Schwab Beats 2Q Estimates as Retail Traders Pile Into Market

[00:00:00]We caught up just a short while ago with Rick Wurster.

[00:00:02]He's the president and CEO of Charles Schwab.

[00:00:04]He joined us here in studio to talk about the latest financial update.

[00:00:09]That was a really strong quarter. And what gives us a great amount of pride and satisfaction is that our clients continue to trust us with more and more of their wealth, and they continue to trust us to do more and more for them. So they're not just coming to us for investing and trading. Certainly they're doing lots of that, but they're also coming to us and asking for help with their wealth, and they're helping for tax planning, and they're asking, uh, for lending for us to help them with lending. And so we're doing more to help our clients financial lives. Their wealth is at an all time high.

[00:00:38]And, uh, it's a great time to be in this business to support our clients and help them thrive. Rick, when you say that clients are trusting Charles Schwab with more of their wealth, where is that wealth coming from? I mean, it is essentially a zero sum game. So if there are they moving it from other platforms to you and sort of how do you measure that?

[00:00:56]Well, first, I think a lot of our client wealth is being delivered by the returns you're seeing in the market over the last year.

[00:01:02]The market's up 21%, I believe, through June 30th, and our client assets are up about 22%. So they've really participated.

[00:01:09]Their wealth has grown I think where their additional dollars come from is there employment activities. Maybe they sell a house.

[00:01:15]Other investment activities outside of Schwab?

[00:01:18]Uh, but with employment so strong it's not surprising.

[00:01:21]And the market doing well. Not surprisingly, they continue to bring us a fair amount of assets. The other place we see it is that we do a lot to serve independent advisors, and independent advisors as a group are really taking share of the advice market.

[00:01:36]And so as they win and they bring more assets to us, we we benefit from growth.

[00:01:40]What are they trading and what are they continuing to trade?

[00:01:43]I'm always curious about what exactly you're seeing across the platform.

[00:01:45]Yeah, it's been a pretty interesting actually.

[00:01:47]I'll highlight a couple things. Number one, which is fascinating to me, is that we saw three and a half times more volume on down days in the market, uh, which means that they're buying the dip.

[00:01:58]Okay. The other thing we've seen is a rotation. So they went from really, uh, interest in the mag seven to more on the I trade. And that's been been a driver of of interest for our clients. And then the final thing I'd say is that because of some of the geopolitical risk in the markets, they are more actively trading so that we see more frequent trading.

[00:02:18]But the trade sizes are often smaller. And so they're making more incremental trades because they're not exactly sure what's going to happen with the geopolitical situation. So those are three of the themes that we've seen with our retail traders. How sustainable are these themes?

[00:02:30]I mean, The Wall Street Journal, I think the headline was, uh, the stock trading boom is Here to Stay, citing you and your comments on, uh, for earlier today.

[00:02:39]Um, why do you believe it's here to stay?

[00:02:41]Why do you think it's sustainable? Well, a couple things.

[00:02:43]I think they're great for our country because the more people invest at a young age, I think the better off they are over the long run.

[00:02:49]And we have seen a real increase in young investors.

[00:02:53]Uh, Gen Z is 45% more likely to invest by the age of 21 than the prior generation. So we have that.

[00:03:00]I think the second structural change is when we went to zero on commissions, and then all the other major brokers followed.

[00:03:06]It just took away the last barrier for investors, for people that were wealthy and trading in hundreds of thousands. The $5 commission didn't mean much.

[00:03:14]But for the person who had 5000 or 1000, that was a barrier.

[00:03:18]And now that's no longer a barrier. I also think AI is helping people get more comfortable researching stocks and taking positions and being an investor and learning about the power of compounding.

[00:03:28]So I think it's all adding up to just more engagement.

[00:03:31]We've seen the highest level of stock ownership of stocks that we've seen in the last 20 years. So it's great to see that kind of interest in markets as you all get to participate in this.

[00:03:41]The power of compounding is a great thing for investors.

[00:03:44]And the more and more people that do that, the better off our country is.

[00:03:46]So you talked about like what clients are asking for.

