SCHW Initiation

RBC Capital Markets, LLC
Bulent Ozcan, CFA (Analyst)
(212) 863-4818
bulent.ozcan@rbccm.com
Sector: Brokers, Asset Managers & Exchanges
Outperform
NYSE: SCHW; USD 29.21
Price Target USD 38.00
Scenario Analysis*
Downside
Scenario
23.00
20%
Current
Price
29.21
Price
Target
38.00
31%
Upside
Scenario
44.00
51%
*Implied Total Returns
Key Statistics
Shares O/S (MM): 1,305.8
Dividend: 0.24
Market Cap (MM): 38,142
Yield: 0.8%
Avg. Daily Volume: 7,146,679
RBC Estimates
FY Dec 2014A 2015E 2016E 2017E
EPS, Rpt Diluted 0.95 1.10 1.58 1.82
P/Rpt EPS 30.7x 26.6x 18.5x 16.0x
EBITDA 2,314.0 2,665.4 3,725.6 4,307.6
DPS 0.24 0.24 0.33 0.40
Div Yield 0.8% 0.8% 1.1% 1.4%
BVPS Basic 8.97 10.27 12.11 14.20
P/BVPS 3.26x 2.84x 2.41x 2.06x
EPS, Rpt Diluted Q1 Q2 Q3 Q4
2014 0.24A 0.23A 0.24A 0.25A
2015 0.26E 0.26E 0.27E 0.30E
2016 0.39E 0.37E 0.39E 0.42E
EBITDA
2014 570.0A 569.0A 567.0A 608.0A
2015 616.6E 652.0E 655.1E 741.7E
2016 903.8E 895.7E 915.6E 1,010.4E
All values in USD unless otherwise noted.
March 26, 2015
The Charles Schwab Corporation
Initiating at Outperform: With Ample Catalysts,
Expect Strong Earnings Growth
Our view: Charles Schwab stands out as having the strongest franchise
amongst its peers. We believe that its diversified business model will
allow the firm to capitalize on numerous secular tailwinds to generate
asset growth. Furthermore, the firm is the most asset-sensitive and should
benefit disproportionately from higher interest rates. We expect EPS to
grow at a CAGR of over 25% over the next three years.
Key points:
Our in-depth study of the latest industry dynamics and our extensive
analysis on the company's interest rate sensitivity leads us to believe that
that The Charles Schwab Corporation is uniquely positioned to generate
strong earnings growth.
We expect numerous secular trends to contribute to top line expansion:
• Growth of independent RIAs: Schwab is the largest custodian for
independent RIAs. Our analysis indicates that wirehouse departures will
accelerate, with over $64 billion of assets likely to move this year. RIA
assets under management are expected to reach $3.4 trillion in 2015.
• Growth of advice-based revenues: We estimate that valuations could
benefit by $3 to $5 if the company were to increase the percentage of
retail clients' AUM that is receiving advice from 17% to 30%.
• Increase in popularity of ETFs: Passively managed products have
enjoyed increasing demand among investors. Schwab generates
revenues through management fees, "program fees", and platform fees,
among others. PwC expects that industry-wide ETF assets could double
by 2020 and exceed $5 trillion.
• Introduction of the robo-advisor product: We believe that Schwab
could grow its assets by providing services to the general public who
have been unable to retain professional asset allocation advice.
Furthermore, we expect rising interest rates and cost control efforts to
contribute to margin expansion:
• Higher interest rates could boost earnings and margins: We expect
rising interest rates to disproportionately benefit Schwab. We estimate
that a 50 basis points increase in interest rates could add $0.31 per share
to earnings.
• Expense saves could add incrementally to margin expansion: Efforts
such as relocating employees to low-cost locations and back office
efficiency improvements should contribute to margin expansion.
We are modeling pre-tax operating margins of 45% for 2016, up from 35%
in 2014. Our above-consensus price target of $38 is based on a 26x P/E
multiple and 2016E EPS of $1.58.
Priced as of prior trading day's market close, EST (unless otherwise noted).
For Required Conflicts Disclosures, see Page 47.

Target/Upside/Downside Scenarios
Exhibit 1: The Charles Schwab Corporation
150m
100m
50m
N
2012
D J F M A M J J A S O N
2013
D J F M A M J J A S O N
2014
D J F
2015
M
UPSIDE 44.00
TARGET 38.00
CURRENT 29.21
DOWNSIDE 23.00
Mar 2016
42
37
32
27
22
17
12
125 Weeks 02NOV12 - 25MAR15
SCHW Rel. S&P 500 COMPOSITE MA 40 weeks
Source: Bloomberg and RBC Capital Markets estimates for Upside/Downside/Target
Target price/base case
Our 12-month price target for SCHW is $38. We arrive at our
price target using a price-to-earnings multiple of 26.0x on our
2016 calendar year earnings estimate of $1.58 per diluted
weighted average shares. We then discount the resulting
valuation using a cost of equity of 10.7%.
Our base case scenario valuation is based on these
assumptions for 2016: Net interest margins of 175 basis points
by 2016; interest-earning assets of $162.9 billion; total funding
sources of $158.3 billion; daily average revenue trades of
319,000; average revenue per revenue trade of $12.05; and a
pre-tax margin of 44.7%.
Upside scenario
Our valuation is $44 based on 2016 EPS of $1.69 and a price-
to-earnings multiple of 28.0x.
Our upside scenario valuation is based on these assumptions
for 2016: Net interest margins of 189 basis points by 2016;
interest- earning assets of $162.9 billion; total funding sources
of $158.3 billion; daily average revenue trades of 321,000;
average revenue per revenue trade of $12.05; and a pre-tax
margin of 46.3%.
Downside scenario
Our valuation is $23 based on 2016 EPS of $1.47 and a price-
to-earnings multiple of 17.0x.
Our downside scenario valuation is based on these
assumptions for 2016: Net interest margins of 160 basis points
by 2016; interest-earning assets of $162.9 billion; total funding
sources of $158.3 billion; a daily average revenue trades of
317,000; average revenue per revenue trade of $12.05; and a
pre-tax margin of 43.1%.
Investment summary
We are rating the shares of The Charles Schwab Corporation
at Outperform, as we believe that the firm's diverse business
model allows it to capitalize on numerous opportunities to
grow earnings.
Potential Catalysts
• Growth of independent RIAs: Schwab is the largest
custodian to independent RIAs. Our analysis indicates that
wirehouse departures will accelerate, with over $64 billion
of assets moving this year.
• Growth of advice-based revenues: We estimate that
valuations could benefit by $3 to $5 if the company were to
increase percentage of retail clients' AUM that is receiving
advice from 17% to 30%.
• Increase in popularity of ETFs: Schwab generates revenues
through management fees, "program fees", and platform
fees among others. PwC expects that industry-wide ETF
assets could double by 2020 and exceed $5 trillion.
• Introduction of the robo-advisor product: We believe that
Schwab could grow its assets by providing services to
the general public, which has not been able to retain
professional asset allocation advice.
• Higher interest rates could boost earnings and margins:
We expect rising interest rates to disproportionately benefit
Schwab. We estimate that a 50 basis points increase in
interest rates could add $0.31 per share to earnings.
• Expense saves could add incrementally to margin
expansion: Efforts such as relocating employees to low cost
locations and back office efficiency improvements should
contribute to margin expansion.
Risks:
• Prolonged period of low interest rates could lead to a decline
in net interest margins and earnings.
• Unforeseen regulatory changes could impact growth and
profitability.
• Increased competition could lead to balance sheet growth
below our expectation and earnings shortfall.
• Losses from credit exposure could negatively impact
earnings.
• Drop in consumer confidence and equity markets could
negatively impact trading revenues and fee-based earnings.
Brokers, Asset Managers & Exchanges
March 26, 2015 Bulent Ozcan, CFA (212) 863-4818; bulent.ozcan@rbccm.com 2

Key questions
Our view
1. Given Schwab’s size, can the
company continue growing assets
at a fast pace?
We believe that Schwab can continue to grow its balance sheet and add client assets
at an attractive pace. We think that there are certain secular trends that could
support our assertion. We expect that advisors could leave wirehouses at an
accelerated rate, favoring open architecture. We expect demand for exchange
traded funds (ETFs) to increase. We believe that Schwab should be able to gain
traction with some of the new products it has been working on, such as ETF-based
401k plans or the firm’s “robo-advisor” that is going to be rolled out in 1Q/15 (see
section on “innovative operator” beginning on page 5).
2. How should investors think about
the firm’s interest rate sensitivity?
Schwab is by far the most asset-sensitive name among the discount brokers. About
75% of the assets are sensitive to movements in short-term rates. We estimate that
the elimination of money market fee waivers alone could add about 16 cents to
earnings. That is equal to 17% of the firm’s 2014 earnings per diluted share.
Furthermore, Schwab earns a net interest margin on assets on its balance sheet. We
would expect net interest margins to widen as interest rates move higher. We
estimate this could add another $0.15 for a 50-bps move in rates. Thus, earnings
could increase by over 30% for a 50-bps increase in interest rates. Furthermore, we
would expect asset sensitivity to increase from recent changes enacted to sweep
account thresholds. Schwab is now routing money coming to the broker–dealer
onto its balance sheet at an increased rate. This decision is expected to add about
$6 billion to Schwab’s balance sheet in 2015 alone. We believe an improving interest
rate environment could significantly alter the value proposition. Our economists
expect yield on the three-month treasury bill to increase from 0.04% in 2014, to
0.90% in 2015, and to further increase to 2.80% in 2016.
3. Are there any regulatory
headwinds investors should be
concerned about?
We believe that some of the most significant regulatory changes have already taken
place. The SEC has provided new rules in respect to money market funds, which
worked out in Schwab’s favor. The company has disclosed its expectation around
the impact of the new Liquidity Coverage Ratio rules on its earnings—which is about
half a penny per year.
4. How well does the company
manage its balance sheet and its
credit exposure?
We believe that the management team has been a good steward of capital. The
ratio of non-performing assets to average loans and real estate owned has
fluctuated around 50 basis points since 2009, peaking at 68 basis points in 2010. This
ratio has declined further in 2014. As of December 31, 2014, outstanding mortgage
and home equity loans were about $11 billion. We would not expect a sharp
increase in default rates and thus see credit risk as not significant.

