Charles Schwab Reports Decline in Net New Asset Flows

In July, Charles Schwab, the renowned financial services company, experienced a decrease in net new asset flows. This decline is primarily attributed to a modest amount of attrition among TD Ameritrade clients and advisors.

While the slowdown in asset growth should not be underestimated, it is crucial to note that despite the decrease, the company's core net new assets still amounted to an impressive $13.7 billion for July. However, this figure is significantly lower compared to June's $33.8 billion and the $31.5 billion recorded for the same month last year.

As a result of this development, Schwab's stock experienced a minor dip of approximately 2.5% during late morning trading. It briefly dropped to $62.24 before rebounding slightly by early afternoon.

It's worth mentioning that Schwab acquired TD Ameritrade in 2020—a strategic move that bolstered the company's brokerage business and cemented its dominance in the fiercely competitive custody sector. Currently, Schwab is actively transitioning millions of client accounts and thousands of registered investment advisors from TD Ameritrade to its own platform.

The company has plans to commence the transfer of a group of TD clients and advisors next month, with more transitions set to follow later this year and early in the next. However, it appears that some clients and advisors have chosen to explore alternative options ahead of the move.

One such example is CG Advisory Services, a registered investment advisor with $3.1 billion in client assets. They recently announced their decision to shift away from Charles Schwab's custody platform in favor of Axos Advisor Services. CEO Tony Mazzali anticipates completing the transition by the end of this year.

Despite the decrease in net new asset flows, Charles Schwab's Chief Financial Officer, Peter Crawford, assures stakeholders that this attrition aligns with the company's expectations. He highlights that the decline is a result of both organic asset gathering and the anticipated attrition among certain client cohorts, including recently converted Ameritrade retail clients and a limited number of Ameritrade advisor clients preparing for their impending transition to the Schwab platform in September.

In summary, Charles Schwab acknowledges the decline in net new asset flows in July, attributing it to attrition among TD Ameritrade clients and advisors. However, the company remains confident in its strategic plans and expects continued success as it navigates the transition process.

Schwab's Transition Process on Track for 2024 Completion

Schwab, one of the leading custodians for registered investment advisors (RIAs), is making progress with its transition process and expects to complete it by the first half of 2024. According to CEO Crawford, the company predicts that the attrition resulting from the transition will be around 4% of Ameritrade revenue or approximately 1% of combined total client assets as of December 31, 2022.

Despite declining to comment further, a company spokesperson expressed confidence in the process. Analyst Jeff Schmitt from William Blair also shared a positive outlook, stating that the anticipated attrition would be modest and temporary. Schmitt maintained his outperform rating on Schwab stock, projecting core net flows of 5% for the full year of 2023.

Schwab has experienced some challenges in recent months, reflected in its stock trading around $62.34 at midday, below its 52-week high of $86. The company's sizable bank operations were particularly affected as clients moved money from low-paying bank accounts to higher-paying options through cash sorting. However, Schwab executives believe this activity is subsiding.

With $8 trillion in client assets as of July, an increase from $7.65 trillion in June and $6.83 trillion the previous year, Schwab remains a dominant force in the custodial sector. Alongside Schwab, Fidelity, BNY Mellon's Pershing, and LPL Financial control an estimated 84% of RIA assets. Such assets totaled $5.8 trillion in 2021.

RIAs rely on custodians to hold client money and provide technology and asset management services. Some advisors choose to work with multiple custodians, with approximately a quarter of all RIAs expressing interest in adding another custodian to their practice, according to Cerulli Associates.

While larger players dominate the custodial sector, smaller companies like Betterment and Altruist are aiming to gain market share, particularly with smaller RIAs. Even Goldman Sachs is attempting to expand its nascent custody unit.