Chit Chat Stocks - Charles Schwab (SCHW) | Deep Dive

Episode Date: October 22, 2020

Charles Schwab is a financial services company based out of San Francisco. Charles Schwab allows you to manage your own investments at $0 commissions, use their robo-advisors, or plan your investments with a real person. Watch in as your hosts, Ryan Henderson and Brett Schafer, welcome on Ian Gray. Ryan covers the business (1:20), Brett dives into the industry (4:58) and Ian analyzes the management (8:15). Watch until the end to find out if Charles Schwab has truly sparked our interest. Enjoy the show! Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Follow Chit Chat Money on Twitter: https://twitter.com/chitchatmoney Subscribe to Chit Chat Money on Youtube: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

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Restrictions apply. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investment. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are not financial advisors. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation.

share. Now, please enjoy this episode. All right, we are recording, and this is the deep dive episode. Today, we're talking at Charles Schwab, but first, how are you guys doing today? Ian, down in, I always forget, it's Arizona or California. I'm going to get it right this one time. Yep, down in Phoenix, and it's, you know, we've been talking about the weather a lot, but I do have to mention it's going to get into the 70s next week, so starting to get pretty nice for all you people, you know, up in colder parts of the world. Come on down to Phoenix, play a little bit of golf and enjoy some good weather. Wow. That sounds so bad compared to this Seattle. Yeah. Raining every day. Yeah. Haven't seen the sun in a week, so it's all right

though. But we're not talking about the weather today. We're talking about Charles Schwab. So Ryan, since you did the introduction, do you want to go over what they do and then the history of the company? Yeah, so they are an investment services company with around $6 trillion in client assets. They're the second largest behind Vanguard in terms of AUM. They might be larger now thanks to the acquisition that they made, and we're probably going to discuss that. But they cover a whole host of different financial services, including wealth management, securities brokerage, banking, asset management, and financial advisory services. So they used to make a bunch. I mean, they used to be just sort of a traditional brokerage. And so they'd make money on commission. So when stuff was traded, they'd get their fee. If you know anything about the history of stock brokers, that was basically how it worked.

they were sort of one of the ones pushing towards lower commissions over time. And they kept doing that for the longest time. And they've essentially built out a whole bunch of AUM because more and more clients wanted to come to them for their lower fees, which allowed them to get into some adjacent services. So they had Schwab Bank, they have their own ETFs, they had mutual funds, I'm sure they still do. And then they have like a brokerage for funds or brokerage for RIAs kind of thing. They have a whole bunch of different products now, but they recently basically cut their commissions to zero. And I'm sure a lot of people have heard about this, but for reference in fiscal year 2018, their trading revenue only accounted for 8% of net revenues. So total net

revenue so it's a very small amount and of the trading revenue only part of it was from commissions the rest was from selling order flow which is a whole nother thing and we'll get into it but um yeah they are much more than just a broker right for anyone that was misunderstanding and they uh it was a big move because a lot of the other brokerages they had their i mean robinhood was already doing commission free but say like td ameritrade e-trade they made like 25 percent of revenue off of that. So Schwab probably said, all right, this is probably a lose-lose, but they're going to lose more than us. Right. The history was pretty interesting though. In 1963, Chuck Schwab and two other partners launched an investment advisory newsletter. So just like the

rest of us, started with the sub stack. I mean, that's how all great stories are started. But nearly 10 years later, that company was incorporated in California. And a year after he bought all the stock of the company from his partners and changed the name to Charles Schwab and Company. Then came along Mayday. So if you know what Mayday is, this is where the commissions for the brokerage industry became deregulated. So they used to be regulated, but there was basically a cap or there was a rate for however much, like if you bought stock, there was a certain commission rate that was regulated by the government. That got deregulated and a lot of brokerage services used it to raise their commissions.

