokerage accounts of 1,576,000; and
• Record core net new assets of $227.8 billion, with total client assets at $3.25 trillion.
   

Total Client Assets (In Billions At Year-End)

From a financial standpoint, we achieved similar record results. In 2018, we achieved our sixth consecutive year of record revenue and our fifth consecutive year of record net income. Revenue grew 18% from 2017, while net income rose 49% from the prior year, aided by tax law changes. We achieved this while continuing to invest consistently in capabilities designed to ensure long-term growth and operating efficiency.

And yet, from a stockholder return standpoint, it was a very disappointing year. After a five-year period in which our total returns to stockholders averaged over 30% per year, we saw our stock price fall in 2018 from a starting point of $51.37 to $41.53, despite our ongoing record-breaking business performance. Truly a dichotomy.

Value of Schwab Stock and S&P 500® Index

We were not alone. The performances of the broader economy and equity markets were similarly contradictory. Although the year was relatively strong from an economic standpoint, with record low unemployment and strong GDP growth, the stock market was highly volatile with the S&P 500^® peaking at 2,931 on September 20 and ending the year down 6% at 2,507. Truly a dichotomy.

Of course, we recognize that individual stock prices and the overall equity market respond to a variety of factors.

Nevertheless, I am disappointed that our strong business and financial results did not lead to stronger 2018 returns for owners of our stock. It is my responsibility to see that we make optimal long-term decisions for the benefit of our stockholders, and I believe we are on the correct long-term path strategically. But, while I remain convinced that our long-term stockholders will be rewarded as a result of our efforts, these decisions did not lead to growth in the value of our stock price in 2018.

Despite this, I have never been more confident about our future. Our position in the marketplace has never been stronger. Our client metrics have never been stronger. And our financials, both revenue and earnings, have never been stronger.

Our business model is relatively simple. It revolves around the Golden Rule: If we treat prospects and clients the way we would want to be treated, they will choose to start a relationship with Schwab and do more business with us. This approach comes to life through our corporate-wide “Through Clients’ Eyes” strategy and its execution, which find life in our “Virtuous Cycle.”

“Through Clients’ Eyes” simply means that we will evaluate decisions we are faced with by examining: (1) whether they are likely to attract more prospects to choose Schwab and encourage clients to do more business with us; and (2) whether the execution of our decisions through the “Virtuous Cycle” will reward our clients, employees, stockholders, and communities.

In a world where consumers have more choices than ever, where transparency is greater than ever, and where the old-fashioned idea of “price versus quality trade-off” has been proven largely archaic, we are more confident than ever that our strategy and execution are ideally positioned for long-term growth.

At Schwab, we have embraced—and even championed—a “no trade-offs” approach, offering our clients what we believe is an unparalleled combination of low costs, full service, and guaranteed satisfaction. And this approach has contributed to our record-breaking results.

Our strategy is designed around our core beliefs about investor needs and the future of investing. And as a company committed to transparency, we share these beliefs publicly for everyone—even our competitors—to see and evaluate. In my Annual Report letter last year, I discussed three of the beliefs we have about the next decade of investing:

• The concept of “beating the market” has given way to a client focus on financial planning, asset allocation, tax efficiency, and low-cost investing;
• Fiduciary-standard advice, fee transparency, and low costs are a fundamental expectation for most clients; and
• Scale is playing an increasingly large role in determining the “winners” as costs related to cybersecurity, compliance, and regulatory oversight challenge sub-scale firms’ ability to compete effectively.

These three beliefs remain valid and central to our view of the landscape. This year, I’d like to discuss three additional factors we believe are shaping the investment services industry today and how we are taking advantage of these changes to better serve our clients and reward our stockholders:

• Independent Registered Investment Advisors (RIAs) will continue to grow faster than the industry overall due to an acceleration in the number of brokers turning independent and affluent consumers’ expectations for transparency and a fiduciary-standard experience;
• Clients view robo-advice as a credible investment product, but investors of all ages will place their long-term trust in firms that offer a combination of people and digital experiences; and
• Although brand matters, brand loyalty won’t ensure client retention as consumers are more willing than ever to change providers in search of lower cost, greater transparency, and more objectivity.
   

Total Brokerage and Banking Accounts (In Thousands)

Over 25 years ago, we noticed an unusual phenomenon at Schwab. Some of the most affluent clients we served were asking us to allow another individual to access their investment account. When we dug into the details, we realized that these investors were hiring independent professionals to help them manage their money.

These professionals were unique in that they did not work on commissions as most brokers in the industry at that time did. Rather, they took a “fiduciary” role—they placed their clients’ best interests ahead of their own, and offered advice and guidance for a clear and understandable fee.

We set to work building an infrastructure to support these independent investment advisors and make it easier for them to serve affluent investors. That was the genesis of our custodial business.

Today, this area is growing rapidly relative to the rest of the industry, and it is poised for ongoing success. Investors see enormous value in the relationship-based, fiduciary RIA model. Prospective RIAs see great potential in exiting the traditional wirehouse model and working independently to build their own privately owned firms. 
 

We proudly serve more than 7,500 of these RIA firms, and they entrust us with over $1.55 trillion of their clients’ money. When appropriate, we even refer Schwab clients to independent investment advisors.

Our position as the largest provider of custodial services for independent investment advisors has been an important driver of our overall growth. The revenue and earnings derived from serving independent advisors make up about 30% of our overall results. And our advertising efforts are educating more and more investors about the benefits of working with an independent investment advisor.