Table of contents
An innovative operator with multiple levers to generate asset growth, we expect
strong top line growth..........................................................................................................5
Well positioned to take advantage of growth of independent RIAs................................... 6
Advisory opportunity to deepen share of wallet; could add $3 to $5 to valuation ............ 9
Growth in usage of ETFs could boost asset growth at Schwab.........................................10
Robo-advisors could help the firm grow assets by focusing on an untapped market......14
Concluding thoughts on ability to grow assets .................................................................15
We expect incremental contributions to earnings growth and margin expansion from
rising interest rates and efforts to control costs .................................................................19
We expect rising interest rates to benefit Schwab’s earnings more than that of its
peers .................................................................................................................................19
Expense saves could add to the bottom line and help expand margins...........................23
Where we could be wrong .................................................................................................27
Interest rate sensitivity could be a headwind, compressing net interest margins, if
rates do not rise................................................................................................................27
Given reliance on offices and infrastructure, required investments could lead to
lower margins ...................................................................................................................27
Schwab is under the supervision of a number of regulators putting the company at
a disadvantage with respect to capital deployment.........................................................27
Valuation framework .........................................................................................................29
Risks and price target impediments ...................................................................................31
Quick overview of Charles Schwab Corp.............................................................................32
Revenue break-down .........................................................................................................35
Sources of revenue ...........................................................................................................35
Business segments............................................................................................................36
Products.............................................................................................................................38
Distribution ........................................................................................................................41
Competitors .......................................................................................................................42
History................................................................................................................................43
Management team.............................................................................................................44

An innovative operator with multiple levers to generate asset growth, we
expect strong top line growth
Having built the most diverse business model among its peers, we believe that Schwab has
multiple opportunities it can capitalize on to grow assets. Today, Schwab offers a full range
of services, including wealth management, securities brokerage, banking, money
management, and financial advisory services. It serves individual investors, as well as
institutional clients. The firm has been an early adopter of technology and management
seems comfortable with exploring new venues of revenues in order to remain relevant.
While commissions were the main driver of earnings in the past, today, about half of the
client assets are under some form of fee-based advisory relationship.
The table below compares the breadth of Schwab’s offerings versus those of its peers.
Exhibit 2: Charles Schwab offers a wide range of services and products
SCHW AMTD ETFC
Brokerage
Full range of investment products   
Third-party research   
In-house research   
Mutual funds
Proprietary funds   
Third-party funds   
Exchange Traded Funds
Proprietary funds   
Third-party funds   
Advice - In-House
Investment advice   
Tailored portfolio construction   
Portfolio management   
Separately managed accounts   
Financial consultants 1,200 ~700 300
RIA relationships 7,000 ~5,000 
Number of branches 325+ 105 30
Corporate services
Retirement plans (401k)   
Equity compensation plans   
Banking services
Full service bank   
Trust
Custody services   
Administrative trustee services   
Source: Company reports, RBC Capital Markets
The firm has built a
diversified business,
offering more products and
services than its peers do

Clearly, the distinction between services a traditional broker and Schwab can offer is not as
clear-cut as it once was. Schwab continues to innovate and be an early adopter of products
and technologies management deems worthwhile pursuing. This is exactly why we like the
company: Management seems to have created a unique culture of innovation and
adaptation, which we deem essential to succeed in a fast-paced industry.
Given Charles Schwab’s strong corporate culture, we would expect the firm to remain
innovative and to pursue various opportunities to generate growth. Below are some of these
potential opportunities. Please refer to our industry piece for a detailed discussion on
current industry themes and drivers.
Well positioned to take advantage of growth of independent
RIAs
We view the independent RIA market as a meaningful venue of growth for Charles Schwab.
We expect record advisor departures from wirehouses in 2015 and estimate that
independent RIAs could control $3.4 trillion of assets by the end of this year. This provides
multiple opportunities to grow revenues.
While not entirely new, Schwab has been a custodian for 25 years, recent developments
bode well for the company. Today, Schwab Advisor Services is the largest custodian, serving
more than 7,000 independent registered investment advisors (RIAs) with $1 trillion of assets
under their management (as of September 30, 2014). About 1,800 professionals provide
custody, trading, and operations support. Their role is to help RIAs focus on their main
objective, namely growing their business. A custodian holds the clients’ assets, but can also
provide investment products, practice management solutions, back-office technology, and
service support.
We believe that wirehouse departures will not only continue, but they can accelerate.
The RIA industry is growing very rapidly as more advisors are leaving the wirehouses either
to retain more of the revenues they would otherwise have to share, because they like the
open architecture firms such as Schwab can provide, or due to pressure by the wirehouses to
eliminate less-profitable clients. Some advisors who have left the wirehouses complain that
the push to move “upmarket” makes it less profitable for the advisor to serve mass-affluent
clients. Merrill Lynch, for example, is implementing rules in 2015 that will negatively impact
brokers’ payouts if they service a large number of affluent client households with under
$250,000 in assets. Regulatory changes/scrutiny is also contributing to departures. Some
advisors do not like the additional compliance and administrative burdens that come with
being part of a wirehouse.
According to InvestmentNews, advisor-move activity is expected to pick up in 2015 should
the economy continue to recover. Investment News projects that there will be an increase in
the assets moving by an average of about 15%. Thus, assuming that the same ratio of
advisors decide to leave the wirehouse channel as in 2014 to become independent (vs.
moving to another wirehouse), there could be a record $64.3 billion of assets these advisors
could take with them in 2015. The exhibit below shows. Assuming that Schwab’s market
share of the RIA custody market is about 45%, as per Bernie Clark who is the executive vice
president of Schwab Advisor Services, we calculate that the move by wirehouse advisors
could add another $29b of new client assets.
We believe that breakaway
brokers represent a very
appealing opportunity, as
Schwab is the largest
custodian for independent
RIAs
We estimate that
breakaway brokers could
add about $29 billion to
Schwab’s net client assets
in 2015

Exhibit 3: Wirehouse departures could accelerate in 2015 ($ in billion)
$27.1
$35.7
$62.6
$58.7
$55.9
$64.3
0%
10%
20%
30%
40%
50%
60%
70%
80%
$0
$10
$20
$30
$40
$50
$60
$70
$80
2010 2011 2012 2013 2014 2015E
Amount of Total AUM Leaving Wirehouses As % of Total AUM Moving
Source: InvestmentNews; RBC Capital Markets estimates
In addition, existing RIAs are growing their practices faster and adding assets, which helps
discount brokers. RIA assets grew by 19.2% in 2013, following an increase of 15.5% in 2012,
according to InvestmentNews. While some of the growth was attributable to movements in
the markets, a larger portion of the growth seems to have been driven either by new assets
that the RIAs did not manage before or by an increase in the assets provided by their existing
clients. About 45% of the new assets were from new clients and another 16% were from
existing clients in 2013. As a comparison, about 39% of new assets were from new clients
and 22% of assets were from existing clients in 2012.
We estimate that the assets managed by RIAs were about $2 trillion by the end of 2012.
Assuming a 19.2% growth in 2013, assets would have been around $2.4 trillion. Using the
same assumptions for 2014 and 2015, we would expect RIA assets under management to be
around $3.4 trillion by the end of 2015.
Exhibit 4: Assets managed by RIAs could reach $3.4 trillion by 2015 ($ in trillion)
$2.0
$2.4
$2.8
$3.4
$-
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
2012 2013 2014E 2015E
Source: InvestmentNews; RBC Capital Markets estimates
Is the 19.2% growth assumption reasonable? We believe so and think that this estimate
could be somewhat conservative if we assume that the growth rate for all RIAs corresponds
Existing RIAs continue to
grow their client assets,
with over a third of these
assets coming from new
clients

to what the top 50 RIAs have been able to achieve. Data collected by InvestmentNews shows
that the AUM grew at a CAGR of 23% over the past two years for the top 50 fee-only RIAs.
While assets stood at $277.8 billion in 2012, that figure increased to nearly $416.9 billion by
2014.
Exhibit 5: Fee-only RIAs are managing more assets than a few years ago ($ in millions)
$277,767
$310,579
$416,855
$-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
2012 2013 2014
Total AUM of the top 50 fee-only RIAs
Source: InvestmentNews; RBC Capital Markets
The increase in assets managed by RIAs could benefit the discount brokers as they act as
custodians for them. The exhibit below shows a ranking by number of RIA clients. Schwab
serves more independent RIAs than any of its competitors.
Exhibit 6: SCHW is the top custodian based on number of RIA relationships (2014)
($ in billion)
# of RIA
clients
RIA Assets in
Custody
Schwab Advisor Services 7,000 $1,081.0
TD Ameritrade Institutional 4,500 $300.0
Fidelity Institutional Wealth Services 2,948 n/a
Trade-PMR Inc. 1,525 n/a
Interactive Brokers 1,388 $150.0
Shareholders Service Group 1,255 n/a
Scottrade Advisor Services 1,100 n/a
Pershing Advisors Solutions 562 $106.4
Folio Institutional 325 n/a
Raymond James Investment Advisors Division 285 $100.0
LPL Financial LLC 282 $78.0
Source: InvestmentNews; RBC Capital Markets
Schwab, as the largest
custodian for independent
RIAs, stands to benefit
from growth in RIA assets