Charles Schwab saw that as an opportunity. So he built an office in Seattle. He built out the world's first 24-hour quotation service. And Schwab eventually became a member of the New York Stock Exchange. And so he was really one of the first ones that was like, no, you guys are doing this wrong. This isn't the time to mark up commissions,

go for the scale play, lower commissions. And that's what he did. Bank of America actually bought them out for $55 million in 1983. Four years later, Chuck Schwab bought the company back and went public two months after. That's some conviction right there. Yeah, this guy sounds like a legend. Yeah, he is. He's done well. And yeah, buying that back for $55 million, I'm going to go over the valuation later. That's quite the good investment. But I'll get to the industry and competition. So like you said, they have three parts of their business, trading revenue, interest

revenue and asset management fees. So they compete on trading and interest revenue with other brokerages like Robinhood, Vanguard, Fidelity, etc. And then they offer or they compete with banks on these services to like Ally, Goldman Sachs, Bank of America. You guys know all the names. And that is basically like it's really simple. They have cash on the balance sheets that they pay interest out to their clients. And then they also invest that cash in treasuries and then they net the difference of that very simple a lot of banks and a lot of brokerages do that they're competing with that and the main thing to look for is just increasing assets under management and then where interest rates are at because that's how they make money

the main competitor for their 401k products would be fidelity um and they also have ira products which gives them a little bit of an advantage versus someone like robin hood or one of those small apps but all the classic brokerages do that as well the asset management fee part which is i I think, about a third or 40% of the business. They compete with that, with Fidelity, Vanguard as well. They're not really competing with all the other players like Robinhood or Goldman Sachs or Allied Bank. But for that, they have RIAs and advisory clients, and then robo-advisors, and then the ETF and index fund products. So Schwab doesn't charge people to use their services, which is an advantage I think they have, but they only charge a fee on their investment products.

So say you were an advisor and you had a billion in management, but you were using Schwab ETFs or using Schwab's robo advisory service. That would only be if you were an individual. You don't get charged much for that or anything, but you get charged on those small take rates on those ETFs. And then overall, the industry is quite large. There's about forty five trillion dollars in investable assets. talk about a tam right there uh in the united states alone with you know basically every competitor is trying to get a slice of each and schwab like you said is about six trillion dollars and that includes the td acquisition uh so you know they're one of the largest players but it's a large large market so to really oversimplify it think of like people think of them as a brokerage and that really is the top of the funnel so if you're bringing in money it's probably for your

brokerage services. They don't really make much money by people trading stocks. They make a little bit, but a majority of it is from the cash. They have a certain cash reserve ratio or whatever it is from the cash, the float that is in the whole system. And then they invest that in interest bearing assets. And there's also other ways they have their own ETFs and fees, but the top of the funnel is really just, they have the best brokerage service. Yeah. And they want to get as much assets under management as possible uh ian you're gonna get to head to management but did you have any thoughts on industry or competition or you got it all covered i think you guys covered it pretty well there like you said it's um it's an interesting how the industry's changed you know from over

history as ryan was getting into and how it's becoming less and less dependent on these actual you know commissions on trades and that they've found that just collecting as much you know assets under management and um as many as much cash as they can into their ecosystem that that's really how they're trying to monetize. I always find it interesting companies and digging into management teams of companies that are named after a founder. And with the founder still involved in the company, it's kind of a, just because there's this extra weight to it, right? When it actually has, you know, Charles Schwab, the name on the company, there's a personal connection there. And so he was the CEO, you know, as Ryan was mentioning, he started the company,

sold it to B of A, bought it back. After he bought it back, he was the CEO from then until 2008, when it was turned over to Walter W. Bettinger, the second, who is the current CEO and has been since 2008. So he's on about a 12-year tenure now. Bettinger actually joined the company in 1995 when he started. So Bettinger, he started his own company. It was a real retirement plan services company that was bought by Schwab in 1995. That's when he became part of the company, worked his way up, was COO at one point directly before becoming CEO. And so he's kind of, I like this transition because it's interesting how it goes from a founder CEO to someone who was a founder CEO, worked in the corporate world of

