Rick Wurster launches (initially) unprompted defense of Schwab's business model at analyst meeting, and says AI won't threaten Schwab's cash cow -- sweep bank accounts -- despite AI 'cash optimizers' giving investors the jitters

Schwab CEO Rick Wurster apparently decided the best defense was a good offense to answer investor fears over the threat AI poses to the company's lucrative “sweep cash” accounts. 

He just didn't count on an analyst blocking and tackling like a linebacker at Schwab's Analyst/Investor's Day on May 16. RIAbiz reviewed a full transcript of the meeting.

Wurster got right to the point with a 751-word monologue to address the question before any analyst could ask… “We have no plans to have a cash optimizer,” he pronounced. 

Then, Goldman Sachs analyst Alexander Blostein immediately asked the question, anyway, in a pointed fashion.

"I wanted to start with your point on cash optimizer," he said, leading off the question and answer session. "Obviously, it's an important topic. 

“I hear you have no plans, and I also hear you that you're not hearing from clients that they want it. But if the competitive landscape changes and this becomes more broadly available to clients through your other competitors, what would your response be then? 

"And how would you think about potentially changing some of the components of the business model to respond to that?” he asked. 

Stock blow up

The topic was indeed important because Schwab's stock blew up in April , in part, over concerns AI could disrupt Schwab’s cash cow -- low-yielding sweep cash accounts – and impinge on other services. See: Schwab Investors Get Spooked by JPMorgan’s AI Strategy. The Big Worry Is Cash Sweeps

JPMorgan Chase has been developing a proprietary AI algorithm — called Cash Flow Intelligence – that creates a custom forecast for the best, and highest yields, causing concern such AI “cash optimizers” could upend Schwab's business model.

Schwab shares fell 7.6% on May 14, following news about JPMorgan's tool, after tumbling 7.4% in February on fintech rival Altruist's launch of an AI-powered tax planning tool called “Hazel.”

The company's stock (SCHW) continues to be undervalued by virtually every major Wall Street analyst, and shares are still marooned around $92 compared with a 52-week, and all-time, high, of $107.50 on investor jitters over the disruptive technology. 

Cash strategies

But Wurster had an answer for that – a long one – and he launched into it without prompting. 

"Now there's been an AI narrative in the market that I think has been a significant overhang for our stock and detached our stock from our fundamentals," Wurster volunteered in his opening remark. 

“And I wanted to take a few minutes since I have all of you here today to hit that one on the head, because I think it's incredibly misfounded.”

"Second point I want to make is that we have no plans to have a cash optimizer. And I want to talk about why. 

“Number one, cash optimizers have been around for a long period of time. I think MaxMyInterest has been around since 2013 or something like that. We compete against all kinds of cash strategies today.” See: Phones at RIA cash managers 'ring off the hook' amid yield crunch and MaxMyInterest pulls rabbit out of hat -- keeping rates on FDIC cash near pre-cut levels

"I travel all over around the country every year. I go and talk to hundreds of RIAs … In the thousands of conversations I've had, not one, not one time have I ever heard, I really need a cash optimizer at Schwab. ” 

Non answer

Blostein bored in like a “Jeopardy” game show contestant asking the question to Wurster's just passionately delivered answer. Would he think about changing the business model, if AI changed competitive landscape? 

“Yes. Thanks, Alex,” Wurster replied. Then, seemingly, that's as far as he would go.

“I think it's important to recognize that we already compete against cash optimizers in different ways. One of our biggest competitors sweeps into higher-yielding cash, others sweep into money funds,” he responded.

“We already face this competitive dynamic. And as I shared with you earlier, we're winning in a big way. So we're not worried about the threat from an AI cash optimizer. And so we think our business strategy is built for what's coming next,” he said. 

He told analysts that Schwab won't succumb to the pressure to agentically optimize cash. Client cash already flows so freely to high-yield accounts from low interest accounts that it can't be much more optimal anyway, he said. 

“We are not a bank that traps their cash in a checking account,” he added. “And I can see why, if you're one of those banks, maybe you need to think about a cash optimizer because it's really hard to move your money around from checking to higher-yielding options. ”

Investing capabilities

Wurster was blunt: Schwab's winning battle-tested strategy need not shift – but he also never directly said “never, or “no” to adopting an AI cash management system. 

An email sent to a Schwab spokesperson asking whether, in fact, he meant to deliver a hard “no” did not get a response.

Wurster did offer other data points to show cash is not trapped in low-return accounts.

“We have $700 million -- $1 billion – of client cash and purchased money funds. We have $800 billion of cash in individual bonds. So clients are clearly finding their way to other options because we make it easy and we have compelling options.”

He added: “We simply do not believe that there is lots of cash just sitting around oblivious to the concept that when you come to Schwab, you can invest in all of these capabilities.”

Time for fees?

Though no other analyst asked Wurster about cash, UBS Investment Bank, Research Division, analyst Michael Brown  later on asked Jon Beatty, Head of Schwab Advisor Services, whether Schwab feels confident leaning on sweep cash for revenues – or whether it might be time to charge a custody fee.

“So I won't let you get off stage without a question about cash sweep and custody fees,” he said acknowledging the unpleasantness of the topic. 

"So Schwab's custody is kind of free to RIAs today, and it's kind of monetized through the broad platform capabilities and sweep cash … As RIAs and clients become more yield aware or perhaps become more yield aware over time, how do you continue to defend the model? 

“And might you offer a paid custody and higher-yield sweep to retain certain RIAs?” he asked.

Beatty took the same tack as Wurster; Schwab need not address an issue if RIAs, like clients, don't raise the issue. He said that RIAs are explicit that they prefer paying Schwab by availing it of sweep balances to paying an explicit custody fee.

“I'll echo a bit what Rick said here.,” he said. "So I have an opportunity to travel around the country. I do roundtables with advisers. We have an advisory board of 20 advisers that we meet with twice a year. 

“We have a client experience advisory Board that meets with us twice a year. I talk to advisers almost every day in my day-to-day activities. … We talk about custody fees, and they continue to tell us that's not something that they're interested in, and they like the business model that we have today.”