Advisor Services Assets (In Billions At Year-End)

Several years ago when the concept of robo-advice—or advice derived from algorithms and delivered digitally via the internet or a mobile device—was a relatively new concept, many proponents suggested that robo-advice would eliminate the need for investors to work with humans.

We did not fall into the trap of thinking that robo-advice was an all-or-nothing approach to investing. Rather, we saw it as an important capability that would supplement the human side of investment advice, not replace it. Interestingly, many of the early robo-only proponents now agree with us.

Digitally delivered advice makes sense for many investors. It can be done at a very low price. It can be delivered efficiently across time and geographic distance. And it helps investors consistently stay rebalanced as the market rises and falls, ensuring that their investments adhere to their level of risk tolerance.

Robo-advice works so well that our program, Schwab Intelligent Portfolios^®, is the largest truly digital advisory program in the world in terms of client assets, with well over $30 billion under management. And it has included access to live investment professionals from day one. 

Combining digital advice with trained and registered investment professionals ensures clients can access a calming voice during times of market volatility. At Schwab, we believe in the power of combining both technology AND people. In 2018, clients interacted with us digitally 4 billion unique times, but they also interacted with us over 25 million times in person or over the phone. Technology is a wonderful enabler, but when it comes to investing, people matter.

In recent years, we have been honored to be recognized by many prestigious third parties such as FORTUNE magazine, J.D. Power, Investor’s Business Daily, Barron’s, and many others. Why does this matter?

Because in the world we live in today—with a 24-hour news cycle, with overwhelming volumes of social media, with opinion blogs masquerading as news stories, and with increasingly sophisticated consumers—the value of what a company says about itself via advertising has never been lower.

While advertising retains a role in building a company, what really matters is whether what a company says about itself publicly is reflected in what it actually does. 

For example, every company claims it is “client-focused,” but how many companies have proactively reduced prices by more than half a billion dollars over the past two years as we did, compelling our competitors to take similar actions?

Every company says it is striving to delight clients, but why has no other investment services firm instituted a satisfaction guarantee as we did several years ago?

Every brokerage firm talks about putting their clients’ interests at the forefront, but why are so many firms reluctant to offer those clients fee-based fiduciary investing advice that puts the clients’ best interests ahead of their own?

At Schwab, we believe that we earn client loyalty through our actions each and every day. We earn it by making courageous decisions that others criticize for their own purposes but that we believe are right in the long run. 

Let’s look at how we operate at Schwab in all three areas touched on by these questions.

Pricing. We have lowered our pricing to clients by more than half a billion dollars over the past two years. In each primary case, we did so proactively, motivating competitors to follow suit. Why? Because one of our core beliefs is that we should share the benefits of our growth with those making that growth possible—our clients. It is important to remember that every dollar an investor doesn’t pay in fees or commissions is an extra dollar in their pocket, where it belongs.

Satisfaction. A number of years ago we introduced a satisfaction guarantee for our clients. Why? If we do not delight our clients, or if they are dissatisfied with any aspect of our service, don’t they deserve a refund? What surprises me is that competitors often copy innovative ideas we introduce—but not this time. At Schwab, we have the courage to stand behind what we do for clients. Shouldn’t everyone?

Fiduciary Standards. Much has been written in the past few years about fiduciary investment advice. The concept is simple: Does the investment provider place client interests above their own when offering investment advice? When a client invests in one of our fee-based investment advisory programs, they can be confident in this: As a fiduciary, we always act in the best interests of our clients.
 

Investor Services Assets Receiving Ongoing Advice (In Billions At Year-End)

I opened this letter to you, our valued stockholders, by discussing the dichotomy of this past year. While your company broke all historical records for client growth in new-to-firm households, new accounts, and core net new assets, our stock price ended the year down almost 20%. And while the economy demonstrated exceptional strength, with low inflation, record low unemployment, and healthy GDP growth, the stock market tumbled in the fourth quarter.

A short-term investor might logically ask, “What are you going to do differently to grow the stock price in 2019?” It’s a fair question. And my answer is simple: We will not change our core strategy!

Our “Through Clients’ Eyes” strategy is working—arguably better than at any time in our 40+ year history. Existing clients are responding and entrusting us with more of their hard-earned dollars than ever before. New clients are trusting Schwab with their money at record levels—younger investors, older investors, new investors, and highly affluent investors alike.

Markets go up and down. Interest rates go up and down. Consumer sentiment ebbs and flows. But a strategy based on serving others the way we would want to be served is timeless.

Of course, we will continue to change and adapt in ways that help us better serve clients through digital platforms, mobile capabilities, ever-improving services, and professional guidance. But who we are and what we believe in will not change.

When I crafted my first Annual Report letter at the end of 2008, at the height of the financial crisis, I ended with the following sentences:

I’d like to emphasize the things that remain true to Schwab, no matter how stormy the external environment may be.

Our Commitment to Clients: We pledge to deliver premier service, build trusting client relationships, offer competitive pricing, and continue the great Schwab legacy of innovation—both in products and in technology.

Our Commitment to Stockholders: We pledge to be vigilant in terms of risk management and expense controls—treating every dollar of expense as if it came from our own wallet—as we work to enhance stockholder value.

Our Commitment to Employees: We pledge to invest in our people and in the resources needed to grow this company for years to come.

As I close my 11th opportunity to share with you, I would like to reiterate these commitments. We have adhered to a deeply held set of principles for the last decade, and as owners you can be confident that these principles remain at the very core of who we are and what we do every day at your company.

Thank you for your ongoing trust and confidence!

Warmly,

Walt Bettinger 
February 27, 2019

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2018 Employer of Choice and Industry Recognition