Schwab for a while and then became the CEO of the company. And so he has a little bit of that founder mentality. And while also having a lot of just deep experience, over 25 years of experience at Schwab now. So it seems like it's been a good transition. Oftentimes after you have a long-term founder CEO like Charles Schwab, it's tough to actually find a successor who then sticks around for a long time. So it's kind of a rare and it's a mark of success that Bettinger was able to do that. And then also that he did that coming out of the financial crisis. There was a lot kind of going around right when he was becoming CEO right out of the 2007 and he became CEO in 2008. So very tumultuous time. And he was still able to stick with the company and be there for the last

12 years and really kind of guide it in its next step forward. Turning to Charles Schwab a little bit to Chuck himself, he's still the chairman of the board. Like I said, he served as CEO from 1986 to 2008 and continues to provide a lot of vision that drives the company's growth. He's always been about more transparency, lower fees, less commissions, and that continues to kind of be a big part of the company today. He owns about 7% of all shares outstanding in the management team in total owns about 10% of the company. And then as, you know, an established kind of large financial institution, it is held by many funds and investment managers. They make up, it's a lot of institutional investors that invest in Schwab just because it's a fairly steady company. And

it's a major part of the economy. Right. It feels a little bit, and this may be a weird comparison like Nintendo, where they want to have a CEO in for a few decades, not just someone that's going to be in a transition period for three years um which is quite common um in at least the united states yeah highly selective it feels like yeah they probably knew he was going to be ceo for some time and he just they waited to sort of let him take over the role yeah it'll be interesting to see who takes over the chairman role um it may not be for a decade or so but that transition period you know charles schwab is going to have to leave eventually um all right next up is the valuation. So I'm going to go through a quick, there's not much here since they're, you know,

a bank, you can only look at a few things and you can kind of treat them like a bank with that interest stuff. That's how they really make their money. So the ticker is SCHW price is $39 and 48 cents as of today, which is October 20th, 2020. When we're recording the market cap is 66.1 billion. And you don't want to use an enterprise value for these companies because the debt, it's not like corporate debt. It's a lot of debt from interest-bearing stuff and getting out loans from, you know, taking out loans from mortgage-backed securities and bonds and stuff like that. So it really gets, it's not the right way to do it. It actually says, if you calculate it correctly, that they have a negative enterprise value, which, you know, obviously isn't right.

Their last 12-month PE is 18. So pretty low on that end. Dividend yield 1.8%. And like I said before, it's hard to peg them down on evaluation. You really look at the balance sheet, which is what Ian is going to go through and the interest rates, you look at that and then total AUM. That's kind of what's going to drive growth. Yeah. And I'll dig into the earnings. So the financials at first glance are somewhat difficult to digest because there's so much going on and it's so susceptible to macro factors because interest rates matter. And then how the market itself is doing kind of matters because their client assets their assets under management goes up a lot if a lot of that is invested in the s&p 500 that's true they can't control that

really so so their total client assets this was before the td ameritrade acquisition was 4.4 trillion that was up 17 percent year over year it's now over probably six trillion that's what they put on their website total net revenue for the third quarter was down 10 percent year over year to $2.4 billion. The reason for that was because I think it's 60%. I might be misquoting that. 60% of their revenue comes from interest on the flow in the system. And that interest that they're gaining on that flow is going to be lower when interest rates decrease, which they have. So it's obviously not a favorable environment for them when interest rates decline. But it's the same across the industry. So the competition, it's all the same. And then income before taxes

was $889 million. That was down 28% year over year. Net income was $698 million, down around 27% year over year as well. So EBIT margins were 36% versus 46% last year. That all looks really bad because there was a large increase in expenses for the quarter that were all primarily related to the acquisition of TD Ameritrade. A lot of them got categorized as professional services expenses. And you can expect that a lot of those costs, keep in mind, this was a $26 billion acquisition. It was a stock deal, all stock deal. There's, but there's also going, they said that they're going to have, they're going to expect 1.6 billion in integration spending after closing the deal. Think about it. There's going to be a lot of lawyers involved, a lot of extra expenses

