Dec 2020: Schwab – Gorilla in the midst

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Schwab – Gorilla in the midst

Dec 2020 ($49)


Charles Schwab has now built a network of epic scale and ultra-low cost. It is loved by customers for the superior value and convenience it offers. It now also looks set to offer a greater array of services via this platform, but ones that are always first and foremost ‘best for its clients’. Does that sound familiar at all?

A proven flywheel

Our earlier work on Schwab demonstrated its flywheel model i.e. its ability to achieve long term asset growth (+7% pa) by giving back to customers some of its scale benefits. Post the TD-Ameritrade (TDA) merger we feel this flywheel is now owned by a market-dominating gorilla who will be impossible to displace by challengers. Schwab is now poised to use this platform to sell an array of new services that will grow fee income at incremental margins and ROEs. A glance at your Bloomberg screen suggests you are paying c.21x PE for this company. Not so fast. We think Schwab is trading nearer 10x our best estimate of the earnings it will make in 3-4x years’ time…and that is using today’s low interest rates not any assumption about them improving much.

Schwab at its core is (and was originally) a simple trading and wealth management platform business. That it is now regulated and has complex capital needs is something it chose to do. Its peers like Hargreaves Lansdown and TD Ameritrade did not make this choice. Schwab’s regulatory capital and interest rate complexities we think distract many investors from the company’s true platform nature. Today Schwab, looks capital heavy once again due to the requirements of its deposit base as clients have stored cash in volatile markets. This will not always be the case as our previous work has shown. At the same time its Net Interest Income is severely depressed due to low interest rates that all are convinced will never again rise. But if they did the company would benefit royally.

In summer 2020 when analysing a European airport, we talked about the ‘time to buy a road toll is when there is no-one is using it’. Maybe we could extend that analogy? The time to buy a powerful, highly profitable, asset light network is when its profits are depressed and its capital requirements are elevated. The lesson for all of us that missed investing in a certain Seattle based platform business would suggest that to be true. We think Schwab can earn $5.00 once its cost synergies on acquiring TDA are realised fully. Were Mr Market then to see what we see (i.e. a profitable, growing network and low cost leader) – then a 20x multiple = $100.

Events, dear boy, events

We first put pen to paper on Schwab in March 2019 and we think our work on it is among our best in demystifying a misunderstood and mispriced business. In the last 18 months, to paraphrase MacMillan, Mr Market’s view on Schwab has been blown off course by a litany of ‘events’.

  1. Firstly, Schwab reminded us all that its disruptive nature was very much alive. In Q319, it abruptly cut commission rates to zero forcing the entire discount broking industry to follow suit. A reminder too, if it was needed, that Schwab thrives on deflation.
  2. Then came the follow on masterstroke when Schwab swiftly acquired major competitor TD Ameritrade (and its $1.6tn of client assets) at a marked-down valuation. In the space of 18 months, Schwab’s market share has rocketed from c.8% to c.13%.
  3. Not content with such ‘elbows-out’ creative destruction, the company has also been hoovering up technology businesses as it continues to add indexing and tax services to clients who still enjoy – by far – the lowest costs in the industry.
  4. Then along came Covid which turned the tide on recovering bond yields. Schwab’s Q320 NIM margins at c.130bp now compare to a previous all-time low of 152bp in 2013! The double whammy of reduced NIM spread with higher retained capital is plain to see as Schwab ROE declined to 12%…

Of these four events, notably the first three were all ‘self-inflicted.’ Deliberate acts of a management team with a track record of market disruption and long-term thinking to drive their future dominance. Yes, the fall in bond yields hurts earnings in the near term – no question. But it is our core contention in this note that Schwab is a far more dominant business today than it was when we first wrote on it in early 2019. As per the front page, we believe that its intrinsic value is double today’s market value.

In noisy years like this one, it is easy for good ideas and good research to be lost. We humbly suggest, it is well worth re-reading those Holland Views highlighted in Fig.1.

Fig.1: We thought Schwab a dominant force since early 2019. More so now.

 Source: Holland Views 2019

Our past Schwab work – A reminder:

  • Holland Views – Another flywheel (March 2019). A near-perfect Holland Franchise. An owner-manager EDLP flywheel with a runway of structural growth and excess capital always well deployed.
  • Holland Views – Endgame (October 2019).
  • Holland Views – Masterstroke (November 2019).

‘What do we make of the deal that Schwab has announced in buying TD Ameritrade? In short, we think it is a masterstroke that will cement Schwab’s place as the preeminent global online platform provider of investment services. The scale and resilience of the business this creates we think cannot be over-emphasised’.

In this note, we make three new points on Schwab
  1. As each year passes, Schwab’s moat widens. That is still very true, even in 2020!
  2. We ought to remember Schwab remains a simple business at heart. To that end we remind ourselves not to get bogged-down in bank capital complexity.
  3. Above all, we suggest that investors should take advantage of the perfect storm that is today’s share price discount to intrinsic value.
1. The ever-widening moat

“The best proof of innovation is customer commitment” – James Hamilton, early engineer at Amazon Web Services

We really like the above quote from an Amazon middle manager. We might offer our own version that the best proof of business success is also customer commitment aka loyal, sticky customers. $6tn is a massive commitment indeed. Amidst all of the action and noise from this busy, competitive sector, we are minded to ask ourselves the question – isn’t Schwab to Financial Services in 2020 what Amazon was to retail in 2010? It is easy to be overly sensationalist in our line of work but we think it is entirely appropriate to point out similarities between Schwab and Amazon. For now, let’s just say that we thought 18 months ago, with some conviction, that Schwab was increasingly dominating its chosen market. It was doing so in a manner that was symbiotic to clients and itself. We outlined this symbiosis and the resulting flywheel in our original note.

We come back to that point in the next section. First, we remind ourselves what a dominant flywheel business looks like. Here is the chart we used in our original flywheel note slowing growth in customer assets at lower platform fees. Now we update it to Q3 2020.