Discount brokers do not usually charge custodian fees. Nonetheless, the firms can generate
revenues as they are charging trading commissions, earning fees when an ETF is part of a
customer’s model portfolio the company runs (advisory fees), and charging sales
commissions. The ETF provider also pays a platform fee to be on the discount broker’s
platform.
There is also room to grow by focusing on existing relationships. The firm’s share of wallet of
its RIA assets is about 45% at this point and Schwab is keen to grow this. These RIAs are using
multiple custodians. The firm should be able to get more of the assets by eliminating the
need to have multiple custodians. There could be a benefit to the RIA to deal with one
custodian, but the RIA has to be comfortable with the product offering, service, and
counterparty risk. We believe that Schwab can address these concerns over time.
Advisory opportunity to deepen share of wallet; could add $3 to
$5 to valuation
We believe there is a significant opportunity to generate advice-based revenues from retail
clients by increasing the share of wallet from currently 17% to the industry standard of
30%.
Currently, Schwab manages about $183 billion of retail client assets under an advisor
relationship. Thus, only about 17% of the current retail clients’ AUM receive some sort of
advice. This compares to about 30% to 35% for the wirehouses. Put differently, we believe
there is an opportunity to gain some of the 83% of assets that are currently “self-directed”.
Assuming that the firm manages to achieve the wirehouse-average of 30% of assets in an
advisory relationship, we think there could be a significant opportunity to add to earnings
and valuation.
Exhibit 7: Increasing the share of wallet to 30% could add $0.12 to $0.20 to earnings
Assumed incremental margins 35% 40% 45% 50% 55% 60%
Incremental EPS per diluted share @
18% share of wallet $0.01 $0.01 $0.01 $0.01 $0.01 $0.02
19% share of wallet $0.02 $0.02 $0.02 $0.03 $0.03 $0.03
20% share of wallet $0.03 $0.03 $0.03 $0.04 $0.04 $0.05
21% share of wallet $0.04 $0.04 $0.05 $0.05 $0.06 $0.06
22% share of wallet $0.04 $0.05 $0.06 $0.06 $0.07 $0.08
23% share of wallet $0.05 $0.06 $0.07 $0.08 $0.08 $0.09
24% share of wallet $0.06 $0.07 $0.08 $0.09 $0.10 $0.11
25% share of wallet $0.07 $0.08 $0.09 $0.10 $0.11 $0.12
26% share of wallet $0.08 $0.09 $0.10 $0.11 $0.13 $0.14
27% share of wallet $0.09 $0.10 $0.11 $0.13 $0.14 $0.15
28% share of wallet $0.10 $0.11 $0.13 $0.14 $0.15 $0.17
29% share of wallet $0.11 $0.12 $0.14 $0.15 $0.17 $0.18
30% share of wallet $0.12 $0.13 $0.15 $0.16 $0.18 $0.20
@ 50 bps management fees
Source: Company filings; RBC Capital Markets estimates
The above scenario assumes retail AUM of $1,077 billion. Furthermore, we are assuming a
38% tax rate. Applying a 25x P/E multiple on these earnings would add anywhere from $2.89
to $4.95 to valuations by our calculations—this excludes any organic growth.
Schwab can generate
revenues in multiple ways
when serving as a
custodian: Management
fees on funds and ETFs,
commission revenues, and
shelf space fees charged to
fund manufacturers are
just some examples
The firm could add about
$3–$5 per share to its
valuation by broadening its
advisory relationship with
clients from 17% to an
industry average of 30%

Exhibit 8: At 30% share of wallet, valuations could improve between $3 to $5
Assumed incremental margins 35% 40% 45% 50% 55% 60%
Incremental EPS per diluted share @
18% share of wallet $0.22 $0.25 $0.29 $0.32 $0.35 $0.38
19% share of wallet $0.44 $0.51 $0.57 $0.63 $0.70 $0.76
20% share of wallet $0.67 $0.76 $0.86 $0.95 $1.05 $1.14
21% share of wallet $0.89 $1.02 $1.14 $1.27 $1.40 $1.52
22% share of wallet $1.11 $1.27 $1.43 $1.59 $1.74 $1.90
23% share of wallet $1.33 $1.52 $1.71 $1.90 $2.09 $2.28
24% share of wallet $1.55 $1.78 $2.00 $2.22 $2.44 $2.66
25% share of wallet $1.78 $2.03 $2.28 $2.54 $2.79 $3.05
26% share of wallet $2.00 $2.28 $2.57 $2.85 $3.14 $3.43
27% share of wallet $2.22 $2.54 $2.85 $3.17 $3.49 $3.81
28% share of wallet $2.44 $2.79 $3.14 $3.49 $3.84 $4.19
29% share of wallet $2.66 $3.05 $3.43 $3.81 $4.19 $4.57
30% share of wallet $2.89 $3.30 $3.71 $4.12 $4.54 $4.95
@ 50 bps management fees
Growth in usage of ETFs could boost asset growth at Schwab
We expect demand for ETFs to increase, providing Schwab with an opportunity to add to its
assets under management and revenues. The company offers proprietary and third-party
ETFs.
We expect exchange traded funds (ETFs) to continue to gain market share. A recently
published study by PricewaterhouseCoopers (ETF 2020 – Preparing for a new horizon)
suggests that global ETF assets could grow from $2.6 trillion in 2014 to $5 trillion by 2020.
Our own research shows that a majority of active managers were not able to beat their
benchmark in 11 out of 13 years under review. We think that ETFs will become increasingly
popular and that Schwab should benefit from this trend in multiple ways:
 It offers its own proprietary ETFs;
 Schwab earns a “program fee” of up to $250,000 for each ETF on its platform that
participates in ETF OneSource;
 It also earns an annual asset fee of up to 15 basis points on the total ETF asset purchased
by customers; and
 The firm earns trading commissions when a client buys/sells ETFs that are not on the
OneSource platform.
Schwab has a number of proprietary ETFs across three core asset classes (domestic equities,
international equities, and bonds). It offers these products in two different flavors: market-
cap index ETFs and fundamental index ETFs. These products are offered commission free, but
the company generates revenues through management fees. As the exhibit below shows,
Schwab’s ETFs are very competitively priced.
PwC expects the ETF
market to double in size by
2020 and our research
supports this as active
managers continue to lag
their benchmarks

Exhibit 9: Schwab’s ETFs are very competitively priced (2014)
Strategy Schwab Vanguard iShares
Multi-cap core 4 bps 5 bps 15 bps
Large-cap core 4 bps 9 bps 7 bps
Large-cap growth 7 bps 9 bps 15 bps
Large-cap value 7 bps 9 bps 18 bps
Equity income 7 bps 10 bps 12 bps
Mid-cap core 7 bps 9 bps 14 bps
Small-cap core 8 bps 9 bps 14 bps
Real estate 7 bps 10 bps 35 bps
Core bond 6 bps 8 bps 8 bps
Inflation protected bond 7 bps 10 bps 10 bps
Short-term US Treasury 8 bps n/a 15 bps
General US Treasury 10 bps 12 bps 15 bps
Source: Company reports; RBC Capital Markets
In addition, Schwab offers a product called Schwab ETF OneSource. This platform allows the
firm’s customers to trade about 200 exchange traded funds from 13 providers commission
free. The exhibit below compares Schwab’s offering versus its peers.
Exhibit 10: Schwab has the broadest ETF selection among peers (2014)
Schwab E*TRADE AMTD Fidelity
Commission free ETFs 198 108 101 76
# of ETF providers 13 3 9 2
Morningstar categories covered 64 37 44 51
As active managers underperform their benchmark, we would expect Schwab to
be a beneficiary of increased demand for passive strategies
We would expect continued growth in the usage of exchange traded funds and indexed
funds. As we have outlined in our industry note, we are continuing to see a majority of active
asset managers underperform their benchmark. Performance in 2014 seems to have gotten
worse, not better.
Exhibit 11: Active managers continued to underperform in 2014
ALL US open-ended funds
Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14
# of funds beating benchmark 2550 2598 2522 2599 2524 2457 2318 2530 2416 2397 2315 2213 2083
# of funds with data 5904 5959 5964 5968 5972 5977 5979 5985 5987 5989 5995 5996 5995
% of funds beating benchmark 43.2% 43.6% 42.3% 43.5% 42.3% 41.1% 38.8% 42.3% 40.4% 40.0% 38.6% 36.9% 34.7%
ALL US open-ended FIXED INCOME funds
ALL US open-ended EQUITY funds
Note: 1-year returns ending in the month. Benchmark used is the primary prospectus benchmark for each fund. Actively managed US mutual funds, ex-index funds. Fund returns exclude sales charges, but include
management, administrative, and 12b-1 fees.
Source: Morningstar, RBC Capital Markets

Exhibit 12: A majority of active managers beat their benchmark only twice in a 13-year period
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Note: Benchmark used is the primary prospectus benchmark for each fund. Actively managed US mutual funds, ex-index funds. Fund returns exclude sales charges, but include management, administrative, and
12b-1 fees.
Source: Morningstar, RBC Capital Markets
There are many reasons for this underperformance: poor stock picking, wrong asset
allocation, or simply managers “hugging” their benchmark, which could result in
underperformance net of fees.
Thus, there could be continued outflows from mutual funds and into passive products,
especially in equities. In fact, we have seen continued outflows from actively managed
domestic equity funds, with domestic equity index funds seeing the inflows.
Exhibit 13: Passive strategies received $795 billion of inflows cumulatively since 2007 ($ in
billion)
$(800)
$(600)
$(400)
$(200)
$-
$200
$400
$600
$800
$1,000
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Index domestic equity mutual funds Domestic equity ETFs
Actively managed domestic equity mutual funds
Note: Cumulative flows and net share issuance to domestic equity funds.
Source: ICI, RBC Capital Markets
What are the implications? Growth in ETFs could benefit discount brokers. There are
multiple levers for Schwab to generate revenues from this trend. A recent win by Schwab
demonstrates that the trend towards ETF investing could increase as even the “naysayers”
seem to warming up to the product. We are referring to the Mutual Fund Store’s decision to
offer ETFs. Schwab is the custodian serving Mutual Fund Store clients. For the longest time,
Mutual Fund Stores had been a stringent opponent of ETFs—until late 2014, when this
company-independent RIA decided to add ETFs to its product offering starting in 2015. The
Overland Park, Kansas-based company (home of Waddell & Reed), currently manages about
$9.5 billion in client assets. One should expect several hundred million of these assets to
move into ETFs. Higher ETF assets under management could translate into higher earnings as
Schwab generates revenues on multiple fronts. The firm also gets compensated for shelf
space by ETF sponsors. The chart below shows total net assets for passively managed ETFs in
the US.