just to make this deal happen and close. So the profits are going to be, the margins in general are going to be sort of random. I imagine it's going to be a little less predictable than most people would hope. So that's what you're seeing with their most recent quarterly financials. Yeah. It's not a recurring revenue business model, but you'd hope that the assets under management are going to be steady over time. Yeah. Uh, Ian, what do you have for balance sheet? Yeah. So I always like to start with cash. They've got about $34 million in unrestricted cash. They've got about 30 million in restricted cash. Is that 34 billion? 34 billion. My bad. yeah it would have been very concerning if we were at 34 million that's uh

that's on me um yes 34 billion dollars in cash and so plenty of cash um they are you know it's it's not a it's not a super cash intensive business except when they want to want to grow and you know fund you know different types of you know it's not really a cash intensive business, they have all the cash because they can earn the interest on it, which comes partly from those accounts that they have, partly from their own cash balance, and some of that restricted cash amount. Before this TD Ameritrade deal, they have hardly any goodwill to speak of, and so once this acquisition is finalized and reflected on the financials, I assume we'll see a little bit of an uptick in goodwill, but it should not be anything that's too concerning. They only paid,

I think, you know, depending on how you calculate it, they paid somewhere between a 20 and a 30% premium on TD Ameritrade. So we will see a little bit of goodwill, but with, you know, go ahead, Ryan. And I was going to say, and that was after they had announced the commission free. So TD Ameritrade stock obviously declined because they knew they were going to have to compete. So it was a 30% markup of the declined value, which probably was less than the original value to begin with. Yes, exactly. But yeah, sorry, continue. Yeah. Yeah, no, that's exactly right. It was very strategic buying by Schwab. As you mentioned, these financial statements can get a little bit complex and look somewhat similar to banks. For people who are familiar with looking

at bank balance sheets. It's just trading it a little bit over two times book value, which doesn't seem compared to some of the other ones in the industry seems to be a fairly reasonable valuation. For me, there's no red flags on the balance sheet. That's generally what I'm looking for when I'm looking at a balance sheet is, is there anything here that's catching my eye and making me worried about the health of the business or the health, you know, if things were to take a downturn, what it would mean for the business, they're earning plenty of money, have cash to fund any growth and only about $8 million or $8 billion in long-term debt. So nothing too concerning there. And we are typically not a price to earnings. We're not really fond of the metric

typically because it can be sort of random. Market cap isn't always perfect. Sometimes we prefer enterprise value. Earnings aren't always perfect, but it feels like price to earnings is actually sort of relevant for this business like it's a somewhat decent metric yes exactly yeah because the business is so simple they're not going to be able to manipulate earnings too much except you know maybe with the acquisition of td but that's a one-time thing uh yeah and the business is so simple that you're not looking at the balance sheet and the valuation it's just tough there's only a few things you got to look at yeah and the the last thing i'd say about that is that it also isn't growing at a crazy rate and so the price to earnings ratio is something that you can look at

and say, this is a mature business, you know, they're going to grow a little bit each year, but it's really going to be based on their valuation. And the price of the stock is really going to be based on what people are willing to pay for each dollar of earnings. Yeah, exactly. All right. Well, we're going to hit the second half here after a few ads. And I'm excited to talk about that because there's a lot of future growth opportunities for Schwab and the industry is quite dynamic right now. So let's get to it. And then back to the second half of the show. you all right welcome back first up is competitive advantages who wants to go first ryan