Fig.2: The Schwab flywheel: every year lower prices

62m 52m 42m 32m 22m 12m +8% cagr -4% cagr $6tn (with TD A) X 13bp • 10b p — Clie nt Assets • "platform" (non interest) Fees/ Client Assets  Source: Holland Advisors

Fig.2 reminds us that the Schwab flywheel, sector dominance and ‘moat’ is even more entrenched today. Even before the momentous TD Ameritrade deal was completed, Schwab had been organically growing assets by c.5% though 2020. Today, Schwab has $6tn AUM (post TDA) with average platform fees down from 13bp in 2018 to 10bp in 2019 (i.e. before TDA was bolted on!). We expect this cost reduction trend to continue post the merger and clients to be the main beneficiary.

Gorilla in the midst

(re: competitors) “it is an intensely competitive world and all lines are sort of blurred as to who works in which space – Walt Bettinger, CEO Schwab

Schwab’s original competitors in the 1970s were the wirehouses and staid broker dealers like Merrills and Morgan Stanley. Schwab’s competition continued to evolve over time. First were the discount brokers in the late 1990s, then index firms like Vanguard in the 2000s and more recently Fintechs and Blackrock. Schwab now has serious AUM scale (c.$6tn) relative to Vanguard ($6.2tn AUM) and is also closing the gap on Blackrock’s $7.3tn juggernaut. Vanguard is of course a mutual company but Blackrock enjoys a market cap of $109bn vs. Schwab’s $89bn (both similarly valued at c.1.5% of AUM).

Blackrock, was a pioneer in the ETF space (iShares brand) and as a true 800lb wealth management gorilla now makes for an interesting peer for Schwab investors to consider. Please see the link below for an authoritative write-up on Blackrock[1].

If imitation is the sincerest form of flattery, it is clear to us that Blackrock is taking some notice of Schwab. Blackrock, like Schwab, has been acquiring personalised index companies, broadening its DTC distribution (Schwab is a reseller/distributor of Blackrock’s iShares products) and advisory capabilities (Blackrock acquired Futureadvisor). As Bettinger says above, the competitive lines are indeed increasingly blurred. But what still marks Schwab out amongst practically all the competition[2] is price. We thought the following comment therefore interesting in the context of Blackrock’s recent acquisitions and overlap with Schwab. We would add that Blackrock might have similar scale but it does not have the culture to emulate Schwab’s low cost client philosophy.

BlackRock has said it has no desire to buy rival firms simply to drive down costs through economies of scale but would look to tactically grow in select areas, including expanding its distribution reach. – WSJ article on Blackrock, 24 Nov 2020

Anecdote from a sticky Schwab RIA client

The aforementioned ultra-low pricing by Schwab is key to client happiness, retention and future sustained growth. Schwab’s successful reach into the RIA (registered investment advisor) market almost a decade ago is instructive. Advisor Services are now a $3bn revenue business for Schwab (28% of total). Here Schwab offers a myriad of low-cost advisory, tax, indexation and custodian services for the huge swathe of RIA-managed money in the American market. It seems to us that Schwab is under-earning in this area (28% of revenues from a segment that contributes half of its AUM).

Nearly half of Schwab’s total customer assets are now managed by roughly 7,500 independent advisory firms that use Schwab as custodian[3].

So these customers are getting great value and look to be ‘sticky’. The following is a great insight into Schwab’s value-add in this area and a reason for its increased dominance (and competitive moat).

Matthew Celenza, an independent financial adviser in Los Angeles, is among the converts (to Schwab). Mr. Celenza this year launched his own wealth-advisory business, Boulevard Family Wealth, with about $1 billion in assets after a six-year run with Merrill Lynch’s private banking and investment group. “Going independent gives us better positioning in the business,” Mr. Celenza said when he left Merrill in July. Yet without the infrastructure provided by a traditional brokerage, finding a place to keep clients’ money was one of the first things Mr. Celenza had to do upon going independent. He went with Schwab and estimates that his clients save 0.15% to 0.20% in annual fees now that their assets are held at the discount brokerage versus his former firm. “I know the perception is that Schwab is a discount brokerage,” Mr. Celenza said, but “they offer every service a large brokerage service would WSJ[4] (emphasis ours)

2. Keep it simple, Sir

“There are two types of companies in the world: those that work to charge more and those that work to charge less” Jeff Bezos

We understand why investors might look at Schwab accounts for the first time in mid-2020 and conclude that it this is a damn complicated business – too complicated perhaps. It wouldn’t be the first time that investors, us included, mistook simple for complicated. We will try to show here why Schwab’s impeccable four-decade track record results from what is actually a very simple business proposition.

Parallels to Amazon – A customer journey

As a thought experiment we pose the question that perhaps Amazon watchers asked themselves in 2005 or even 2010? Is this Amazon business (in 2005) a tech platform, a retailer, a wholesaler, an auction house or a cloud computing company? Actually, it turns out, Amazon was at heart a customer company, albeit a ginormous one. Amazon aggregates and retains masses of customers[5] by offering them tremendous service and value for money. It makes money itself by making a very small spread (a tax of sorts) on retail activity of all those users. Simple if you know how!

For Schwab watchers in 2020, they similarly might ask, is Schwab (in 2020) a discount broker, an asset manager, a custodian, a bank or a technology distribution platform? The answer might be ‘yes’ to all of the above but actually at heart, Schwab, like Amazon is also just a customer company. It too aggregates masses of financial customers by offering them tremendous service and value. Schwab too makes money by making a very small spread (also akin to a very small tax of sorts) on customer assets held in Schwab’s custody. Above all else, Schwab, just like Amazon, prioritises customer trust over short-term profits.

By the way, look at how similar Charles Schwab’s mantra was to Bezos’ (20 years before Bezos even arrived on the scene!).

“Keep prices low and the rest will follow” – Charles Schwab[6]

We remember reading a WSJ article citing a middle manager at Schwab who recounted that in his 16 years at Schwab, someone asked at every meeting: “Can we do it cheaper?” Business really doesn’t really get much simpler than that. The EDLP businesses that we love at Holland Advisors; the Costco’s, the Amazon’s, the Ryanair’s, the Wetherspoons’, the Geico’s, and the Schwab’s all do this one seemingly simple thing extremely well. They offer the lowest prices (and typically great service), they gather customers and make a small spread on those vast numbers of customers. It’s not a coincidence that all are pre-eminent compounders too. The compounding coming from customer loyalty and new customers being attracted to the value proposition they offer.

