Charles Schwab 2010 Annual Report Download - page 36

THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
A
sset Management and Administration Fees
Asset management and administration fees include mutual fund service fees and fees for other asset-based financial services provided
to individual and institutional clients. The Company earns mutual fund service fees for shareholder services, administration,
investment management, and transfer agent services (through July 2009) provided to its proprietary funds, and recordkeeping and
shareholder services provided to third-party funds. These fees are based upon the daily balances of client assets invested in the
Company’s proprietary funds and third-party funds. The Company also earns asset management fees for advisory and managed
account services, which are based on the daily balances of client assets subject to the specific fee for service. The fair values of client
assets included in proprietary and third-party mutual funds are based on quoted market prices and other observable market data. Asset
management and administration fees may vary with changes in the balances of client assets due to market fluctuations and client
activity. For discussion of the impact of current market conditions on asset management and administration fees, see “Current Market
and Regulatory Environment.”
Asset management and administration fees decreased by $53 million, or 3%, in 2010 from 2009 primarily due to the decrease in
mutual fund service fees, partially offset by an increase in investment management and trust fees. Asset management and
administration fees decreased by $480 million, or 20%, in 2009 from 2008 due to decreases in mutual fund service fees and
investment management and trust fees.
Mutual fund service fees decreased by $169 million, or 11%, in 2010 from 2009 and by $414 million, or 22%, in 2009 from 2008
primarily due to money market mutual fund fee waivers. Given the low interest rate environment in 2010 and 2009, the overall yields
on certain Schwab-sponsored money market mutual funds have fallen to levels at or below the management fees on those funds. As a
result, the Company waived a portion of its fees in 2010 and 2009, in order to provide a positive return to clients. There were no
money market mutual fund fee waivers in 2008. The decrease in mutual fund service fees in 2010 was partially offset by the effect of
higher average balances of client assets invested in the Company’s Mutual Fund OneSource funds as a result of higher average asset
valuations and continued asset inflows. The decrease in mutual fund service fees in 2009 was also due to lower average balances of
client assets invested in the Company’s Mutual Fund OneSource funds and mutual fund clearing services as a result of lower average
equity market valuations.
Investment management and trust fees increased by $104 million, or 38%, in 2010 from 2009 primarily due to higher average
balances of client assets participating in advisory and managed account services programs. This increase was partially offset by
temporary fees rebates of $63 million offered to qualifying clients that participated in those programs. Investment management and
trust fees decreased by $67 million, or 20%, in 2009 from 2008 due to temporary fee rebates relating to the same programs discussed
previously.
N
et Interest Revenue
Year Ended December 31,
Growth Rate
2009-2010 2010 2009 2008
Asset management and administration fees before money market
mutual fund fee waivers
7% $ 2,255 $ 2,099 $ 2,355
Mone
y
market mutual fund fee waivers 93% (433) (224)
—
Asset mana
g
ement and administration fees (3%) $1,822 $1,875 $2,355
Net interest revenue is the difference between interest earned on interest-earning assets and interest paid on funding sources. Net
interest revenue is affected by changes in the volume and mix of these assets and liabilities, as well as by fluctuations in interest rates
and portfolio management strategies. The Company is positioned so that the consolidated balance sheet produces an increase in net
interest revenue when interest rates rise and, conversely, a decrease in net interest revenue when interest rates fall (i.e., interest-
earning assets generally reprice more quickly than interest-bearing liabilities). When interest rates fall, the Company may attempt to
mitigate some of this negative impact by extending the maturities of assets in investment portfolios to lock-in asset yields as well as
by lowering rates paid to clients on interest-bearing liabilities. Since the Company establishes the rates paid on certain brokerage
client cash balances and deposits from banking clients, as well as the rates charged on receivables from brokerage clients, and also
controls the composition of its investment securities, it has
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