[00:03:49]So do they want more sophisticated investments or are they like they're doing just fine with stocks. Are they pretty happy with it?

[00:03:55]Yeah. What's great is we've got clients of all stripes and all different wealth sizes. One of the real themes that we've seen from our more wealthy clients recently is a high degree of interest in tax related strategies. We've got a lot of clients that have built up large positions up in concentrated positions and their wanting to manage the attack, the capital gain associated with this.

[00:04:15]The other thing we're seeing is a real increase in pledged asset loans.

[00:04:18]So people have built up wealth in a in a small number of stocks.

[00:04:22]They want to buy a house, they want to put their kid through college, and they don't want to have to sell that position.

[00:04:27]What they're doing is they're taking out a pledged asset lunch.

[00:04:29]They're not having to sell that position.

[00:04:31]So between tax aware strategies and, uh, pledged asset lines, we're really seeing people be thoughtful about not paying big capital gains.

[00:04:39]Let's talk a little bit about space. Because in your commentary today you said you had a record trading day, uh, on the day of the space IPO.

[00:04:47]I'm just wondering what you learned from that to, to sort of prepare you and the team for what many think is the day that anthropic will go public in the near future and OpenAI will go public. And I thought you were going to ask him about the unlock, but we'll get to that next space. It's so interesting to have been a part of this. We've been around for 50 years and we've seen, you know, lots of bear markets, lots of bull markets, the internet boom, all this stuff. The heaviest day of call volume we've ever seen in the history of the firm was SpaceX.

[00:05:17]Were you surprised? Was your team surprised?

[00:05:19]We weren't surprised. We knew it would be a busy day, but to be a record day in the top few days we've ever had in terms of client interest. It's pretty remarkable over one.

[00:05:27]One company. So that's great.

[00:05:29]It just shows how engaged the retail investor is.

[00:05:32]And you know, our clients bought it. They tried to buy as much as they can.

[00:05:35]And you know, what they received relative to what they put in probably wasn't what all of them wanted. And that's probably our learnings is really to be really clear about like demand was higher from your clients for the IPO and they weren't able to get it all.

[00:05:48]Demand was far higher, the level of retail interest.

[00:05:51]I've never seen a level of retail interest like this in an IPO or anything. It was off the charts and as a result, not everyone got the allocation they wanted.

[00:05:59]Now, one thing we did do, it's made sure everyone got something.

[00:06:01]And so everyone walked away with some shares.

[00:06:03]And uh, with the with the action in the stock, people that had a chance to buy it actually below the stock price. So hopefully those didn't get filled.

[00:06:10]Have been out there buying if it's of interest.

[00:06:12]They still buying? Because you know, we've seen certainly the share price go below the IPO price for space.

[00:06:17]We've got the unlock coming. Uh, August 6th is going to be two days after the company reports earnings. How are you thinking about that or preparing for that? Yeah.

[00:06:25]The retail investors still buying space. We still see volume.

[00:06:28]And it's it's a largely one sided. So lots of activity and interest in space. And, uh, I know maybe we should move our, our headquarters to the space. Might be good for evaluation.

[00:06:39]He's working on it. He's working there.

[00:06:40]Or go all in on on it. Right.

[00:06:43]Uh, prediction markets, we always ask you about prediction markets and sort of, you know, you've talked to us about the difference in what you see us as gambling versus what you see as being useful prediction markets.

[00:06:53]Can you give us a date on, on on when and what Schwab clients will see?

[00:06:57]Yeah, we're working with the Cboe to make, uh, binary options available, which would allow you to take a position on the S&P 500.

[00:07:04]It's possible that may extend into other financial related events like KPIs or uh, certain macroeconomic indicators. I think we're open to anything that's You can make a link to a client's portfolio.

[00:07:17]We serve a lot of active and very engaged traders.

[00:07:20]We want to make sure what they have and need to be successful.

[00:07:23]So that's what we're looking at. We don't have a timeline.

[00:07:26]We are actively working on it. The Cboe is as well.

[00:07:28]We will follow them and we're excited to be in that marketplace.