Sure. So the diverse revenue streams was and will continue to be a competitive advantage because this is why they were able to, and if anyone paid attention to the deal that happened, they come up, they cut commissions to 0% because they were able to TD Ameritrade and all the other brokerages had to follow suit because they can't compete if they don't lower the commissions as well. It kind of happens all at once, but that, that made up much more of the other companies revenue than it did for Schwab. So they were basically, I think I've used this metaphor before, but they shot themselves in the shoulder to hit their competitors in the heart kind of thing. You know what I'm talking about? That makes, that makes sense. Yeah. And it worked perfectly and that's going to expand their, that's going to further expand their assets. And over time we'll expand their revenue because of interest, you know, the interest on their assets. So if they can have revenue from all these different areas, they're way less susceptible to a harmful, like a one-time

event like TD Ameritrade had to face as soon as Schwab cut their commissions. No, that makes sense. And it's just something that it's a really strong competitive advantage because you have to get to that scale before you can use it. You can't just do that by intuition or, you know, innovation or kind of disrupting something. All right. Uh, Ian, what do you got? Yeah. So I'm going to talk about their, their branding, their good name, um, which is kind of ironic since it's actually the founder's name, but you know, they just have this people trust Schwab. Um, they had the very popular talk to Chuck ad campaign in the early two thousands. Um, it's not Robin hood, right? People, people just have more of a trust for Schwab and it tends to be, they're able, they've developed into this

thing where people take them seriously and they also trust them and it's not like um you know it's not like from years past like scott trade or even e-trade today like with just kind of scammy marketing or like stuff that's kind of like jumping out at you real fast they're just a steady kind of it's the type of place that provides a little bit of security you trust them with your money um they have a wide range of services like ryan was mentioning that helps with revenue but also helps just people like on Robin Hood, for instance, you can't start a Roth IRA, right? With Schwab, you can trust my whole entire financial picture can be here. And I can just trust that it's going to be safe. And I don't have to worry about it. And I don't have to have accounts here,

there and the other place that can just all be focused on this one stop shop. And yeah, to follow on that, if someone were to say, okay, this order flow stuff has to stop and it got regulated or something and people said it can't happen anymore, Robinhood and maybe some other companies are screwed. Because of the diverse revenue streams that Schwab has, they'd be fine. It only makes up like 6% of their top line.

Yeah, that's exactly true. And with that customer service too that you're talking about and having the comprehensive things, if you're on Robinhood, you can't talk to a person. But when you're on Schwab, and I've noticed this because I've used both the products,

Schwab, you can talk to either on the phone or through a message just on their website with anyone and you can get them within like two minutes and it's a real person, so. Right, yeah, and just to give a little bit of advice or not advice, but a little bit of insight into that, I actually just transferred over, I had a small Robinhood account

and transferred over my money to Schwab this past week. I had just a little tiny snafu with it and called someone up on Schwab and said, hey, I got this extra charge I wasn't expecting. They said, no problem, we'll take care of it right now. before I was off the phone, they already had the charge reversed and everything, you know, I just checked today and everything's looking great. So, um, I've been a Schwab customer for since I started investing and decided I don't want to have extra money sitting over in Robinhood. I'm

going to move it over to Schwab. And it was a really easy process. Right. And there's that, uh, there was that recent story where people had their money stolen and they couldn't contact Robinhood for two weeks. Um, I think that's a benefit for Schwab, But I'll get into my competitive advantage. It's a little similar to Ryan's. So I think that economies of scale also help them enable that reverse pricing power, as you'd maybe want to say, where they can lower prices more sustainably. And that can help compete with Wealthfront and Betterment, which are the two big startup

robo-advisory services. So those places have to charge a little more because their only product is robo-advisory. But with Schwab, they've been able to scale up, one, because they already have a bunch of clients under management. And two, because they can charge a cheaper price. And that's really simple, but I think that's another way they can compete strongly with anyone that's trying to compete. Sorry, I said compete twice, but you know, they'll be able to outlast their competitors that way. What's your future growth opportunity? All right. Well, I said the robo advisory service for this too. I guess I was just staying with the same stuff here. So if you're a regular investor,

it takes as little as $5,000 and it has no advisory or commission fees. And you only pay money on the ETFs they invest in. So the way Schwab makes money with this is say you're using the broad market ETF. They take three basis points. You're going to pay a little bit on that like you would in a regular account. And then they're also going to have some cash in money market funds that they'll make money on where just like in the traditional account where if you have cash, they pay you a tiny bit of interest, but they're also investing that cash in higher interest bearing um securities and right for anyone that doesn't know what's the robo advisors oh okay so yeah i guess that we should do a quick explainer on that so instead of having a human financial