Exhibit 14: ETF assets under management have grown at a CAGR of 22.7% since 2005
276
382
547
465
686
886 934
1,201
1,474
1,735
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
AUM($B)
Passively Managed, Long-term ETF AUM
Source: Morningstar; RBC Capital Markets
Consider this: While assets under management have grown at a compounded growth rate of
22.7% since 2005, assets for actively managed US open-ended funds have grown at a rate of
8.5% for the same time period. As of the end of 2014, ETFs composed about 15% of the
combined assets. We believe there is further growth momentum.
There has been an increase in exposure to ETFs and there is further growth potential among
existing users. Schwab’s 2014 ETF Investor Study found that ETFs make up only about 18% of
the assets of investors who hold them in their portfolios. As a comparison, a 2008 study
found that while 80% of RIAs owned ETFs, the average exposure to ETFs was only 10%. As for
the future, about half of all investors think that ETFs will be a larger portion of their total
portfolio. And an earlier study done by Schwab in 2013 (Independent Advisor Outlook Study
– Fall 2013) concluded that 55% of the RIAs think that future client investment interest will
focus on low-cost index funds and ETFs. We think the writing is on the wall.
Despite the company’s size and its diverse product offerings, Schwab continues to introduce
new products to capitalize on the ETF opportunity. For instance, the company launched
Schwab Index Advantage 401(k) plans in 2012. This product combines internal and external,
low-cost index funds with third-party investment advice services. Two years later, in 2014,
the company built upon this platform and introduced a second version of this product using
ETFs only. This is yet another example of a disruptive product that the company launched.
Certainly, there are intense discussions among pension consultants whether having an ETF in
a 401(k) plan makes sense as there is potential for tracking error and no need for intraday
liquidity. Some think that employers will not add ETFs to their 401k offering if the
consultants do not recommend those. After all, revenue-sharing helps to pay for the costs of
operating a pension plan. ETFs would not provide such arrangements or not to the same
degree as actively managed mutual funds, i.e., there is less of an incentive for pension
consultants to include ETFs in a pension plan. This is the kind of idea that could once again
change the status quo. Certainly, others have introduced similar products. TD Ameritrade’s
product gives plan participants the choice between mutual funds and ETFs. However, given
Schwab’s marketing power and its ability to cut fees, we would expect increased demand for
a low-cost retirement product offering. Assuming an employee works and saves over the
next 40 years, a reduction in fund expenses could significantly boost returns.
The firm has come a long way despite entering the ETF space late. Schwab introduced its first
ETFs in 2009 and had $200 million of assets under management (AUM) as of December 2009.
Schwab continues to
introduce products most
industry participants would
consider disruptive – such
as ETF-based 401k plans
and a “robo-advisor”
Despite recent growth, we
estimate that ETFs
comprise about 15% of
total retail assets in the US.
We believe there is room
for growth

The industry had about $690 billion of AUM at that point. Today, Schwab manages about $27
billion of assets in its proprietary exchange traded funds. This shows the power of
distribution, especially since its competitors have been claiming that their ETFs would not sell
as they did not have the liquidity needed to succeed. The 401k industry is about $3.2 trillion
in size and Schwab has a 3.1% market share. Close to 100% of the assets are currently in the
company’s traditional 401k plans. There is certainly an opportunity for growth, despite the
firm’s limited target market of plans with $20m to $1 billion of plan assets.
Robo-advisors could help the firm grow assets by focusing on an
untapped market
We view the robo-advisor product as an opportunity to tap a new market: We believe that
Schwab could grow its assets by providing services to the general public who have been
unable to retain professional asset allocation advice.
Another product that could significantly alter the current landscape are robo-advisors. Robo-
advisors are online portfolio management tools that help determine an optimum asset
allocation strategy relying on algorithms and Modern Portfolio Theory. We believe that this
product will allow Schwab to target a new client base that it had not previously, namely parts
of the mass market and the middle market. Schwab believes that this is a $400 billion
market. We believe that this could be a conservative assumption given that households with
investable assets of less than $500,000 hold combined assets of $7 trillion. We view this
opportunity as an option and do not incorporate associated earnings into our model.
We are optimistic about this product as early surveys point to a high uptake rate. Charles
Schwab provided some context during its 2015 Winter Business Update. About 83% of the
company’s retail assets are currently self-directed. Management stated that it has been to 15
branches since the beginning of this year and that there is significant interest in Schwab’s
robo-advisor. About half of the financial consultants management met with stated that they
have won clients from competing firms in anticipation of enrolling in Schwab’s robo-advisor
called “Schwab Intelligent Portfolios” (SIP).
Schwab is currently introducing SIP to its retail clients, and will roll out to RIAs shortly
thereafter. It offers a number of exchange traded funds to customers to construct their
portfolios. This product will be an RIA offering (RIA advisory account vs. brokerage account),
meaning that it will be a fiduciary-based product. In fact, management stated that only one
of the ETFs it offers on Schwab ETF OneSource passes the screen to be on this platform.
The firm will not charge advisory fees, trading commissions, or account-servicing fees.
However, the firm will earn fund-management fees on Schwab’s proprietary ETFs, platform
revenues from ETF providers, and will be able to earn a yield on cash balances held by
clients. The ultimate goal is to attract new clients outside its core baby boomer base, namely,
Generation X and Millennial clients. This product is important, as it should allow the firm to
move “down-market”, targeting less-affluent clients.
Sure, Schwab is not the first firm to offer this technology. However, we would expect an
increased adoption rate among consumers once Charles Schwab puts its marketing machine
into gear. We would expect Schwab to surpass competitors in terms of AUM given the firm’s
relationship with over 7,000 independent RIAs who manage about $2.4 trillion in assets.
We believe that the impact of technology on financial advisors could be similar to that of
exchange traded funds on active managers. Will robo-advisors put human advisors out of
work? We do not believe so, but they will have to work harder to retain assets if they are

targeting the mass-affluent segment. There could also be fee pressure unless human advisors
can demonstrate that they are providing genuine value-added services. However, advisors
who are merely in the asset gathering business could lose assets as investors could use
Schwab’s robo-advisor to construct an auto-balancing portfolio based on their individual risk
profile and investment horizon. We believe some advisors will have to rethink their approach
and refocus on providing value-added advice. Based on Schwab’s Independent Advisor
Outlook Study, which was given to 720 advisors and published June 2014, 56% of the
advisors responded that they believe robo-advisors can supplement their current offer/help
grow their business. The remaining 44% see robo-advisors as a threat to their business.
Concluding thoughts on ability to grow assets
We do not believe that Charles Schwab’s ability to grow assets is constrained by the firm’s
size. In fact, we would expect strong growth given secular tailwinds.
A key question on investors’ minds is whether the firm will be able to grow assets as it is
already the largest discount broker by a wide margin. Our answer would be yes and, as we
stated at the beginning of this note, it all comes down to the company’s culture. We believe
that the company has demonstrated, over time, that it is willing to explore new
opportunities and navigate uncharted waters in pursuit of profit. The organization is
constantly evolving and innovation remains a key driver of the firm’s success. Charles
Schwab seems to have a very good understanding of consumer behavior and market
dynamics – and is willing to adapt to these changes in order to capitalize on the opportunity
set. However, management is not taking a “risk it all” approach. It is content with being an
early adopter, as demonstrated above, if the long-term growth opportunity justifies the
investment. We think the company’s culture reflects this, and believe that it provides the
appropriate mix of entrepreneurial spirit and risk management.
The exhibit below shows the evolution of Schwab in pursuit of opportunities. While trading
contributed to total revenues to the tune of 40% a decade ago, commissions comprise only
about 15% of total revenues today.
Exhibit 15: Today, Schwab is less dependent on commission revenues than ever
39% 40%
15%
49%
21%
38%
7%
27% 42%
12%
6%4%
0%
20%
40%
60%
80%
100%
120%
1990 2000 2014
Commissionrevenues Interest revenues Asset management Other
Source: Company filings; RBC Capital Markets
An added benefit of this evolution is that the firm’s diversified revenue mix should provide
added downside protection versus its peers. Trading is highly dependent on volatility and
We like the fact that
Schwab continues to
explore a multitude of
opportunities to find
catalysts of growth—the
firm’s change in revenue
mix reflects this effort

consumer sentiment and revenue trades can vary significantly from period to period. Thus,
having multiple levers to pull could dampen the impact of a slowing economy.
Exhibit 16: Schwab’s revenue mix is the most diversified among its peers (2014)
15%
43%
25%
38%
19% 60%
42%
36%
10%
2% 5%6%
0%
20%
40%
60%
80%
100%
120%
SCHW AMTD ETFC
Commissionrevenues Spreadrevenues Feerevenues Other
And the evolution continues: Schwab expects trading revenues to contribute less
prominently than today as it grows the top line. The firm provided some context around
where it sees trading revenues trending as it grows its total revenues from $6 billion in 2014
to $10 billion in the coming years and ultimately to $12 billion. Exhibit 17 depicts this.
Exhibit 17: Management expects contribution from trading revenues to decline as it grows its
top line
85%
90% 91%
15%
10% 9%
75%
80%
85%
90%
95%
100%
105%
2014 Actual Revenues reach $10B Revenues reach $12B
Other revenues Trading revenue
Source: 2015 Winter Business Update; RBC Capital Markets
Certainly, Charles Schwab is the well-known 800-pound gorilla among discount brokers. The
firm manages more assets than its two public peers combined. The question then becomes
whether Schwab can grow at a swift pace. We believe so. The exhibit below shows growth
over a period of five years (2009 to 2014) for the following: average organic growth rate for
client assets, growth in average fee-based investment assets, and growth in interest-earning
assets. While TD Ameritrade was able to grow at a faster pace than Schwab in terms of client
assets and interest-earning assets, Schwab was able to grow fee-based assets at a much
faster pace.
We do not view the firm’s
size as a hindrance to
growth—recent data
supports this