Schwab and monetisation

The Devil’s advocates might retort that even if one accepts that Schwab can further succeed at EDLP, there is another greater question. That is, how will Schwab make money if it continues to rely on Schwab Bank to generate a NIM and interest rates stay lower for longer or forever? We feel well prepared to answer such a question as it is one we have debated ourselves at some length. Indeed it is the only question other analysts on the stock ever ask about!

Not to overuse the Amazon analogy but again it is a useful one. In 2005, did anyone foresee Amazon Web Service, Amazon Prime, Amazon payments as successful new income streams for Amazon? Very few people did. One of the reasons that platforms are attractive is that their scale and network relationships with customers offer a myriad of options on monetisation. Take Ryanair, who could have envisaged, 20 years ago that priority boarding/bags would account for 30% of sales? The broader point is that when you have 100m customers, finding an extra €1 of value to give each is well within reach from a customer perspective but multiplied by 100m and soon we are talking proper money from a P&L perspective!

When one looks at the fees being charged for advice in the wealth management industry, it is clear to us that opportunities abound for Schwab to up its ‘take rate’ just a little across a huge customer base. We recognise that creaming commissions is a well-worn strategy in financial services very often at the expense of customers’ interests. We are confident that this is not the Schwab way. Instead it is attuned to finding ways to offer greater help/service to its customers on a ‘win-win’ basis.

So could Schwab offset ‘lower for longer’ NIM spread? We think so. Easily bearing in mind Schwab has a 50 year track record of moving-up the value chain in asset management here is some food for thought:

  • Technology – Blackrock’s Aladdin generates c.$1bn in very high margin revenues (see that Net Interest article linked above). Blackrock is the benchmark for monetising proprietary B2B investment technology. Bettinger has been making noises lately that RIA’s have been utilising Schwab tools without ‘sharing’ the value derived.
  • Tools such as proprietary index building (see Schwab’s motif acquisition), tax services (also acquired via the Wasmer Schroeder business) and robo-advisors are clear value-add tools that customers, both RIA and retail, will see value in.
  • Advisory service – the Appendix shows how Schwab’s Asset Management (i.e. non-bank) fees are derived. In the most recent 3 month period, Schwab derived asset management fees in aggregate of just 17bp – but on just 50% or half of its AUM ($2tn out of $4tn). Of that $2tn, just $308bn actually derived an advisory fee. There’s that runway again!
The discounter changes gear to a “Modern Wealth Manager”

Schwab has started using the term ‘Modern Wealth Manager’ as a tag line to coincide with the announcement of the TD Ameritrade deal in Nov 2019[7]. We think this is more than marketing fluff and underpins a very real effort to now balance how Schwab is monetising its business. It also ties in with our earlier comments re Blackrock and Schwab increasingly going head to head.

With all that in mind, we can see below that the CEO is thinking more like a Bezos (or a Fink) in terms of turning an expense line into a revenue line. This is something that Amazon has been exceptionally clever at. Amazon turned legacy costs (cloud computing most famously, but also fulfilment etc.) from operating expenses into revenue segments. Blackrock’s Aladdin does the same. It originated as an in-house Fixed Income pricing system and is now sold extensively to asset managers globally.

Analyst: if we are in a lower rate environment for much longer than anyone thinks, I guess, what are your thoughts on globally migrating the revenue mix away from interest rate sensitive types of areas?

Walt Bettinger CEO: we do have a longer term goal of striving for a balance between spread income and other forms of revenue. And of course, that plays out in two of our three strategic initiatives, very clearly in monetization and segmentation. And the thing that I would just emphasize is that all of our monetization efforts are — we want to ensure are done in terms of them being good for clients. But you can see them unfolding before you whether it’s the acquisition of the technology and the talent from Motif, the acquisition of Wasmer Schroeder, the negotiations that we are having with firms, who effectively capitalize on our platform and we provide services they would otherwise have to provide, but yet don’t provide any offsetting compensation for those services. These are all in line with actions that we’re taking as well as continue to build our advisory solution… But I think we’re fairly confident in our plans to get to a more balanced approach within a reasonable period of time and are taking all prudent actions to get there – Q3 2020 conference call (emphasis ours)

I think clearly the greatest opportunity today when we look at the revenue that our clients are generating for third parties is in the asset management space. And so that is a focus of ours in evaluating whether the consumer is getting the absolute best service, best value, best outcomes for what they’re paying or are there alternatives that might be better for them overall. And at the same time, potentially shift some of the revenue from third parties to us. But again, only in the context, if it’s in the best interest of the client – Walt Bettinger, April 2020

Now, we are not saying this will be an easy process. Indeed Schwab will have to walk a delicate line if it is to extract more revenue-sharing from a key client constituent that is the RIA advisors – (especially from the larger ones who may be more resistant). But no-one understands win-win better than Schwab. After all, this is a company whose motto is actually true to its culture: “Through clients’ eyes”.

3. Take advantage of a near-perfect storm

Getting back to brass tacks, on the front page of this note we suggested that the Schwab business is under-earning and that the earnings power of the business today is closer to $5.00 in EPS. That will seem very fanciful to readers so we’d better explain ourselves.

The previous two sections in this note were intended to show, at a high level, Schwab’s tremendous scale and increasing ability to both create and derive further value from its chosen wealth management markets. Clearly, these prospects have been over-shadowed by a perfect storm of events this year. To remind you, the perfect storm derives from:

  1. The interest rate cycle. Who would have thought, at the start of 2019 that NIM spreads would fall to 130bp, an all-time low, within 18 months? Schwab’s ROE has been negatively hit as a result of this.
  2. Volatile markets and higher client cash balances led to higher regulatory capital needs. The duration uncertainty of that higher capital requirement seems to be the primary concern of Schwab-watchers.
  3. Finally, the TDA deal is clouding Schwab’s earnings power. To our eyes, it is quite a straightforward deal with clearly defined operating cost and fee synergies. That said, there are layers to the synergies that need to be peeled back to fully appreciate the opportunity.