advisor they run the portfolio and then automatically rebalance it so for example if you wanted a simple like 50 in stocks 40 in bonds 10 in cash and then whatever diversification you wanted um they could set up the etfs for you for that and then every month or quarter however you set it up, they rebalance it for you and it's automated. So you don't have to spend any time on it, but with Schwab, you also don't have to pay any extra fees. So someone like Betterment or Wealthfront, I think they charge like 0.25%, which, you know, that adds up over time. Yeah. I'll get to mine. I think security focused marketing campaigns is probably a good use of money. And the reason I say that is because at this point, individual investors that are younger

have essentially one of two choices. They have two options really. And it's Robinhood or one of those brokerages that feel a little scammy, that sells your order flow and it has a nice pretty user interface or the Schwab TD Ameritrade. And I think over time,

it's really going to be just Schwab is probably going to be one of the only options other than maybe your Vanguard or something like that. But the point is, Robinhood has basically destroyed their own business. obviously their private valuation has been great which is irrelevant but they they're going to push customers and clients away because we've seen it time and time again because they've tried so hard to democratize it they've essentially gamified it and now they've made basically

royal screw-ups that they can't they yeah you can't do that that's like the one rule that you can't have whether it's unlimited uh margin or infinite leverage it's a good tactic right infinite leverage or you know clients losing their money getting hacked uh allowing people to trade options when you shouldn't i think if charles schwab basically acts as the shoulder to cry on when these customers inevitably get pissed like that's a good place to be yeah and oh that's totally true and the thing is people get worried because robin hood touts how many customers have accounts downloaded and Ian just, you know, he counts as a user, but you have no money over there. We've discussed before how the three of us here don't have any money in our

Robinhood accounts. And I think it's telling that Robinhood does not brag about their AUM. They only brag about their users when in reality, it only matters what AUM you have. It serves as a pretty watch list, but that's all I use it for. And that makes no money for Robinhood. So I think people are concerned about that for investing in Schwab, but reality, the one thing you got to watch out for is AUM because you'd rather have a few whales coming in with a million dollars in their retirement accounts than like a guy with a thousand bucks trading options. Not to that we're that's us. That's us. But, you know, OK. Yeah. So just to touch briefly on that Robin Hood conversation, too, you know, I think to to give the counterpoint and the Robin Hood pro point,

right, we might say Robin Hood would say, well, we care about users because the users are going to grow the amount of money they invest with us over time. We have young people like Lemonade that we were talking about last week. As these people get older, they're going to use more and more of our services. The problem is Robinhood hasn't really shown that they're going to expand out to some of these other investment products that people need and want as they get older with IRAs, custodial accounts, things of that nature. And so they're not really capturing that market And it forces users who do want to kind of start investing with some more kind of complex kind of account types like that, that they have to move to something like Schwab. So that being said, I generally agree with Brian that Schwab should be focused on attracting young investors.

And I think security focused marketing is a really interesting way to go about that. I do think, however, that Schwab should spend some money trying to develop a better UI, and maybe even an entirely separate product for younger investors, because I think Schwab has a lot to offer. And Robinhood is the shiny thing that's attracting everybody right now. If you can create something that's also shiny, but actually has some backbone behind it, and isn't gamified, Schwab has a lot of great resources for learning. But if you try and find them on your on their website, it's almost impossible to find them. And they're like, you know, they look dated, they look like they're from the 2000s. They don't, you know, they're not modern, easy for young investors to grab a hold of. And I think that Schwab really owes it to young investors to, to make something that's attractive to them, and gets them into, you know, a more reputable broker than something like Robinhood. And I think they're just missing out on some of that because their user interface is a little bit dated. No, I agree. I agree. They could definitely improve that website layout. It is confusing, but it doesn't mean that they provide a bad service or anything. But when you look at it, you're like, oh, is this from 2013?