Exhibit 18: Schwab’s five-year compound annual growth rate versus peers (2009 to 2014)
5%
11%
5%
24%
20%
n/m
16% 17%
-2%-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
SCHW AMTD ETFC
Client assets organic growth Avg. fee based investment balances Avg. Interest rate sensitive assets
What are our expectations for asset growth? We remain optimistic that the firm will
continue to grow its balance sheet smartly. Management provided some guidance during its
Interim Business Update in October 2014. It expects to add about $12–$15 billion to its
interest-earning assets in 2015. Investors were provided with a breakdown of these new
assets: $6bn will be due to organic growth of money funds; $3bn–5bn will be added from
changing sweep account thresholds for advisors, and $3–4bn will be in potential bulk
transfers. Our 2015 earnings estimate incorporates asset growth at the lower end of this
guidance, leaving room for a positive surprise. As for 2016, we are assuming that total
interest-earning assets could grow by about $13 billion as interest rates rise. The main
drivers of asset growth are innovative products that meet clients’ needs and distribution, in
our view. Schwab has both. Going back to our ETF example, Schwab did not have a presence
in the market in 2009. Today, the firm is a top 8 ETF provider.
However, there are also other initiatives that can add to balance sheet growth. The firm is
optimizing how it uses its balance sheet. Schwab recently announced changes to its sweep
account option and is now routing more of the new cash from clients onto their balance
sheet, as opposed to the broker–dealer business. Previously, if an advisor had client assets of
over $100,000, any cash held by the client would qualify to be invested in money market
funds. The hurdle rate for retail clients was $500,000, as a comparison. Schwab has raised
the limit to use money market funds as a sweep option to $500,000 for clients of its
independent advisors. Consequently, the firm expects to direct more cash onto its balance
sheet where it currently earns a yield of 160 bps, versus 12 bps on money market funds. The
yield of 160 bps could grow to over 300 bps in a normal rate environment. The yield on
money market funds is about 55 bps in a normal rate environment.
The firm has raised the threshold for the bank sweep default from advisor services to $500k
a month ($1.5bn a quarter), so that it syncs with the retail services. Clearly, the sweep assets
that can be invested on its balance sheet are one of the most profitable cash products, with
Schwab earning about 145 bps above what it could at the broker–dealer. However, there will
be some limitations to growth, as Schwab would have to hold additional capital to support
the balance sheet. As a reminder, there are no capital charges for money market funds as
these are segregated assets.
As for the future, we
expect growth to be driven
by smarter usage of its
balance sheet, increased
cross selling, and
introduction of new
products

We expect incremental contributions to earnings growth and margin
expansion from rising interest rates and efforts to control costs
We expect rising interest rates to benefit Schwab’s earnings
more than that of its peers
Schwab is by far the most asset sensitive of the discount brokers. We estimate a 50 bps
increase in short term rates could add about $0.31 to earnings per share (33% accretive
based on 2014 EPS).
Our Chief US Economist, Tom Porcelli, holds a constructive view on the economy and expects
the first Fed hike as early as June. Specifically, he expects the three-month treasury rate to
be 90 basis points by the end of 2015 and to increase to 280 basis points by 2016. Likewise,
he believes that the rate on the two-year Treasury note could increase from 66 basis points
as of the end of 2014 to 200 basis points by the end of 2015 and further to 320 basis points
by 2016.
Our Head of US Rate Strategy, Michael Cloherty, holds a similar view and expects rate
increases in the near term. More importantly, he expects rate increases to happen gradually
over time for the following reasons: First, the Fed needs to learn to use its new tools in an
utterly changed regulatory environment. The Fed will be treading carefully in order not to
negatively impact the economic recovery. Second, the massive volatility we saw on October
15, 2014 suggests the market will not be able to handle rapid tightening, and as the Fed can't
move rapidly without shocking the markets, it will need to start tightening its monetary
policy well before inflation appears.
We would be buyers of Schwab under this premise. Our analysis demonstrates that the
firm’s earnings are the most sensitive to movements in short-term rates and should benefit
disproportionately from rising rates.
To be precise, about 75% of the firm’s assets are sensitive to movements in short-term rates.
One of the key drivers of this interest rate sensitivity is money market funds. Charles Schwab
is the only discount broker that offers proprietary money market funds to its clients. In fact,
Charles Schwab is the seventh largest money market mutual fund manager in the US. As of
4Q/14, the firm was managing close to $168 billion of money market funds. While this
exposure has been a hindrance to earnings growth in the current low interest rate
environment, we expect the company’s shares to outperform its peers in a rising rate
environment.
Consider this: Instead of earning a normalized fee of 58 basis points (bps) on its money
market fund assets, the company was able to earn an effective fee rate of only 13 bps during
the most recent quarter. Like other money market fund managers, Charles Schwab
voluntarily “waived fees” to ensure that investors were not earning a negative yield on the
funds. These money market fund fee waivers are material. The exhibit below shows the
amount of money market fund waivers over time. The past year stands out with $751 million
of revenues that were lost as Schwab reduced its management fees to ensure clients would
not experience negative returns on their cash balances.
Our Chief US Economist
and our Head of US Rate
Strategy both expect the
Fed to start tightening its
monetary policy at a
measured pace this year

Exhibit 19: Money market fund fee waivers have been increasing since 2009 ($ in millions)
$224
$433
$568 $587
$674
$751
$-
$100
$200
$300
$400
$500
$600
$700
$800
2009 2010 2011 2012 2013 2014
Should short-term interest rates rise, we could see a significant uptick in earnings at Schwab.
Unlike asset managers who have been “sharing the pain” with distributors when interest
rates declined, Schwab had to absorb the impact of money market fee waivers dollar-for-
dollar. Thus, when interest rates start increasing, Schwab should be able to experience
accelerated earnings growth relative to asset managers such as Federated Investors (ticker:
FII) that will now have to share the incremental management fee revenues with their
distributors as interest rates rise. Schwab is the only discount broker among its peers
providing proprietary money market funds.
Assuming interest rates rise to pre-financial crisis levels allowing Schwab to earn 58 bps on
its money market mutual funds, a 38% tax rate, and no growth in money market fund AUM,
we calculate incremental earnings of $0.16 per diluted shares. This estimate is based on an
assumption that about 60% of money market fund assets would not have to waive fees,
Schwab keeps 25% of the incremental revenues for growth initiatives and invests the capital
back into the business. Furthermore, we are using our 2015 projected diluted weighted
average share count of 1,327 million shares. As a reference point, Schwab earned $0.95 per
diluted share in 2014. Thus, we estimate a rise in interest rates would be accretive to the
tune of 17% based on 2014 earnings.
The current rate environment is certainly unusual given historical patterns and not
sustainable over the long run, in our view. The exhibit below alludes to this and shows the
effective federal funds rate over time. As a reference, this rate was around 5% in 2006 and
2007.
EPS could increase by 16
cents if 60% of money
market fund assets were
not to waive fees with
higher rates

Exhibit 20: Monetary easing has resulted in record low federal fund rates
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1955
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
Source: Board of Governors of the Federal Reserve System; RBC Capital Markets
We estimate that a rise of 45 bps in the federal funds rate should result in the elimination of
60 percent of fee waivers.
Money market fund waivers impact asset management and administration fee revenues.
However, this is not the only component of revenues that could be positively impacted by
rising rates. Net interest revenues contribute to a significant portion of revenues. Broker–
dealers are putting clients’ cash to work in a similar fashion to a bank. Discount brokers earn
a yield on these “interest-earning assets”. In its 10k filings, the company provided the results
of a simulation of changes in interest rates and the impact on net interest revenue. The
exhibit below assumes a 100-bps gradual increase/decrease in market interest rates relative
to Schwab’s market rates forecast over a 12-month period (base case).
Exhibit 21: Impact on net interest revenue from rising interest rates seems meaningful
11.1% 11.0%
-4.2% -4.5%
-9%
-4%
1%
6%
11%
16%
Sep 30, 2014 Dec 31, 2013
Increase of 100 bps Decrease of 100 bps
We can only assume what the base case assumption is for the firm. Thus, we do not view the
sensitivity provided by the firm in its annual filings as useful.

Our approach to determine Schwab’s interest rate sensitivity
Charles Schwab has provided some data points, which we used to come up with our interest
rate sensitivity. The company disclosed that a 100-bps increase in rates will add about 60 bps
to net interest margins. A further 100-bps increase will add another 60 bps. Assuming
average interest-bearing assets of $142.5 billion, the first 100-bps increase would add $855
million of incremental net interest revenue, while a 200-bps increase would add about $1.7
billion of incremental revenue. There seems to be a linear relationship. Hence, if we assume
a 50-bps increase in interest rates, net interest revenues could add about $0.32 per diluted
share—again, we are using our projected share count of 1,327 million shares. Were we to
assume that 75% of this amount flows through to shareholders and a 38% tax rate, we
calculate earnings could increase by $0.15 on top of the $0.16 from recouping 60% of money
market fund fee waivers. Thus, earnings could pick up by $0.31.
We believe that the impact on earnings from a 50-bps increase will be driven by elimination
of money market fund fee waivers and expansion of net interest revenues. Thereafter, net
interest revenue will be the main driver of earnings expansion. We show this below.
Exhibit 22: Elimination of fee waivers could meaningfully add to EPS
Assumed margins
Money Market Funds 70% 75% 80% 85% 90%
2014 Fee waivers ($MM) $751 $751 $751 $751 $751
Recovery percentage 60% 60% 60% 60% 60%
Fee rate 13bps 13bps 13bps 13bps 13bps
Normalized rate 58bps 58bps 58bps 58bps 58bps
Delta 45bps 45bps 45bps 45bps 45bps
Incremental revenues for 50 bps increase
in rates $451 $451 $451 $451 $451
Tax rate 38% 38% 38% 38% 38%
Share count (2015E) 1,327 1,327 1,327 1,327 1,327
EPS Impact $0.15 $0.16 $0.17 $0.18 $0.19
Source: Company reports; RBC Capital Markets estimates
The exhibit below shows impact on earnings using various margin and changes in interest
rate assumptions:
Elimination of fee waivers
could add $0.16 to earnings
per diluted share, assuming
that the company retains
25% of revenues for growth
initiatives