The bright side is that all these events are, we think, temporary in nature, and have weighed excessively on the Schwab share price thus offering an opportunity. Importantly our $5.00 of EPS earnings power does not rely on the expectation of new streams of fee income we allude to above only already identified cost savings synergies.

A recap on Schwab Bank’s capital

We wrote at length on the interaction between client cash balances, Schwab Bank deposits and regulatory capital in our note of March 2019. In short: in periods of market volatility, Schwab clients, like many rattled equity investors, raise their cash balances. Schwab rationality choses to sweep these new balances into its bank to earn a NIM spread (i.e. greater profits). The capital cost of this is, however, not insignificant and regulatory rules forces commensurate balance sheet growth to underpin these client liabilities.

Fig.3 below shows an update of the table we originally created in early 2019 summarising this trend. At that time, Schwab Bank equity capital had been levelling off and we were enthusiastic on the boost that this could lead-to in Schwab’s group future ROE – all else being equal.

Of course, events since have conspired against us. But, we believed then and continue to believe today that Schwab is at heart an asset-light platform business. In due course, cash balances will revert to more normal levels and rising group ROEs will result.

In the longer run, as investor cash balances fall and fee income is diversified, equity capital will once again grow at a slower rate than AUM thereby unleashing higher ROEs and ultimately, excess capital.

Fig.3: Cash balance up, equity capital up, ROE down – but not permanently

Source: Holland Advisors

Fig.3 shows that with cash balances now 50% higher compared to nine months ago, one can see that Schwab Bank equity capital has grown in the short term.

For those that wish to skip some detail on this capital complexity, please skip this paragraph! The table above also shows that bank equity capital ($21.6bn) has in fact risen much faster than regulatory capital ($16.6bn) thanks largely to the unrealised gains in Schwab’s bond portfolio (see excel comment in Fig.3). These unrealised gains could be drawn on to increase regulatory capital (possibly at the expense of future NIM) or Schwab could see to continue to issue preferred equity. The latter seems more likely in the near term. For a further sense of the complexity around this area, consider the following. As part of the TDA deal, Schwab will have the option to start sweeping a regular portion of the TDA cash balances (that used to be held by TD Bank) into Schwab Bank. This too will of course require capital buffers. The deal agreement is skewed in favour of Schwab over TDA bank though. So, whilst TD Bank will no doubt be keen to retain some of these deposits it will not have much negotiating leverage to insist beyond the transition period. This leaves optionality for Schwab.

In short, we are fully aware of the Schwab’s current capital needs and the negative impact on group ROE but we strongly urge readers not to get bogged-down in this complexity but to focus on the bigger picture. That is the strength of its platform business and its ability to generate strong cashflows once it is outside its chosen heavy investment phase.

The crux of it: Schwab shares are on sale at 10x earnings power

In this section we try to identify and unearth the layers of under-earning that is embedded within the Schwab-TDA business. Today we suggest there are three layers to prudently assess the extent of this earnings power. Fig.4 below shows a simple outline of three scenarios.

  1. A simple bolt-on of the two businesses plus stated opex synergies = $3.38 EPS
  2. As 1. above, plus the uplift from TDA cash deposits swept to Schwab Bank = $3.83 EPS
  3. As 2. above, plus a continuation of the underlying 7% asset growth = $5.02 EPS

We always strive to be approximately right rather than precisely wrong and the sector-specialists will no doubt quibble with the timeframe in which these synergies are actually realisable (“that’s years away”, or “NIMs were even lower in Q3 20 than last 12m” they might say). Our point is to demonstrate the inherent earnings-power and it is our contention that the market is has not yet begun to consider the impacts of scenarios 2 and 3. It cannot ignore them for long.

Fig.4: Unpeeling the onion

Source: Holland Advisors

In further defence of our prudence, and this is an important point, we should remind readers that we are assuming that NIM rates stay relatively depressed at c.191bp[8] in this analysis and that none of the Fee diversification potential outlined earlier is realised in the medium term.

Briefly then, the three scenarios in Fig.4 explained

Schwab made $4.8bn in pre-tax profit in 2019 and c.$3.8bn in the last 12 months to Sept 2020 as shown in Fig.4 above. The main difference in those two starting points is the lower NIM spread realised through 2020. We use the last 12 months as our starting point and offer three scenarios.

  1. We start with the assumption that Schwab realises the entire $1.8bn of TDA operating cost synergies which it originally guided investors to and recently reiterated. On that basis, and remember it assumes a depressed NIM of 191bp in the last 12 months, then pro-forma earnings would be c.$3.38 implying a pro-forma P/E of c.14.5x. We think that is broadly how the market is thinking about Schwab’s valuation today.
  2. However, there is another, substantial kicker to Schwab earnings resulting from this deal. In the Appendix Fig.6, we show TDA’s simple income statement and standalone profit streams, a portion of which is also derived from a NIM spread on TDA’s customer cash balances. However, TDA’s historical reported NIM is about half that of Schwab[9]. TDA’s lower NIM is because TDA shares the NIM with its partner, Canada’s TD-Bank.Post-deal, Schwab-TDA has the opportunity to gradually sweep those acquired balances from TD-Bank over to Schwab Bank thereby allowing it to monetise those assets at its own higher NIM. This scenario is shown in the scenario 2. At today’s depressed NIM spreads, this would suggest another (admittedly further-out) upside of c.$1.264bn synergies thus boosting pro-forma earnings to c.$3.83 (and lower today’s P/E on those earnings to 12.8x).
  3. In both scenarios above, the adjustments are all considered before any assumption that underlying growth of the business will continue. In the context of AUM which continues to grow 5-8% organically (+5% most recently), we are confident that Schwab will not stop growing organically any time soon.

Scenario 3 simply assumes a continuation of the 7% growth rate for four years which would turn $3.83 into a $5.02 EPS in four years. (NB: This 7% growth assumed rate in EPS is likely lower than the outcome rate the company normally achieves of 10-12% when reporting 5-6% asset growth).