All right. The last segment we have here is highlights and lowlights. Ryan, I'll let you go first. Okay, so my highlight here is that they are coming off one of maybe, if not the most brilliant business moves, most strategic business moves I've seen ever. Oh, yeah, maybe. I mean, at least the last few years. Yeah, it was really well done. I'm sure Walt Bettinger is feeling like the king right now because it was, I mean, it played out perfectly if you think about it. Like they cut commissions, everyone else did. Their stock got cut by like 3%. Other stocks got cut by 30% and then they bought one. And it's like, I mean, it just, it played out really well. And I think the willingness to cannibalize your own business so that you can gobble up competitors is a testament to the management they have. I mean, it was a baller move. And I think it's a good sign of the current management in general. However, low lights, it's going to be lumpy from here on out. $26 billion in an all-stock deal is going to have some impacts on the balance sheet and also just cost in general, being able to integrate that. But over time, you'd hope that there will be cost synergies. I know we hate that word synergies, but you would hope that their margin over time will improve. They'll be able to expand it with a combination.

But it's just lack of predictability because of this big deal that's going on. Also, the susceptibility to big macro swings. So assets can go down with the market. Revenue can decline 10% in a low interest environment. That is a big concern. That is definitely a potential low light. How much lower can interest rates go? Not much. I mean, can they go negative? That's really the only question we have. Yeah. And that, that does matter. So you kind of got to be able to dig into the macro to own a business like this. Ian, what do you have? Yeah. So some of my highlights are, like we've mentioned this entire episode, the diversified revenue streams just gives them so much more flexibility and making some of those strategic moves like buying TD Ameritrade gives them just a great competitive advantage. I'd say they also, we haven't really touched on this yet today, but there's some switching costs involved for users, right? You don't really want to, you know, if

you've got a million dollars with Schwab, you're not really going to want to have to figure out how to move that to another broker, right? You can, you can do it, but you kind of get familiar with the tools. You get familiar with the way your statements look, all that type of stuff. And it's just, people don't often switch brokers. There's also like literally a 15% switching costs because there's in, I mean, you can trade your account. That's a really painful process, but more than likely you have to sell your securities and transfer the money and you have to pay capital gains tax on that money. Or it takes a long process to have it switched over, you know what I mean? Like have them do it for you. And that's just another step.

Right. They make it, you know, for the, it's funny because on this, you know, in this business, like everything with Robinhood, when I'm trying to switch over my account from Robinhood to Schwab, they were making it as slow as possible, right? Schwab on the other side, who's receiving the money is trying to make it as fast as possible. And so you've got this interesting dynamic that goes on, but it creates a little bit of a headache for consumers trying to switch accounts a lot of times. So that's a highlight for Schwab with all the assets under management they already have. A couple of my lowlights, it really centers around this idea that they're not super innovative. They've kind of been innovative in this idea of driving down costs, but in terms of their

technology or the types of products that they roll out, the types of tools they have, people for years I know have preferred TD Ameritrade's tools and trading tools to Schwab's. So it's kind of nice to see them actually buying TD Ameritrade and bringing that in-house, but, um, there's just some, they don't have a culture of building these great trading tools or building, um, impressive user interfaces. And so it's not, you know, it's not a deal breaker, but it's something, it would be nice to see if they took a little bit more of an innovative approach, but as Ryan has mentioned, um, sometimes you sacrifice a bit of innovation to be known as the place where you can be secure and you can trust. Yeah. It seems like they're really good at coming up with business

models to crush competitors, but they're not good at showing it to the customers, right? Because that seems like it's summing up the whole thing here. Yeah, they're not. Their business model is equipped to ruin everyone else, but not help themselves. Yeah. So they got to get that other side of the equation going. All right. I'll finish up with my highlights. They have a strong history of ROE, which is return on equity. And typically we don't like to look at that, but for a bank, it is really important. So it's just kind of the return on that equity portion of the balance sheet, I think. I'm not an expert on that, but it is strong. It's been on double digits for a sustained period here. They don't need interest rates to rise to survive. They're not dependent

