Schwab Sees Drop in Net New Assets

by Warren Seah


The attrition of TD Ameritrade customers has taken a toll on Charles Schwab, causing a decline in core net new assets for October. This decrease is significant compared to previous months.

Decline in Net New Assets

According to Charles Schwab’s monthly activity report, core net new assets for October fell to $11.3 billion. This is considerably lower than the $27.1 billion recorded in September and well below the $42 billion achieved in October 2022.

Reasons for the Drop

The decrease in net new assets can be attributed to the attrition of TD Ameritrade customers and delayed tax disbursements by clients in certain states, such as California. Throughout the year, Charles Schwab has been migrating TD Ameritrade customers and advisors to its platform. However, this transition has not been without challenges, with some advisors experiencing technical glitches and other issues.

Advisors’ Reaction

Advisors who intended to leave Schwab for another custodian likely did so before Labor Day weekend, which was when Schwab planned to migrate thousands of advisors and $1.3 trillion in assets to its platform from TD Ameritrade. Those who have already made the switch but are dissatisfied with Schwab may not leave for several months due to the complexity of changing custodians.

Acquisition of TD Ameritrade

Schwab’s acquisition of TD Ameritrade in 2020 greatly boosted its online brokerage and advisory custody businesses. Despite the attrition of Ameritrade customers, Schwab maintains that the level of attrition has been lower than initially anticipated.

Stock Performance

As of noon on Tuesday, Schwab’s stock was up by approximately 3%, trading at around $55.75 per share. This increase may be attributed to a decline in interest rates following a lower-than-expected CPI report earlier in the day. However, the company’s stock has experienced a decline of approximately 34% this year and is far below its 52-week high of $86.63.

Schwab Faces Pressure from Cash Sorting

Schwab, like other wealth managers, has been grappling with the phenomenon of cash sorting, where customers transfer uninvested cash from low-paying bank accounts to higher-paying options such as mutual funds. While this may seem like a positive move for clients, it poses challenges for Schwab as it earns less revenue on these higher-paying alternatives. Moreover, when the outflows of deposits exceed the available cash, the company is forced to rely on short-term, high-cost borrowings.

However, there is some good news on the horizon. Schwab executives have observed a decline in the pace of cash sorting. According to the monthly activity report, client cash as a percentage of client assets rose slightly to 11.2% in October, compared to 10.8% in September.

Analysts are also optimistic about this trend, expecting it to relieve pressure on Schwab’s earnings in the coming year. William Blair analyst Jeff Schmitt, who rates Schwab stock as outperform, notes that the average daily pace of cash realignment has slowed to $420,000 per trading day, down from $580,000 in September and a peak of $1.7 billion in February. Schmitt writes in a research note on November 14 that this trend is likely to continue and indicates that sorting may soon turn the corner.

To address cost concerns, Schwab recently implemented layoffs, reducing its workforce by approximately 5% to 6%. The company, based in Westlake, Texas, had nearly 36,000 full-time employees as of September.

As the nation’s largest custodian of assets for registered investment advisors and one of the largest discount brokerage firms, Schwab is a prominent player in the industry. As of October-end, the company reported total client assets of $7.65 trillion, representing a 9% increase from October 2022 but a 2% decrease compared to September 2023. Additionally, Schwab welcomed 284,000 new brokerage accounts last month, a gain of 4,000 from the prior month.

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