Schwab CEO tells Wall Street threat of TD Ameritrade RIAs bolting ended months ago, with potential defectors holding fast to avoid repapering headaches

Walter Bettinger delivered a raft of good news today (Oct. 16) that spiked Schwab's share price by 4.66% – not least that anticipated RIA defections never much materialized and now, almost certainly, never will. 

Part of the Charles Schwab Corp. CEO's download focused on fears over TD Ameritrade (TDA) RIA asset attrition. From Schwab's perspective, it's game over; the peril of RIA assets flying the coop has long past, Bettinger assured analysts. 

“As we've communicated, almost all RIA attrition occurs before the conversion date," he said. See: Some TD Ameritrade RIAs are voicing misgivings -- faint compared to the loud attaboys

"A firm considering leaving Schwab would not want their employees and clients to learn our new processes and technology, only to switch to a different custodian,” Bettinger said on today's broadcast call.

Gabriel Pincus, principal of GA Pincus Funds, in Nashville, Tenn., which manages about $40 million in assets, says now's not the time to leave. 

"In general, I don't think my clients would appreciate the re-papering," Pincus says. “I think the time to leave would have been pre-conversion. At this point, I have to wait for things to get better."

Ryan Naugle, principal of Advice & Planning Services in Youngwood, Pa., agreed that a second conversion would be a bridge too far. 

“If it were not such a labor-intensive process, we would likely leave,”  he said. See: Fresh wave of TD Ameritrade RIAs are speaking out 30-days after Schwab Advisor Services merger, complaining about more red tape and problems befalling clients -- stress levels high

Trust breakdown

But Phil Waxelbaum, founder and CEO of Masada Consulting LLC, a recruiter, said Schwab departures could actually continue for years. 

"If you look at historic events, the majority of departures from entities happen after the fact and not before. But it takes place over an expanded period of time with a slow, consistent hemorrhage.” 

He adds: “The challenge, of course, is that all of these RIAs just put all of their clients through a significant event. They have to execute the lift twice, and that's what makes it a slow bleed rather than a bleed out."

Waxelbaum expects 8% or 9% of assets could seep away over a longer period of time, or nearly double what Schwab now projects.

Schwab has some work to do to build long-term trust after a rough transition, which included his RIA having to rebuild its billing system, Naugle says.

“Just like our client relationships, trust is everything. Schwab did a lot to violate that trust," he says. 

But Naugle also says his firm had a good conversation with Schwab staffers last week. “They have promised some technology updates very soon, and a roadmap of more to come. Hopefully, that is true.”

Tracking firms

Bettinger assured analysts Schwab is pressing ahead to iron out wrinkles left in the merger's wake. See: Charles Schwab Corp. CFO proclaims TD Ameritrade RIA conversion a 'tremendous success,' but Wall Street dour after he also disclosed TDA-'originated' $20-billion-plus assets flowed out in August

“We continue to make enhancements,” he said. 

"The work is far from done, but even the most negative observers have acknowledged the skill and attention to detail that is going into our integration efforts and clients are responding.

"Former Ameritrade retail clients are rewarding us with levels of loyalty and retention that are far better than we anticipated when we announced the acquisition back in 2019."

Schwab has added 3.6 million retail client accounts and roughly 7,000 RIAs, or about 80% of the TDA's former business, according to the company.

In fact, to the degree TD Ameritrade RIAs are complaining, Schwab says they bear responsibility for the misery caused by rough transitions. See: Fresh wave of TD Ameritrade RIAs are speaking out 30-days after Schwab Advisor Services merger, complaining about more red tape and problems befalling clients -- stress levels high

“We carefully tracked all RIA firms and their engagement with the many seminars and planning events that we offered prior to the conversion weekend," Bettinger said.

"And, not surprisingly, those firms who took advantage of these programs, which make up the majority of the client assets, have had the smoothest path to conversion.”

More training

Among the conversions completed over the Labor Day weekend – by far the largest number -- Schwab averaged 45 complaints per one million converted accounts, Bettinger said.  With 4 million accounts, that translates to just 180 complaints. See: Schwab's agonizingly long, methodical process to absorb near 8,000 TD Ameritrade RIA custody accounts into its own system is odds-on to yield a sweet result over Labor Day

He says that his firm averaged less than one minute answering client calls.

In contrast, during a period of stock volatility in 2021, there were about 200 “escalations per 1 million accounts," he said.

Bettinger didn't explain the difference, if any, between a “complaint” and an "escalation" although his comment suggested a “complaint” rose to the level of an escalation if an RIA demanded to speak with a supervisor.

 A Schwab spokesperson did not reply to an email seeking clarification. 

Pincus says he thinks Schwab support teams still need additional training. 

“While some employees are experts, others are guessing. I would rather someone tell me they don’t know than guess and be wrong,” he says in an email. 

Earnings 

The jump in Schwab shares was propelled by better-than-expected earnings, in part because the rate that investors are reallocating assets to higher interest rate-bearing instruments is waning.

Schwab also recorded a gain of $46 billion in core net new assets in the third quarter ended Sept. 30, including $27 billion in September following the massive TD Ameritrade RIA conversion. 

But Schwab's RIA custody business, Schwab Advisor Services, saw net new assets plunge 67% to $19.6 billion compared to $59.5 billion in new advisory assets in the third quarter of 2022. 

That shortfall can be explained largely by RIA prospects holding off until the dust settled on the conversion but that the pipeline is returning to business as usual, the company said 

Earnings per share of $0.77 beat estimates. Revenue, however, fell 16% from a year ago to $4.61 billion, missing forecasts. Net interest revenue of $2.24 billion was more than anticipated.

Analysts expected earnings of 74 cents per share on $4.62 billion in revenue, according to a FactSet poll. 

Shares rebounding?

Schwab shares are down about 35.5% so far this year. They hit a 2023 low of $45 on Mar. 10 following the spring bank panic. 

Schwab's bank got caught holding low-interest bonds during the Federal Reserve's rapid escalation of interest rates, raising concerns about unrealized balance sheet losses that numbered in the billions of dollars. See: Schwab assures it has financial muscle to shrug off billions of dollars in unrealized bank losses, but interest rate blunder exposes vulnerability if Fed hikes continue, analysts say

But Bettinger soothed the Street by noting the losses were only on paper and that Schwab had ample cash flow to remain solvent. 

It did not face a run on deposits that sank Silicon Valley Bank, First Republic Bank and New York's Signature Bank. 

Bank sweep deposits increased for the first time since March 2022 in the third quarter, according to the company.  

The average price target for Schwab's stock is $71.85 over the next 12 months, with a high forecast of $92 and a low of $55,  based on their estimates in the last three months by 14 Wall Street analysts who follow the stock. That represents a gain in excess of 35%.