Charles Schwab 2006 Annual Report Download - page 31

29
client loyalty while simultaneously driving further
enhancements in financial performance. With care-
ful attention to prioritization, resource allocation,
and client feedback, the team posted another
impressive year of accomplishments: additional
price cuts to bolster our competitiveness, a new
client concierge program, a Branch Extension
Team to provide personalized service to selected
clients with less than $250,000 in assets, and
new products like complimentary portfolio con-
sultations and our Schwab Managed Portfolios
mutual fund wrap offering. Schwab IS also made
extraordinary progress with clients. Their “client
promoter score,” which we use as a measure of
client loyalty, turned from slightly negative at
year-end 2005 to solidly positive, and their net
new assets rose by 54 percent. These improved
client metrics helped Schwab IS post 18 percent
net revenue growth, a 32 percent pre-tax margin,
and a 25 percent return on equity for 2006,
versus 5 percent, 27.6 percent, and 20 percent
in 2005.
Schwab Institutional (SI) had a straightforward
objective in 2006 – “just” sustain their industry
leadership in serving independent Registered
Investment Advisors while maintaining superior
financial performance. The SI team did exactly
that – their accomplishments in 2006 included
the introduction of the annual IMPACT Awards™ to
honor industry-leading advisors and firms, the
launch of a comprehensive program to help advisors
plan and manage the growth of their businesses, a
new website to assist advisors thinking of estab-
lishing their own practices, and enhanced platform
capabilities around cashiering and e-document
management. With net new assets rising 22 per-
cent over 2005 levels, SI continued to build
market share, and financial results included 20
percent revenue growth, a 41.8 percent pre-tax
margin, and a 33 percent return on equity, versus
11 percent, 39.5 percent, and 30 percent in 2005.
So, good news on the financial front, but how are
we doing with clients overall, since the strength
and durability of those relationships will clearly
determine our future success? Our 2006 client
metrics pointed to great progress in building
stronger relationships, as new account openings
rose 15 percent to 655,000, net new assets in
Schwab IS and SI were up a combined 33 percent
to $87 billion, and total client assets rose 18
percent to a record $1.24 trillion. With our
momentum continuing to build, we’re expecting
to deliver double-digit increases in these metrics
again in 2007. Which brings me to my final
thoughts. How far have we come together? Since
2004, we’ve accelerated our growth in client
assets and revenues, more than doubled our
pre-tax profit margin, passed the $1 billion mark
in net income, and improved the company’s
return on equity by more than four-fold. We have
sharpened our strategic focus with the pending
sale of U.S. Trust and acquisition of The 401(k)
Company, and we have sustained the financial
discipline necessary to support growth and
contain costs.
What’s ahead for 2007? In a word, more. More
strong revenue growth, with another double-digit
objective for the year. More improvement in
pre-tax margins, with a goal approaching 37
percent. More significant growth in EPS, although
the final result for 2007 will be affected by the
choices we make in redeploying the proceeds
from the U.S. Trust sale. I remain extremely con-
fident in both Schwab’s prospects and in our
commitment to following the same formula laid
out last year – expense discipline, careful capital
management, and a relentless focus on our
clients and their needs.
You may already be aware that I’m retiring from
Schwab after our Annual Meeting in May, so this
is my last letter to you as CFO. I’ve had a wonder-
fully fulfilling career here, yet I’m especially proud
of what we’ve accomplished in this most recent
chapter in Schwab’s history. The time is right for
me to move to the next chapter in my life, but
leaving behind two decades of experience at this
remarkable institution is truly bittersweet. I know
I’m leaving the company in great shape and in
great hands, and I want to thank my fellow stock-
holders for the support you’ve shown me and the
company over the years. It has been an honor to
serve you.
Sincerely,
CHRISTOPHER V. DODDS
Executive Vice President and Chief Financial Ocer
March 15, 2007
T HE C H A R LE S S C H WAB C O RPO R ATI O N 200 6
L ET T E R F RO M T H E C H I E F FIN A N C I AL O F F I C ER