In Conclusion

We’ve said from day one that Schwab is the quintessential ‘flywheel business’. Real-world mechanical flywheels are designed to conserve and store energy. Ergo, by definition a flywheel has pent-up energy stored within it. Furthermore, the amount of energy is exponentially related to the size of the wheel and the enlarged Schwab-TDA fits the bill perfectly. We believe that Schwab-TDA has masses of pent-up earnings power yet to be unleashed.

We can see why analysts might get tied up in a knot over Schwab. Market volatility, regulatory capital requirements and falling bond yields all weave a complicated web at first glance. So with this business, one must keep an eye on the big picture, the track record, its scale and the opportunity it has to entrench dominance. But also on the power of its network and its focus on giving customers great value.

The recovery in Schwab’s share price in recent weeks likely reflects the uptick in bond yields and thus prospects for a slightly better NIM outlook. In other words, Mr Market is starting to look back at the 2019 income levels to value the business. However we are not so sure Mr Market is yet giving Schwab full value for TD deal synergies yet. Nor is it assuming a significant recovery in interest rates.

As for valuing the company on an Amazon-esq industry dominating flywheel whose marginal returns could accelerate as it offers incremental services to its loyal customers? Well, we are a long way short of Mr Market coming to that conclusion. Were it to think along those lines we think our $100 target share price might look a lot less silly than maybe it does today!

We finish with an apt insight from Mr Buffett.

I have always been attracted to the low cost operator in any business and, when you can find a combination of i) an extremely large business, (ii) a more or less homogenous product, and (iii) a very large gap in operating costs between the low cost operator and all of the other companies in the industry, you have a really attractive investment situation. – Warren Buffett

Buy Schwab, the gorilla in our midst.

Andrew Hollingworth & Mark Power

The Directors and employees of Holland Advisors may have a beneficial interest in some of the companies mentioned in this report via holdings in a fund that they also act as managers to.


Fig.5a: NIM spread

 Source: Schwab, Holland Advisors

Fig.5b: Professional Forecasters!

Image Source: Bianco Research

Fig.5c: Schwab Asset Management fees

Source: Schwab, Holland Advisors

Fig.6: TDA income streams

 Source: Holland Advisors

Fig.7: Our simple estimate of upside to TD-A NIM at Schwab bank

 Source: Holland Advisors

Fig.8: Schwab KPIs

Source: Holland Advisors


This document does not consist of investment research as it has not been prepared in accordance with UK legal requirements designed to promote the independence of investment research. Therefore even if it contains a research recommendation it should be treated as a marketing communication and as such will be fair, clear and not misleading in line with Financial Conduct Authority rules. Holland Advisors is authorised and regulated by the Financial Conduct Authority. This presentation is intended for institutional investors and high net worth experienced investors who understand the risks involved with the investment being promoted within this document. This communication should not be distributed to anyone other than the intended recipients and should not be relied upon by retail clients (as defined by Financial Conduct Authority). This communication is being supplied to you solely for your information and may not be reproduced, re-distributed or passed to any other person or published in whole or in part for any purpose. This communication is provided for information purposes only and should not be regarded as an offer or solicitation to buy or sell any security or other financial instrument. Any opinions cited in this communication are subject to change without notice. This communication is not a personal recommendation to you. Holland Advisors takes all reasonable care to ensure that the information is accurate and complete; however no warranty, representation, or undertaking is given that it is free from inaccuracies or omissions. This communication is based on and contains current public information, data, opinions, estimates and projections obtained from sources we believe to be reliable. Past performance is not necessarily a guide to future performance. The content of this communication may have been disclosed to the issuer(s) prior to dissemination in order to verify its factual accuracy. Investments in general involve some degree of risk therefore Prospective Investors should be aware that the value of any investment may rise and fall and you may get back less than you invested. Value and income may be adversely affected by exchange rates, interest rates and other factors. The investment discussed in this communication may not be eligible for sale in some states or countries and may not be suitable for all investors. If you are unsure about the suitability of this investment given your financial objectives, resources and risk appetite, please contact your financial advisor before taking any further action. This document is for informational purposes only and should not be regarded as an offer or solicitation to buy the securities or other instruments mentioned in it. Holland Advisors and/or its officers, directors and employees may have or take positions in securities or derivatives mentioned in this document (or in any related investment) and may from time to time dispose of any such securities (or instrument). Holland Advisors manage conflicts of interest in regard to this communication internally via their compliance procedures.

  2. Bogle-heads, as the Vanguard community are called might disagree but Vanguard is a much narrower business in that is sole offering is index funds.
  5. Amazon grew customers 6x fold 2005-2015 to 304m
  8. We recognise that Q3 NIM was even lower (mid 130s) but in the context of historical NIM (see Appendix Fig.5a) that a still-depressed 191bp is prudent
  9. we estimate c108bp vs. Schwab’s 191bp in the last 12m as shown in Fig.4 green shaded area

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Under no circumstances should any part of this website be construed as an offering or solicitation of an offer for any investment in the products on this site Holland Advisors (London) Limited is authorised and regulated by the Financial Conduct Authority (FRN 538932).

1. Not for U.S. Persons
The provision of the information in this web site does not constitute an offer of securities to any person in the United States or to any U.S. Person as such term is defined under the Securities Act of 1933, as amended. The information contained in this site about Holland Advisors (London) Ltd is not directed to any person in the United States. Funds referred to herein are neither registered under the Securities Act 1933 of the USA, nor are they registered under the Investment Company Act of 1940. Consequently, they cannot be offered for sale or be sold in the USA, its territories, possessions or protectorates under its jurisdiction, nor to nationals, citizens or residents in any of those areas.

No investments or services mentioned on this website are directed at US Persons who are not Eligible Counterparties as defined by the UK Financial Conduct Authority (FCA) Handbook or Qualified Purchasers as defined under the Investment Company Act of 1940. The information contained herein does not constitute a distribution, an offer to sell or the solicitation of an offer to buy any securities in any jurisdiction in which such distribution or offer is not authorised.