[00:07:31]But don't look to be able to bet on Taylor Swift's first child when that's when that child is born. Our pleasure when we speak to you in October, do you think they'll have launched yet?

[00:07:40]Well, we'll see in October. I mean we're working hard at it.

[00:07:42]Cboe we're still dependent on their timeline so I can't.

[00:07:46]I'd love to give you a timeline but I really can't at this point.

[00:07:49]But if Taylor has an idea for the S&P 500 by the end of the year would that be a bear. That would be whether it's related the S&P 500. We could make it work.

[00:07:57]Um, what about crypto? What can you tell us about the early reception, uh, to this back crypto trading rollout?

[00:08:02]What do you guys see in there for us? You know, crypto's an important part of being able to offer everything that our clients want.

[00:08:07]And our clients are already engaged in crypto in a big way.

[00:08:09]They've bought the ETF, they participate in futures.

[00:08:12]They are invested in crypto in many different ways.

[00:08:15]At Schwab, we're excited for them. If they have crypto outside the firm, to be able to bring it in will make crypto available for transfers by the end of the year. You can buy Spark Crypto now with cash on our platform and we're excited about that.

[00:08:26]You know, the level of interest in crypto right now, I think is lower than it has been. It's really declined.

[00:08:31]It's put back, uh, you know, some of that's related to the price action.

[00:08:34]I'm sure there's other reasons. But, uh, main point for us is that our clients want it. We want to have it regardless of what the interest level is. I'm going to ask you a question.

[00:08:43]And we kicked this around in the newsroom because while we're talking about crypto, um, a lot has come up with the president and his financial disclosures. And Schwab is one of the investment accounts, along with UBS and JP Morgan. And I'm just curious as people kind of look at this, do you think at some point Schwab might be asked to either testify before Congress about the president's accounts or anything?

[00:09:05]Has any of that come up? You know, we we can't talk about who our clients are. And, uh, but but what I would say is what's been reported is that he uses a, uh, tax strategy himself, direct direct indexing, where you can use your recipe. Replicate an index by owning, say, 300 stocks that are going to give you the index return.

[00:09:25]Instead of holding, say, one position in ETF.

[00:09:27]And so if the market goes up 20% a year, but you hold 300 stocks and some have gone down, you can sell those and replace them with another.

[00:09:35]If Coca-Cola went down over a short window, you sell it.

[00:09:37]You put Pepsi in there. You're still tracking the index, but you've harvested a loss. It's a very thoughtful strategy for a wealthy investor to use. And I would just say some of the commentary around this idea that he's timing the markets in some way because he sold a stock before or after he met. These strategies are run on a discretionary basis by professional money managers with no influence from from the account holder, and the level of trading in them is very high because they're constantly trying to pick up any loss of the security and replace it with another one. So I think some of the reporting that tries to link this in the various behavior, I think is just misplaced.

[00:10:13]And to be fair, I kind of I feel like I left out an important line.

[00:10:16]It does feel like it's a lot of political backlash.

[00:10:18]And as we see kind of things make their way through the new cycle.

[00:10:22]Why? One of the things that we were pleased with was how the reporting might have shifted from, I think, the original intent of that the reporting was seeking to when the facts came out and things were explained. I think the reporting was pretty accurate in terms of explaining what these strategies do and why you might have, uh, you know, active levels of trading in a strategy like this.

[00:10:42]Appreciate that. Just to wrap up here, we're in this environment where it feels like FOMO in terms of a lot of the trades and, um, kind of chasing certain things. It also feels like there's a lot of nervousness out there when you look at the environment.

[00:10:55]Net net. I mean, coming off of this quarter, how would you describe the environment right now?

[00:11:00]I still think clients are bullish okay. But but there is some caution.

[00:11:03]And you do see them taking smaller positions and they normally would and maybe being a little more anxious about it.

[00:11:09]But but all in all they're still bullish.

[00:11:10]They're buying on the dips. They're going into the eye uh stocks for areas of the market that you know have certainly have higher valuations to them. So they're not shying away from risk in there. And they're bullish.

[00:11:21]But they're doing so with an element of caution.