Exhibit 23: Impact on EPS due to margin expansion
Assumed margins
Net interest revenue 70% 75% 80% 85% 90%
Average interest-earnings assets ($B) $142.5 $142.5 $142.5 $142.5 $142.5
Incremental revenues ($MM) - 50 bps $427.5 $427.5 $427.5 $427.5 $427.5
Incremental revenues ($MM) - 100 bps $854.9 $854.9 $854.9 $854.9 $854.9
Incremental revenues ($MM) - 200 bps $1,709.9 $1,709.9 $1,709.9 $1,709.9 $1,709.9
Tax rate 38% 38% 38% 38% 38%
Share count (2015E) 1,327 1,327 1,327 1,327 1,327
EPS Impact - 50 bps $0.14 $0.15 $0.16 $0.17 $0.18
EPS Impact - 100 bps $0.28 $0.30 $0.32 $0.34 $0.36
EPS Impact - 200 bps $0.56 $0.60 $0.64 $0.68 $0.72
While there are a number of assumptions in our analysis, the main point should not be
missed. Rising interest rates will have a significant impact on earnings. Thus, assuming no
growth, we estimate elimination of fee waivers and higher net interest revenues could add
about $0.31 to earnings. Put differently, 2014 earnings per share could have been 30%-plus
higher in a more benign interest rate environment.
The company provided an updated earnings-sensitivity to movements in the Federal Funds
rate in February 2015, which seems consistent with our analysis. Management expects the
first 100-bps increase to add about $1.6 billion to revenues. It expects a further 100-bps
increase to add an incremental $800 million to revenues. Thus, revenues could rise by $2.4
billion for a 200-bps move in the Federal Funds rate without any asset growth. Based on this
model, earnings could move about $0.28 for a 50-bps increase in rates, were we to assume a
margin of 75%, a 38% tax rate and 1,327 million diluted shares outstanding. While this figure
seems slightly more conservative than our own calculation, one should not ignore that $0.28
would still be 29% accretive to 2014 earnings.
Expense saves could add to the bottom line and help expand
margins
Controlling expenses will continue to remain a priority at Schwab with its clients
benefitting in the form of lower fees. Expense savings should lead to increased investments
in new products, revenue growth and better margins.
Another driver of margin expansion and earnings growth could be expense saves. We believe
that the current efforts to control costs in combination with an increase in revenues could
bear fruit over coming years. While the company does not provide specific guidance on the
dollar amount of expense saves, it discloses certain efforts. A recent one of these efforts
would be the relocation of employees from higher cost locations such as San Francisco to
lower cost markets such as Denver, Austin and El Paso. Management indicated that this is a
multi-year effort. The goal is to relocate about half of the 2,400 employees that are currently
working out of the San Francisco office. There are first signs that the management is moving
forward with its plan. The past year’s margins were compressed as the company is altering
its geographic footprint. Schwab took a severance charge of $68 million in 3Q/14.
A 50-bps move in short-
term rates could add $0.15
to earnings per share;
however, should rates
move by 200 basis points,
investors could see an
increase of $0.60 in EPS—
assuming 75% incremental
margins

While we do not believe that there will be any impact on 2015 expenses from this initiative,
we would expect expense growth to slow down starting in 2016. Currently, just a small
number of employees have relocated. The pace of moves should pick up in later 2015 and
continue into 2016. The exhibit below shows the potential impact on EPS assuming that
1,000 employees had been relocated.
Exhibit 24: We estimate the current relocation efforts could save around $26 million
Employees relocating 1,000
Average salary assumption $65,000
Cost savings based on cost-of-living adjustments
Austin (TX) 43.3%
El Paso (TX) 43.8%
Denver (CO) 34.7%
Average savings 40.6%
Average savings $26,392,167
Sharecount (m) 1,338
Pre-tax impact on EPS $0.02
Source: Bankrate.com; RBC Capital Markets estimates
We estimate that this effort could add about 30 basis points to margins in 2016. While the
current initiative to relocate employees is not a key contributor to earnings growth, investors
should be aware that it is one of many initiatives to control the growth of expenses. Other
efforts to improve efficiency include subleasing one building in San Francisco or enrolling
clients in paperless statements.
The broader goal is to grow expenses at a slower pace than earnings. The firm intends to
reinvest cost savings back into the company, allocating capital to new products and to drive
down fees that the firm charges its clients. Thus, the ultimate goal from cost-saving
initiatives is not merely a reduction in the expense base, but top-line growth through
competitive pricing. Thus, the company needs to be judged by how fast it can grow its
margins and we believe that the firm’s size can be a significant advantage.
We believe there is a meaningful amount of operating leverage embedded in Schwab’s
business model, given the firm’s size and reliance on technology to drive margins. The chart
below shows expenses as a percentage of average client assets.
We estimate that the
relocation of employees
from higher cost locations
such as San Francisco to
lower cost markets such as
Denver, Austin and El Paso
could save the firm $26
million per year – this
excludes revenues
generated by subleasing
one of their two buildings
in San Francisco

Exhibit 25: Schwab’s cost base appears to be the lowest among peers
0.64%
0.58%
0.55%
0.33%
0.18%
0.60%
0.56%
0.41%
0.29%
0.17%
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
MS BoA ETFC AMTD SCHW
2013 2014
Given our expectation of increasing interest rates, balance sheet growth, and efforts to
control costs, we would expect a significant improvement in the company’s pre-tax margins
over the next three years. We are showing our estimates below.
Exhibit 26: Schwab’s margins have been expanding constantly, with further improvement
projected
30%
18%
30% 30%
31%
35%
37%
45%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2009 2010 2011 2012 2013 2014 2015E 2016E
How has Schwab done historically in controlling expenses? We have analyzed expenses as a
percentage of ending client assets over time and have found that Schwab was able to control
expenses beginning in 2010. The exhibit below depicts this. For our model, we are assuming
that expenses as a percentage of ending client assets will not decline further in arriving at
our earnings estimates. One could argue that this is a conservative assumption. However, we
are expecting pre-tax operating margins to expand north of 40% despite the conservatism
over the next two years.

Exhibit 27: Schwab is benefiting from economies of scale as it is growing assets (expenses as
% of ending client assets)
0.21%
0.22%
0.20%
0.18%
0.17% 0.16% 0.16% 0.16%
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
2009 2010 2011 2012 2013 2014 2015E 2016E
Note: Calculated using simple averages; figures differ from expense ratios provided by the companies in Exhibit 25
The firm disclosed during its recent Business Update meeting that while assets have grown
by 75% over the last five years, expenses have increased by 35% only. The key takeaway
would be that Charles Schwab is more efficient than wirehouses and its peers. Thus, we
would expect asset growth to add incrementally more to the bottom line versus peers.
Charles Schwab provided some guidance for 2015 during its Business Update meeting in
February. The firm wants the gap between revenue and expense growth to be at least 150
basis points. Could there be some conservatism in this figure? We believe so. Management
had set a goal of growing revenues by 300 to 500 basis points faster than expenses. The firm
ended the year with a gap of 580 basis points.
While there are a number of short-term catalysts that could lead to strong performance, we
believe that Charles Schwab has created a strong franchise that could bode well for asset
growth. The following section will cover these growth opportunities.

Where we could be wrong
Interest rate sensitivity could be a headwind, compressing net
interest margins, if rates do not rise
We consider Schwab to be the most asset sensitive discount broker. Our investment thesis is
based on our expectation that interest rates rise. This perspective is based on our house view
that the Federal Reserve Bank could raise interest in mid-year. However, it is difficult to
predict with certainty what might/could expire in the current year. There are certain global
developments to consider.
Investors view the US dollar as a safe haven. Geopolitical and economic difficulties abroad
could lead to capital influx into the US, offsetting any efforts undertaken by the Board of
Governors of the Federal Reserve System to raise interest rates. Lower interest rates would
mean continued fee waivers on money market funds and thus lower revenues than we
expect.
Absent of a meaningful revenue growth, it would be difficult for Schwab to expand margins
as the cost-cutting efforts are really reducing expenses. These efforts are geared towards
reducing the pace of expense growth.
Given reliance on offices and infrastructure, higher than
expected investments could lead to lower margins
Another “drag” on earnings could be increased investments in infrastructure. Unlike its
peers, Schwab relies extensively on its branch offices. There are currently over 300 branch
offices and our discussions with the company indicate that this number could increase as
interest rates rise. Their market research indicates that affluent clients are more likely to use
branches in a higher rate environment. We assume that this could be driven by perceived
wealth as rising rates point to a stronger economy and higher stock market valuations.
Assuming we are right with our expectation that interest rates do indeed rise, the company
could incur additional expenses not factored into our model. Put differently, margin
expansion at Schwab could fall below our estimate as the company expands its branch
offices.
Schwab is under the supervision of a number of regulators
putting the company at a disadvantage with respect to capital
deployment
Given the company’s size and business model, Schwab is under the supervision of a number
of regulators. The Charles Schwab Corporation (CSC) is a savings and loan holding company
and Schwab Bank is a federal savings banks. While CSC is regulated by the Federal Reserve
Bank, Schwab Bank is regulated by the Office of the Comptroller of the Currency. Schwab’s
principal broker–dealers are members of FINRA and are also regulated by the Commodities
Futures Trading Commission. Furthermore, Dodd-Franks created the Consumer Financial
Protection Bureau, which could negatively impact the range of products offered and the
profitability of products sold by Schwab.
As one can see, a number of regulators control how the company conducts its business and
ultimately determine how much capital Schwab can return to its shareholders in the form of
dividends and share buybacks. This is in stark contrast to TD Ameritrade, which operates
under a “capital light model” and under less regulatory scrutiny.