2. Terms and Conditions of Use



3. Information on the Website
Except where stated otherwise, the information, content and services on this Website (the “Information”) are provided by Holland Advisors (London) Ltd (referred to as “we” and “us”) as at the date indicated on the relevant material.

The Information is provided for personal use and information purposes only. The Information does not take account of the investment objectives, financial situation and particular needs of any particular person and is not general advice to any class of persons. Therefore, you should not rely on the Information and should obtain relevant and specific professional advice in making any investment decision.

Furthermore, nothing on this Website constitutes or should be construed to constitute
(i) an offer, advice, invitation or solicitation from us or our affiliates to buy or sell any investments or securities, futures, options or other financial instruments;
(ii) an invitation or inducement to engage in investment activity or a financial promotion of any kind; or
(iii) investment advice or recommendation.

4. Stock exchange prices and exchange rates
The prices/values shown on this Website in relation to different underlying securities are based on the prices notified to Holland Advisors (London) Ltd as the last sale price of the relevant securities on the stock exchange on which they are traded as at the time and date shown. Those figures may vary throughout the course of, and between, stock exchange trading days, market trading times and business days in general. Holland Advisors (London) Ltd has not verified the figures with the relevant stock exchange and you should verify the accuracy of those figures separately before relying on them.

5. Permitted users of the Website
The laws and regulations of the country from which you access this Website may include restrictions on the distribution of the Information. This Website is not directed at or intended for distribution to or use by any person or entity in any jurisdiction where (by reason of that jurisdiction’s applicable securities laws, person’s nationality, residence or otherwise) such distribution, publication, availability or use of this Website or any part of its contents would be contrary to applicable law or regulation or would subject Holland Advisors (London) Ltd to any registration or licensing requirement within such jurisdiction. If you are such a person or entity, you are not authorised to enter the Website. It is your responsibility to ensure that your use of this Website complies with any restrictions or any applicable local laws regarding use of the Information on this Website. Persons or entities in respect of whom such restrictions apply must not access the relevant pages on this Website.

The Information displayed on this Website contains material that may be interpreted by the relevant authorities in the country where you are viewing this Website as a financial promotion or an offer to purchase securities. Accordingly, if you reside in any such country or fall within the scope of any law that seeks to regulate financial promotions in the country of your residence or in the country in which you are viewing this Website, please cease accessing or using this Website immediately.

If you are uncertain about your position under the laws of the country in which you are viewing this Website, then you should seek clarification by obtaining legal advice from a lawyer practicing in the country of your residence or in the country in which you are viewing this Website before accessing this Website.

You may not use any part of the material or Information on this Website to establish, maintain or provide or assist in establishing, maintaining or providing a stock market for trading in securities.

6. Investment Performance and Accuracy of Information
The Site contains material about the past performance of our Funds. The value of an investment in a Fund may go up as well down so that an investor’s investment in a Fund, when redeemed, may be more or less than the original investment amount. By its nature, investment in a Fund managed by Holland Advisors (London) Ltd is only suitable for sophisticated investors who do not require immediate liquidity for their investment, for whom an investment in a Fund does not constitute a complete investment programme and who fully understand and are willing to assume the high risk involved in the investment programme of a Fund. THE PAST PERFORMANCE OF ANY INVESTMENT, INVESTMENT STRATEGY OR INVESTMENT STYLE IS NOT INDICATIVE OF FUTURE PERFORMANCE.

Whilst the information contained on the Website has been given in good faith and every effort has been made to ensure its accuracy, the Information may not be complete or accurate for your purposes. This Website and the Information is provided on an “as is” basis and Holland Advisors (London) Ltd may not, and has no obligation to, update the Information or correct any inaccuracy which subsequently becomes apparent. The Information and/or opinions and estimates comprised in the Information may be changed or withdrawn without notice and may become outdated. You, therefore, should verify any information or other material obtained from this Website before you use it.



The Information is assembled from material prepared by Holland Advisors (London Ltd) or its agents but may not include Information made known to Holland Advisors (London) Ltd officers (or agents) subsequent to the date of publication of the Information indicated on the Website. If you use the Information, you do so at your own risk. Please recognise that the previous performance of securities or other instruments does not guarantee or predict future performance.

7. Exclusion of liability



8. Third Party Websites
We may provide, on our Website, links to websites operated by third parties as a convenience to you. If you use these other sites, you will leave this Website. If you decide to visit any linked site, you do so at your own risk and it is your responsibility to take all protective measures to guard against viruses or other destructive elements.

Holland Advisors (London) Ltd makes no representations, warranties or guarantees of any kind about any of the content of any other website which you may access by hypertext link through this Website. When you access any other website by means of a link from this Website, you should understand that your access to that other website is independent of Holland Advisors (London) Ltd and Holland Advisors (London) Ltd has no control over the content of the website, nor does Holland Advisors (London) Ltd in any way endorse or approve the content of that website. In no event will Holland Advisors (London) Ltd in any way be liable to you or any other person(s) or organisation(s) for loss or damage (whether direct, indirect, consequential, special or other) for any use of any site linked to it by means of hypertext or otherwise.

9. Indemnity
You agree to indemnify Holland Advisors (London) Ltd and its officers from and against any claim brought by third parties against Holland Advisors (London) Ltd and its officers as a consequence of your breach of the Terms of Use. Furthermore, if your use of this Website results in the need for servicing, repair or correction of equipment, software or data, you assume all costs thereof.

10. Intellectual Property Rights and Licence
The copyright, trade mark or any other intellectual property rights in the Website and the Information are owned by or licensed to Holland Advisors (London) Ltd. You may download or print out a hard copy of individual pages and/or sections of this Website provided you do not remove any copyright or other proprietary notices. Any downloading or other copying from this Website will not transfer title to any software or material to you. You may not reproduce (in whole or in part), transmit (by electronic means or otherwise), modify, link to or use for any public or commercial purpose this Website without the prior written permission of Holland Advisors (London) Ltd. Any rights not expressly granted in the Terms of Use are reserved.

11. Operation of the Website
You should be aware that the internet, being an open network, is not secure. If you choose to send any electronic communications by means of this Website, you do so at your own risk. Holland Advisors (London) Ltd cannot guarantee that such communications will not be intercepted or changed or that they will reach the intended recipient safely.