on interest rates. It's not existential to them, but it'd be nice if interest rates rise to four to 5% because there's a ton of inflation in the next five years. That would be a huge benefit to Schwab. They have economies of scale that they can offer the lower price products, and that's a giant moat i mean i would say schwab has one of the biggest moats right like one of like or the strongest easily defended right against the competition i'd agree and there's also like okay interest bearing uh float provides them 50 of their revenue but whether it's in cash or whether it's in stocks if you're buying their etfs they're still making money one way or the other so i think it's sort of a double-edged sword in that sense. Yeah, that's true. All right. And then my low

lights, the profitability is controlled by interest rates and that's out of their control. So that's just tough because when you invest in them, there could be something random that happens that causes interest rates to either skyrocket or go even worse than they are now. And Schwab can't control that even if they're running a solid business here. And then I think they did move too slowly to go commission-free. Slight red flag there because they probably should have done that three years ago and killed Robin Hood in the crib, but it seemed to work out in the end. So, all right, last question, the wrap up one, are you guys more or less interested in Schwab after today? Ian, you want to go first? Yeah, I can start. I'd say I kind of went back

and forth. I think if any, maybe I'll say I'm exactly as interested as I was. Um, I was, it's, um, there's things about the business that are intriguing and to get the top dog and really the person the the company that has this trust behind it and the company that is it's hard to imagine a world without schwab in it right it's going to be around presumably it's going to continue to be successful for many years because of that those assets under management that they have um but there's not there's not enough um compelling growth in the future for me to say need to go after this there could be some potential value here with the td ameritrade acquisition and people being a little bit worried or you know a little bit scared off by it and so there could be some

if it goes successful i assume that um it'll create some value for schwab but um yeah it's just it's not something i can get super super excited about yeah yeah ryan um i'm more excited uh the investors podcast had rf kareem on who we had on before we have had him on in the spring and he talked about it a lot and he had a pretty convincing argument um just around schwab as a whole. And it really is an industry leading company that is basically going to be the beneficiary of a lot of consolidation, I imagine. And they're right there to capture it. Is it growing super fast? No. Are they susceptible to things that are out of their control? That is something I really don't like to see usually is they have no real ability to dictate their own

growth. It's basically they're reliant on some outside factors. Or at least for half of their revenue. Right. And so that is unfortunate, but yeah, generally still a fan of the business and it's priced pretty cheaply. Yeah. I would say, yeah. I mean, I agree with all those. I say I'm more interested, but I'm not pounding the table on Schwab. It seems very safe. The floor is high. It probably has one of the highest floors of any business, especially if they continue to just grow AUM at about 50 billion a year or even less, as long as they're not losing AUM, it should be fine. But this won't be a 10 bagger in five years. It probably will give you some dividends. It's going to provide some value. They're going to have steady earnings as long as interest rates don't

go crazy. But this isn't, I don't know, you don't get too excited with Schwab and maybe that's what keeps people away and it's going to end up being a good investment, especially, I mean, the one thing that does get me excited is that Robinhood is, I think investors think that people our age love Robinhood, but we kind of know that it's not really that way. It's really for the people that want to gamble with their money to use Robinhood. But if you're actually going to be an investor and have a strong lifetime value to Schwab, I mean, I'm going to probably stick with them for my Roth IRA for the next 40 years. I mean, that's very valuable. So I don't know. I have those two things conflicting in my head and i think both of you guys do as well any closing

thoughts or we get i'm good gideon yep all right well that's going to do for this episode you can follow ian at ian gray live dot sub stack or is it dot com or dot com dot com okay um and then you can follow us on twitter at chit chat money give us any suggestions on shows to do uh remember we are not financial advisors anything we say on this show is not formal advice or recommendation Thank you all for listening. We'll see you on our next episode. Thanks for watching!