Given the size of Schwab Bank, with a balance sheet of $105.6 billion, the firm has to comply
with rules that don’t apply to its peers. An example of this would be a quantitative liquidity
requirement consistent with the liquidity coverage ratio (LCR) standard established by Basel
III. The LCR ratio compares the ratio of high-quality liquid assets that the firm needs to hold
to potential cash outflows under certain scenarios. While LCR applies to all international
banks, Schwab has to comply with a modified LCR approach as mandated by the federal
reserve bank. Schwab will be required to be fully compliant by January 1, 2017. The company
disclosed that compliance would impact annual returns by less than half a penny. However,
there are still some uncertainties around how the rules will apply to the brokerage business.
There are also other considerations to take into account as the company becomes compliant
with Basel III rules. Here are some excerpts from the company’s 2013 10K filing:
 Revise required minimum risk-based and leverage capital requirements by (1)
establishing a new minimum Common Equity Tier 1 Risk Based Capital Ratio of 4.5%; (2)
raising minimum Tier 1 Risk Based Capital Ratio from 4% to 6%; (3) maintaining the
minimum Total Risk Based Capital Ratio of 8%; and (4) maintaining a minimum Tier 1
Leverage Ratio of 4%
 Add a requirement to maintain a minimum capital conservation buffer, composed of
common equity Tier 1 capital, of 2.5% of risk-weighted assets, which means that banking
organizations, on a fully phased-in basis no later than January 1, 2019, must maintain a
Common Equity Tier 1 Risk Based Capital Ratio greater than 7% and Tier 1 Risk Based
Capital Ratio greater than 8.5% and a Total Risk based Capital Ratio greater than 10.5%
 Change the definition of capital categories for insured depository to be considered “well
capitalized”, Schwab Bank must have a Common Equity Tier 1 Risk Based Capital Ratio of
at least 6.5%, a Tier 1 Risk Based Capital Ratio of at least 8%, a Total Risk Based Capital
Ratio of at least 10% and a Tier 1 Leverage Ratio of at least 5%.
 The new minimum regulatory capital ratios and changes to the calculation of risk-
weighted assets are effective beginning January 1, 2015. The required minimum capital
conservation buffer will be phased in incrementally, starting at 0.625% on January 1,
2016 and increasing to 1.25% on January 1, 2017, 1.875% on January 1, 2018, and 2.5%
on January 1, 2019
Schwab might appear to have less flexibility in terms of how it can deploy capital versus
peers. E*TRADE, for instance, has a tier 1 leverage ratio of 9.2% vs. Schwab’s 6.6%. We are
not suggesting that the firm is close to violating any regulatory guideline as their portfolio
differs significantly from E*TRADE’s. Not at all. However, there are more variables to
consider from a compliance perspective that its peers do not have to worry about to the
same degree.

Valuation framework
We value The Charles Schwab Corporation using a forward-looking P/E multiple approach.
We understand that there are biases to this approach as P/E multiples can be overly high
during bull markets and depressed during bear markets. We are trying to compensate for
this by taking an average P/E multiple over an extended period.
Our 12-month price target for The Charles Schwab Corporation is $38. We arrive at our price
target using a price-to-earnings multiple of 26.0x on our 2016 calendar year earnings
estimate of $1.58 per diluted weighted average shares. We then discount the resulting
valuation using a cost of equity of 10.7%. The discount rate is based on a beta of 1.68x, a risk-
free rate of 4%, and a market premium of 4%. The discount period is 0.8 years. This leads us
to our price target of $38.
Exhibit 28: Price target based on one-plus-a-half-methodology
Valuation
CY 2016 EPS $1.58
P/E Multiple 26.0x
Valuation $41
NTM Price target $38
Source: RBC Capital Markets estimates
Our $38 base case scenario valuation is based on these assumptions for 2016: Net interest
margins of 175 bps by the year 2016; interest-earning assets of $162.9 billion; total funding
sources of $158.3 billion; daily average revenue trades of 319,000; average revenue per
revenue trade of $12.05; and a pre-tax margin of 44.7%. We believe a 26x P/E multiple is
justified given historical valuation.
Exhibit 29: Historical P/E multiple averages prior and post the financial crisis are fairly similar
0.0x
10.0x
20.0x
30.0x
40.0x
50.0x
60.0x
04/21/2003
11/13/2003
06/15/2004
01/10/2005
08/08/2005
03/07/2006
10/02/2006
05/02/2007
11/27/2007
06/25/2008
01/22/2009
08/19/2009
03/18/2010
10/13/2010
05/11/2011
12/06/2011
07/05/2012
02/04/2013
08/30/2013
03/31/2014
10/24/2014
P/EMultiple
Priced as of market close ET, March 24, 2015.
Source: FactSet; RBC Capital Markets

We have looked at P/E multiples going back to April 2003. On average, shares of SCHW have
traded at a 26.4x P/E multiple. The average P/E multiple prior to 2008 was 26.3x, as well. As
for the period post the financial crisis, our data shows that SCHW has been trading at an
average P/E multiple of 25.6x. We are utilizing a long-term historical average of 26.0x P/E
multiple to arrive at our price target.

Risks and price target impediments
Prolonged period of low interest rates
Our price target assumes that interest rates will rise. The company is the most asset sensitive
among its peers in our view. Consequently, we would have to adjust our price target and our
earnings estimate should interest rates remain low for a prolonged period. This could lead to
a decline in net interest margins. Furthermore, should interest rates remain low for a
prolonged period and the economic recovery slow down or reverse, clients could move their
investments back onto the company’s balance sheet in the form of cash. The firm would
have to hold additional capital for these assets.
Unforeseen regulatory changes could impact profitability
The Dodd-Frank Act had a tremendous impact on the financial services industry. With the
elimination of the Office of Thrift Supervision, The Charles Schwab Corporation came under
the supervision of the Federal Reserve and the OCC became the primary regulator of Schwab
Bank. As the company points out, there are multiple studies mandated by the new legislation
that could result in additional legislative or regulatory action. This could affect how the
company conducts its business, the growth trajectory, and ultimately profitability.
Balance sheet growth below our expectation could lead to earnings shortfall
The discount brokerage business is characterized by intense competition. Peers may attempt
to gain market share by reducing trade commissions, offering higher yields on deposits and
lower interest rates on loans, or reducing the fees they are charging for services. The firm
also faces competition from wirehouses and traditional banks. Increased competition could
lead to lower asset growth and a decline in profitability.
Losses from credit exposure could negatively impact shares
The company is subject to counterparty risk. Its exposure results from margin lending,
clients’ options trading, securities lending, and mortgage lending. The firm has exposure to
credit risk through its investments in US agency and non-agency mortgage-backed securities,
corporate debt securities, and commercial papers among others. Loans to clients are in the
form of mortgages and home equity lines of credit. A deterioration of the credit portfolio
could result in increased loan provisions and charge-offs, and could negatively impact the
company’s share price.
Drop in consumer confidence
A decline in trading volume could negatively impact commission revenues and earnings.
Trading volume is to a high degree dependent on market volatility. However, a prolonged
period of market volatility in declining markets could lead to a decrease in consumer
confidence and thus trading activity.
Sharp decline in equity markets
The firm earns asset management-related revenues based on assets it manages in its
proprietary funds and through fees on RIA assets. A sharp decline in markets could lead to
lower asset management-related earnings. Furthermore, clients could start withdrawing
funds based on fears about the direction of the market. This would result in lower topline
growth, a decline in margins, and earnings growth below our projection.

Quick overview of Charles Schwab Corp.
Founded in 1986 and headquartered in San Francisco, California, Charles Schwab
Corporation is engaged in brokerage, banking, money management, and advisory services.
The company offers a range of products to meet customers’ varying investment and financial
needs.
Charles Schwab’s business model is the most diverse among its peers and thus, as appealing
to us. While the firm has its origins in discount brokerage, the business model has evolved
over time. We believe that it would be difficult for competitors to replicate the firm’s
business model today. These days, the lines between a discount broker and a full-service
brokerage firm are not as clear-cut as they were in the past, and Schwab was certainly a
contributor to this development. Despite having gone through many changes and iterations,
we believe that the firm continues to follow a simple mantra: Be disruptive and question the
status quo.
This perspective seems to have served the company well. It was one of the first firms to
embrace new trading rules after the SEC mandated negotiated commission rates for all
security transactions in 1975. This was the beginning of an industry today known as discount
brokerage. Regulatory changes opened up the financial markets to ordinary citizens, that is,
to retail clients. While established broker/dealers such as Merrill Lynch saw this as an
opportunity to raise commissions, Charles “Chuck” Schwab, the company’s founder, took an
entirely different stance. He saw the regulatory changes as an opportunity to reach the
masses by reducing commissions. The firm’s target market became the price-sensitive
individual investor, who did not need access to extensive research and “white glove”
advisory services. Prior to the deregulation, commissions could be as high as 10% of invested
capital and mutual funds often carried 9% sales loads. The emergence of the discount
brokerage changed this, ultimately resulting in commission fee rates dropping from
hundreds of dollars per trade to less than $10 today.
We would argue that “creative destruction” is in Schwab’s DNA. The company is willing to
take uncharted roads in order to pursue long-term growth objectives. And sometimes, the
strategy can appear to be counter-intuitive or might even seem to cannibalize its sales—
such as opening up branch offices while other discount brokers did not see the need, or
considered branches as too capital intensive. Consider this: By 1985, the firm had 90
branches and 1.2 million customers. Despite building a brick-and-mortar business, which
seemed the “traditional” way of doing business, adapting the latest technological innovation
remained a focus. In order to improve services, the firm introduced products like the
Equalizer (a DOS-based personal computer software) and SchwabQuotes (a touch-tone
quote system) in 1985. Clients could now place orders via computers, as well as call up stock
information and obtain research reports. Thus, being an early adopter of technology was an
integral part of the firm’s strategy and more in line with how discount brokers differentiate
themselves from traditional brokers.
After going public and barely managing to get through the stock market crash of 1987, the
company once again embraced a growth strategy. With the acquisition of Chicago-based
Rose & Co. in 1989, the fifth-largest discount broker at that time in the US, the firm
controlled around 40% of the discount brokerage market. However, their market share
equated to about 8% of all retail commissions only. Maybe this was the impetus needed to
grow to a full-service brokerage house. Furthermore, we expect falling commission revenues
due to the recession in the early 1990s likely reinforced management’s decision to diversify
the firm’s revenue stream.
Schwab has evolved from a
discount broker to a full-
service brokerage firm.
However, the firm has not
changed its perspective on
its business. It follows a
simple mantra: Be
disruptive and question the
status quo