12. Privacy
Any personal data relating to you will be collected, used and recorded by us in accordance with current data protection legislation, the Terms of Use and our Privacy Policy. You must read our Privacy Policy as it forms part of the Terms of Use.

13. Governing law
The Terms of Use are governed by the laws of England and Wales and the courts of England and Wales will have exclusive jurisdiction over any disputes arising under them.

14. Waiver
If you breach the Terms of Use and we take no action, we will still be entitled to use our rights and remedies in any other situation where you breach the Terms of Use.

15. Our details
This website is owned and operated by Holland Advisors London Ltd. You can contact us at: Holland Advisors London Ltd, The Granary, 1 Waverley Lane, Farnham, Surrey, GU9 8BB.

Updated and effective as of  31st March 2021


Please read the following conditions of use of this website.
This website is directed at high net worth experienced investors and institutional investors who understand the risks involved with the investments being promoted and it should not be relied upon by retail clients (as defined by Financial Conduct Authority).

The information on this website is issued by Holland Advisors (London) Limited (hereafter referred to as “Holland Advisors”), a limited liability company (7431314) incorporated in England and Wales, which is authorised and regulated by the Financial Conduct Authority (FRN: 538932).

This website is for information purposes only and does not constitute an offer or solicitation to buy or sell securities, funds or any other financial instrument. The information is directed inside the United Kingdom and is not directed at any persons in jurisdictions where it would be against local law or regulation.  In particular, information on this site is not directed at any person, partnership or corporation being resident in the United States of America. Holland Advisors disclaims all responsibility if you access or download any information in breach of any law or regulation of the country in which you reside.

Information on this site
The information provided does not constitute advice. Holland Advisors believes that the sources of the information in this website are reliable. However it cannot and does not guarantee, either expressly or implicitly, and accepts no liability for, the accuracy, validity, timeliness or completeness of any information or data (whether prepared by it or by any third party) for any particular purpose or use or that the information or data will be free from error. Holland Advisors does not undertake any responsibility for any reliance which is placed by any person on any statements or opinions which are expressed herein. Neither Holland Advisors nor any of its directors, officers or employees will be liable or have any responsibility of any kind for any loss or damage that any person may incur resulting from the use of this information. This does not exclude or restrict any duty of liability that Holland Advisors has to its customers under the regulatory system in the United Kingdom. All Information may be changed or amended without prior notice although Holland Advisors does not undertake to update this site regularly.

Marketing Communications
Documents on this site do not constitute investment research as they have not been prepared in accordance with UK legal requirements designed to promote the independence of investment research. Therefore, even if they contain research recommendations they should be treated as marketing communications and as such will be fair, clear and not misleading in line with Financial Conduct Authority rules. These communications are not personal recommendations to you and any opinions cited are subject to change without notice. Holland Advisors takes all reasonable care to ensure that the information on this site is accurate and complete; however no warranty, representation, or undertaking is given that it is free from inaccuracies or omissions. Documents on this site are based on, and contain, current public information, data, opinions, estimates and projections obtained from sources we believe to be reliable. Past performance is not necessarily a guide to future performance. The content of these documents may have been disclosed to the issuer(s) prior to dissemination in order to verify their factual accuracy.

Investments in general involve some degree of risk, therefore Prospective Investors should be aware that the value of any investment may rise and fall and you may get back less than you invested. Value and income may be adversely affected by exchange rates, interest rates and other factors. The investments discussed on this website may not be eligible for sale in some states or countries and may not be suitable for all investors. If you are unsure about the suitability of an investment given your financial objectives, resources and risk appetite, please contact your financial advisor before taking any further action.

Holland Advisors and/or its officers, directors and employees may have or take positions in securities, funds or derivatives mentioned on this site (or in any related investment) and may from time to time dispose of any such securities (or instrument). Holland Advisors manages these potential conflicts of interest internally via its compliance procedures.

Fund Information
Parts of this site may refer to Funds managed or advised by Holland Advisors. These are not solicitations to invest and any potential investors should refer to the “Our Funds” section of the website in order to learn more about these Funds and find out how and where to obtain the relevant full legal documentation.

Linked Websites
This site may be linked to third party websites or contain information provided by third parties. Holland Advisors does not make any representation as to the accuracy or completeness of such websites or information, has not and will not review or update such websites or information, and cautions browsers that any use made of such websites or information is at their own risk. Holland Advisors does not accept any liability arising out of the information contained on any linked website or Information provided by a third party and the use of such sites and information is at your own risk. This does not exclude or restrict any duty or liability that Holland Advisors has to its customers under the regulatory system in the United Kingdom.

You agree to indemnify and defend Holland Advisors, its affiliates and licensors, and the officers, directors, employees, and agents of Holland Advisors and its affiliates and licensors, from and against any and all claims, liabilities, damages, losses, or expenses, including legal fees and costs, arising out of or in any way connected with your access to or use of this website and the Information.

Use of Cookies
If you agree to these terms and conditions a “cookie” might be placed on your computer. A cookie is a packet of information that does not identify individual users of a website, but allows the collection of website activity (such as the number of users who visit our website, the date and time of visits, the number of pages viewed, navigation patterns, what country and what systems users have used to access the site). We can use this information for statistical purposes, which allows us to analyse and improve our website. The cookie will expire automatically after 6 months or you can manually remove cookies in your browser settings.

Copyright, Trademarks and Other Rights
Copyright, trademarks, database rights, patents and all similar rights in this site and the information contained in it are owned by Holland Advisors or relevant third party providers. You may use the Information and reproduce it in hard copy for your personal reference only. The information contained herein and any supplemental documentation provided is confidential and should not be copied, reproduced or redistributed without the prior consent of Holland Advisors.

Governing Law
You agree that your use of this site and any dispute arising from this use is subject to English law and you submit to the jurisdiction of the Courts of England & Wales.

Privacy Notice

This is the privacy notice of Holland Advisors London Ltd our company number is 07431314. Our registered office is at 7 York Road, Woking, Surrey, GU22 7XH.



This notice describes how we collect, store, transfer and use personal data. It tells you about your privacy rights and how the law protects you.

In the context of the law and this notice, ‘personal data’ is information that clearly identifies you as an individual or which could be used to identify you if combined with other information. Acting in any way on personal data is referred to as ‘processing’.

This notice applies to personal data collected through our website

Except as set out below, we do not share, or sell, or disclose to a third party, any information collected through our website.


Data Protection Officer

We have appointed a data protection officer (‘DPO’) who is responsible for ensuring that our privacy policy is followed. If you have any questions about how we process your personal data, including any requests to exercise your legal rights, please contact our DPO, Claire Brunt at


Personal data we process

1. How we obtain personal data

The information we process about you includes information:

  • you have directly provided to us
  • that we gather from third party databases and service providers
  • as a result of monitoring how you use our website or our services

2. Types of personal data we collect directly

When you use our website, you may provide personal data by submission of data by our Sign Up or Contact Us forms. This can be categorised into the following groups:

  • personal identifiers, such as your first and last names
  • contact information, such as your email address and your telephone number for communication
  • records of communication between us including messages sent through our website, email messages and telephone conversations
  • marketing preferences that tell us what types of marketing you would like to receive

3. Types of personal data we collect from your use of our services

By using our website and our services, we process:

  • technical information about the hardware and the software you use to access our website and use our services, including your Internet Protocol (IP) address, your browser type and version and your device’s operating system
  • usage information, including the frequency you use our services, the pages of our website that you visit, whether you receive messages from us and whether you reply to those messages
  • your preferences to receive marketing from us; how you wish to communicate with us; and responses and actions in relation to your use of our services.

4. Our use of aggregated information

We may aggregate anonymous information such as statistical or demographic data for any purpose. Anonymous information is that which does not identify you as an individual. Aggregated information may be derived from your personal data but is not considered as such in law because it does not reveal your identity.

For example, we may aggregate usage information to assess whether a feature of our website is useful.

However, if we combine or connect aggregated information with your personal data so that it can identify you in any way, we treat the combined information as personal data, and it will be used in accordance with this privacy notice.

5. The bases on which we process information about you

The law requires us to determine under which of six defined bases we process different categories of your personal data, and to notify you of the basis for each category.

If a basis on which we process your personal data is no longer relevant then we shall immediately stop processing your data.

If the basis changes then if required by law we shall notify you of the change and of any new basis under which we have determined that we can continue to process your information.

6. Information we process with your consent

Through certain actions when there is no contractual relationship between us, such as when you browse our website or ask us to provide you more information about our business, you provide your consent to us to process information that may be personal data.

Wherever possible, we aim to obtain your explicit consent to process this information, for example, we ask you to agree to our use of non-essential cookies when you access our website.

We continue to process your information on this basis until you withdraw your consent or it can be reasonably assumed that your consent no longer exists.

You may withdraw your consent at any time by instructing us

7. Information we process for the purposes of legitimate interests

We may process information on the basis there is a legitimate interest, either to you or to us, of doing so.

Where we process your information on this basis, we do after having given careful consideration to:

  • whether the same objective could be achieved through other means
  • whether processing (or not processing) might cause you harm
  • whether you would expect us to process your data, and whether you would, in the round, consider it reasonable to do so

For example, we may process your data on this basis for the purposes of:

  • improving our services
  • record-keeping for the proper and necessary administration of our business
  • responding to unsolicited communication from you to which we believe you would expect a response
  • preventing fraudulent use of our services
  • exercising our legal rights, including to detect and prevent fraud and to protect our intellectual property
  • insuring against or obtaining professional advice that is required to manage business risk
  • protecting your interests where we believe we have a duty to do so


How and when we process your personal data

8. Your personal data is not shared

We do not share or disclose to a third party, any information collected through our website.


Use of information we collect through automated systems

9. Cookies

Cookies are small text files that are placed on your computer’s hard drive by your web browser when you visit a website that uses them. They allow information gathered on one web page to be stored until it is needed for use at a later date.

They are commonly used to provide you with a personalised experience while you browse a website, for example, allowing your preferences to be remembered.

They can also provide core functionality such as security, network management, and accessibility; record how you interact with the website so that the owner can understand how to improve the experience of other visitors.

Some cookies may last for a defined period of time, such as one visit (known as a session), one day or until you close your browser. Others last indefinitely until you delete them.

Your web browser should allow you to delete any cookie you choose. It should also allow you to prevent or limit their use. Your web browser may support a plug-in or add-on that helps you manage which cookies you wish to allow to operate.

The law requires you to give explicit consent for use of any cookies that are not strictly necessary for the operation of a website.

10. Personal identifiers from your browsing activity

Requests by your web browser to our servers for web pages and other content on our website are recorded.

We record information such as your geographical location, your Internet service provider and your IP address. We also record information about the software you are using to browse our website, such as the type of computer or device and the screen resolution.

We use this information in aggregate to assess the popularity of the webpages on our website and how we perform in providing content to you.


Other matters

11. Your rights

The law requires us to tell you about your rights and our obligations to you in regard to the processing and control of your personal data.

We do this now, by requesting that you read the information provided at

12. Communicating with us

When you contact us, whether by telephone, through our website or by email, we collect the data you have given to us in order to reply with the information you need.

We record your request and our reply in order to increase the efficiency of our business. We may keep personally identifiable information associated with your message, such as your name and email address so as to be able to track our communications with you to provide a high quality service.

13. Complaining

If you are not happy with our privacy policy, or if you have any complaint, then you should tell us.

When we receive a complaint, we record the information you have given to us on the basis of consent. We use that information to resolve your complaint.

14. Retention period

Except as otherwise mentioned in this privacy notice, we keep your personal data only for as long as required by us to provide you with the services you have requested.

15. Compliance with the law

Our privacy policy complies with the law in the United Kingdom, specifically with the Data Protection Act 2018 (the ‘Act’) accordingly incorporating the EU General Data Protection Regulation (‘GDPR’) and the Privacy and Electronic Communications Regulations (‘PECR’).

16. Review of this privacy policy

We shall update this privacy notice from time to time as necessary.