Today, the company’s business model has evolved to a point where advisory-based services
have replaced trading revenue as the significant producer of revenue. As of September 2014,
approximately 50% of all Schwab assets are utilizing Schwab’s advisory services.
Exhibit 30: Assets under an advisory relationship
$640
$1,015
$107
$177
$747
$1,192
Q3 '11 Q3 '14
Advisor Services Retail & other advisory solutions
17% of retail assets
are enrolled in an
advice solution
Note: 50% of all Schwab assets are now receiving some form of ongoing advisory service
Schwab offers a wide range of products including:
 Brokerage – Brokerage accounts including selected accounts with check-writing
features, debit card, and bill pay; individual retirement accounts; retirement plans for
businesses; college savings accounts; equity incentive plan accounts; and margin loans
 Mutual funds – third-party mutual funds; proprietary mutual funds from two-fund
families – Schwab Funds and Laudus Funds; other third-party mutual funds; and mutual
fund trading and clearing services to broker–dealers
 Exchange traded funds – third-party and proprietary ETFs
 Advice solutions – separately managed accounts; customized advice for tailored
portfolios; and specialized planning and full-time portfolio management
 Banking – checking accounts linked to brokerage accounts; savings accounts, certificates
of deposit; demand deposit accounts; residential mortgage loans; home equity lines of
credit; personal loans; and entity lending
 Trust services – custody services; personal trust reporting services; and administrative
trustee services
As of December 2013, the company had $2.25 trillion in client assets, 9.1 million active
brokerage accounts, 1.3 million corporate retirement plan participants, 916,000 banking
accounts, and about 13,800 full-time employees.

Exhibit 31: SCHW snapshot
CharlesSchwab Corp Snapshot
Founded 1986
Headquarters San Francisco, California, USA
President and CEO Walter W. Bettinger II
Employees 13,800 (as ofDecember 31, 2013)
Business Segments Investor Services and Advisor Services
Total Revenue US$5.435 Billion (as ofDecember 31, 2013)
Total Client Assets US$2.4 Trillion (as ofSeptember 30, 2014); Active brokerage accounts US$9.3 Million
Key subsidiaries through which SCHW conducts its business include:
 Charles Schwab & Co., Inc., incorporated in 1971, is a securities broker–dealer with over
300 domestic branch offices in 45 states;
 Charles Schwab Bank, commenced operations in 2003, is a federal savings bank located
in Reno, Nevada; and
 Charles Schwab Investment Management—the investment advisor to the Schwab
mutual Funds and Schwab ETF.

Revenue breakdown
Sources of revenue
The company’s major sources of revenues are asset management and administration fees,
net interest revenue, and trading revenue.
Asset management and administration fees
This includes mutual fund service fees and fees for asset-based financial services provided to
individual and institutional clients. The company generates mutual fund service fees for
shareholder services, administration, and investment management provided to its
proprietary funds, and recordkeeping and shareholder services provided to third-party funds.
The company also earns asset management fees for advice solutions, which include advisory
and managed account services.
The current low short-term interest rate environment is affecting this revenue head. As the
overall yields on money market mutual funds remain below the management fee, Schwab
continues to waive a portion of its management fees. As of September 30, 2014, fee waivers
eroded 0.45% of average fees earned on Schwab money market funds.
Net interest revenue
Net interest revenue is the spread between interest earned on assets and interest paid on
funding sources. Net interest revenue depends on changes in the volume and mix of these
assets and liabilities, as well as by fluctuations in interest rates. The company’s strategy is
that when interest rates fall, the company may attempt to alleviate some of the impact by
extending the maturities of assets and lowering rates paid to clients on liabilities. The
management has indicated that the prevailing low interest rate environment limits the
extent to which the company can reduce interest expense on funding sources.
Trading revenue
Trading revenue comprises commission and principal transaction revenues. Commission
revenue is largely dependent on the number of trades and the average revenue earned per
trade.
Principal transaction revenue is primarily comprised of revenue from trading activity in fixed
income securities. To enable clients to trade in fixed income trading, the company maintains
positions in fixed income securities. Principal transaction revenue is the spread between the
price at which the company buys and sells securities to and from its clients and other
brokers.

Exhibit 32: Revenue breakdown LTM Sep’14 vs. FY’99 ($M)
Asset
management
& admin fees,
42%
Net interest
revenue, 38%
Trading
revenue, 15%
Other, 5%
SCHW's LTM Sep'14 Revenues (in $M)
Asset
management
& admin fees,
19%
Net
interest
revenue,
18%
Trading
revenue, 60%
Other, 3%
SCHW's FY'99 Revenues (in $M)
The company has diversified its revenue stream since FY’99. From a transactional-based
revenue model in 1999, the company has now moved to a more advisory-based revenue
model. As depicted in the chart, during FY’99, the majority of revenues were from trading
revenues (60%) followed by asset management and administration fees (19%), net interest
revenue (18%), and the remaining through other (5%). However, during LTM ended Sep’14,
the majority of revenues were generated through asset management and administration
fees (42%), followed by net interest revenue (38%), trading revenue of (15%), and the
remaining through other (5%).
Business segments
The company provides financial services to individuals and institutional clients through two
segments—Investor Services and Advisor Services.
Investor services
The Investor Services segment provides retail brokerage and banking services to individual
investors, retirement plan services, and corporate brokerage services. For the year ended
December 2013, investor services accounted for 77% of the net revenue.
Advisor services
The Advisor Services segment provides custodial, trading, and support services to
independent investment advisors (IAs), and retirement business services to independent
retirement plan advisors and record-keepers. For the year ended December 2013, Investor
Services accounted for 23% of the net revenue.

Exhibit 33: Revenue breakdown of business segments
Investor Services LTM Sep'14 Revenues
(in $M)
Asset
manageme
nt & admin
fees, 38%
Net interest
revenue,
44%
Trading
revenue,
14%
Other, 4%
Investor Services LTM Sep'14 Revenues
(in $M)
Advisor Services LTM Sep'14 Revenues
(in $M)
Asset
manageme
nt & admin
fees, 56%
Net interest
revenue,
18%
Trading
revenue,
21%
Other, 5%
Advisor Services LTM Sep'14 Revenues
(in $M)
During LTM Sep’14, the company’s Investor Services segment generated the majority of its
revenue as net interest revenues (44%) coupled with asset management & admin fees (38%),
followed by trading revenue of 14%, and the remaining through other (4%).
During LTM Sep’14, the company’s Advisor Services segment generates majority of its
revenue asset management & admin fees (56%), followed by trading revenue (21%), net
interest revenues (18%), and the remaining through other (5%).

Products
Exhibit 34: Revenues from business segments
Traditional products Account Solutions Portfolio Solutions Additional Services
for direct investing for specialized strategies for comprehensive
guidance
to help clients achieve
their goals
• Stocks • Schwab Managed
Portfolios
• Schwab Private Client • Banking
• Bonds • Windhaven Portfolios • Schwab Advisor
Network
• Mortgage
• Mutual Funds • Thomas Partners • HELOC
• ETFs • Managed Account
Select
• Insurance
• Margin Lending • Global Trading • Income Solutions
• Charitable Giving
Source: Company presentation; RBC Capital Markets
Besides the traditional offering of brokerage, mutual funds, ETFs, banking, and custody
services, SCHW offers certain unique and distinguished products based on customers’ needs
and financial goals. The various product offerings include:
Schwab Managed Portfolios, Windhaven, and Thomas Partners programs
Schwab provides customers with investment options that allow them to completely delegate
their investment decisions. Schwab provides clients access to a diversified account invested
completely in either mutual funds or ETFs through the Schwab Managed Portfolios and
Windhaven, or in equities through Thomas Partners programs.
Windhaven, with AUM of $17.7bn in 3Q14, follows a broadly diversified ETF strategy
focusing on limiting the downside and seeking to capture growth in rising markets over full
cycles. This essentially also leads to lower upside in a bull market.

Exhibit 35: Windhaven AUM ($bn)
8.6
10.3
11.1
12.5
13.6
15.6
17.3
18.2 18.5 18.5 19
17.7
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
1Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14
Thomas Partners, with AUM of $6.1bn in 3Q14, follows a dividend income strategy, which is
highly appealing to investors in a low rate environment.
Exhibit 36: ThomasPartners AUM ($bn)
2.4
2.6 2.8
3.3
4.5
5.0
5.7
6.1
$0
$1
$2
$3
$4
$5
$6
$7
4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14
Schwab’s portfolio consultants
This service provides guidance to clients and access to online portfolio planning tools and
professional advice. These consultants support clients in developing an investment strategy
and carrying out investment and portfolio management decisions and offer a range of fully
delegated managed solutions providing ongoing portfolio management.
Schwab Equity Ratings
Schwab offers a few Internet-based research and analysis tools, including Schwab Equity
Ratings. The tool is a quantitative model-based stock rating system, which provides ratings
on approximately 3,000 US stocks and about 4,000 non-US stocks traded on 27 foreign
equity markets.

SCHW Initiation

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