Good morning, everyone. Welcome to Schwab's 2018 Fall Business Update. This is Jennifer Como, Vice President of Investor Relations for Schwab coming to you from a somewhat foggy San Francisco. Also here with me in the studio today are Walt Bettinger, our President and CEO; Peter Crawford, our CFO; and Rich Fowler, our Head of Investor Relations. In our agenda today, we will spend a focused hour sharing our perspectives on Schwab. Walt is going to start us off with a strategic picture, and Peter will take a look at our recent financial performance and current outlook. Rich will then facilitate the Q&A until it's time to wrap up. And while we're on the topic of Q&A, let's review the process. As usual, we'll do so via the webcast console as well as the dial-in. To help us get to as many focus possible, we very much appreciate you sticking to our question guidelines, which is one question plus a follow up. Before we start, let's spend a minute on the ever-important forward-looking statement page, the main point of which is to remind everyone that outcomes can differ from expectations. So please keep an eye on our disclosures. Last, for those of you looking for the slides, we plan to post them on the IR site following the prepared remarks. And with that I think we’re ready to begin. Walt?

Thanks, Jen. Good morning, everyone. Normally, at this time of year, I make some kind of comment about my beloved Baltimore Orioles, but after 115 lost season, I think I'll just move right on to talking about the third quarter, which, by the way, I've been incredibly excited for our webcast this morning because it was just such a extraordinary quarter and a continuation of our strong organic growth. So let's start of and talk a bit about our operating model. It's very simple and straightforward. As you all know, for years, we have referred to it as the virtuous cycle and it’s working again in 2018 just as it should. Begins with challenging the status quo of our industry. On behalf of investors, they, in turn, reward us by investing their hard-earned money at Schwab, and that grows our base of planned dollars contributing to strong revenue growth and financial results. The results of this lead to more earnings, enhance our returns for our owners. And then we turn around, and we reinvest. We reinvest a part of those results back in the business to be able to better serve and reward our clients and prospects. And of course, then the cycle starts all over again. So maybe what we'll do right now is go a little bit deeper into a couple of the components of the virtuous cycle. Let's start off with a prospect and client response to some of our efforts to challenge the status quo. You can see extraordinary results again here in the third quarter. New accounts continued to grow; rapid rate, up about 13% year-over-year and 80% over the course of the last decade. At the same time, our clients are very engaged with us. And you can see that reflected in our daily…

Alright, well thank you Walt and good morning everyone. So Walt talked about what we call the virtuous cycle and how well it worked in Q3 and over the course of 2018. In my time today, I'll dive deeper into the financial performance note of the wheel, sharing how our record business momentum that Walt talked about in the third quarter combined with a generally helpful macro environment led to record financial results as well. I'll also talk more about the balance sheet and capital management, a story, which as Walt mentioned, we're evolving as we near the end of sweep transfers. And finally, I'll share our thoughts in the fourth quarter and some very, very high-level thinking on 2019, recognizing, of course, that we're still working on our plans for the year. 2018 has definitely been a tumultuous year for investors; but on a whole, a positive one. On our winter business update, we communicated two different financial scenarios given the range of possible interest rate paths. And with the strength in the equity markets and the increase in both short-term and longer-term rates, conditions have on the whole been even better than our 3-hike scenario, with the equity market a bit ahead of our scenario at least until recently, three rate hikes now behind us and the prospects looking good for a fourth in December, longer-term rates finally rising and trading much stronger than we've anticipated. Now while the Now while the macro environment has general provided us much appreciated tailwinds, our financial results would not have been possible without our continuous success in driving strong organic growth. I'll talk about our record core net new assets, enabled in part by robust transfers from our competitors. We're seeing momentum in both our Investor Services and Advisor Services businesses…

All right. Thank you, gentlemen. Well done, once again. Let's plunge right in. We're going to follow the same practice as always. [Operator Instructions] Operator, do you want to start us off?

Certainly. [Operator Instructions]

Shall we take our first caller?

And our first question comes from the line of Mike Carrier from Bank of America Merrill Lynch.

Alright thanks guys. Walt, maybe first one for you. You mentioned the net new assets, the transfer of assets, everything continues to be very strong Schwab. The competitive dynamics, it seems like it's starting to pick up again through the summer. So I just wanted to get your thoughts on how you kind of view Schwab's competitiveness in the industry and if you feel like there's any hurdles for kind of bringing in the customers given some of the competitive moves by some of your peers.

Thanks, Mike. I think our view is really the same that we like our pricing position right now. And at the same time, as I've indicated in the past, we are committed to the idea that we will not have core competitors who go underneath us from a pricing standpoint in important areas. And so we’re pleased with our position right now. I don’t believe that pricing is a barrier to clients or prospects coming to Schwab. I think the metrics bear that out. And at the same time, as you would expect, we monitor on an ongoing and very regular basis whether any competitor – core competitor makes changes that are things that we feel would change that current dynamic.

Okay. Thanks. And then, Peter, maybe just one for you. Given what you guys have been investing, some of the investments in infrastructure and kind of improving like the cost structure, just wanted to get your sense, when we look at that EOCA or the expense per client assets, what initiatives are in place that can continue to lower that, particularly if we see more competition in the industry or more pressure on the revenue side?

Sure. So thanks, Mike. So driving down EOCA, expense on client assets, as Walt mentioned, is a really important imperative for us and something we have a track record of having done for many decades now. And the way that you do that is really three things. One is you grow assets, allowing you to amortize your fixed costs over a larger client base. Second is you operate with discipline and prioritization. And third is you make investments on an ongoing basis that improve the productivity and efficiency and/or move friction. I think a couple of things that Walt highlighted earlier are some of the big initiatives that I’m very excited about in terms of what they can do in terms of continuing to reduce cost, while at the same time, improving the experience for our clients because what we don’t want to do is remove cost at the expense of our clients. But I’d highlight something like our digital transformation, which I don’t use that word, that transformation word lightly. I do think that can be a transformation. When you consider the number of calls, for example, that we take every year that are password resets or status updates, if we can eliminate the need for clients to have to call for that or allow them to do that on their mobile device, on schwab.com, eliminate that call, that’s better for the client and it’s better for us as well because that’s a call we don’t have to take. We can use that time talking to them about something else. Application modernization creates a more scalable infrastructure and a lower cost infrastructure over time. We’re doing a lot of work on business process transformation, straight-through processing in our operations area. There’s a lot of technology now that we are leveraging to try to remove friction and, again, lower the cost to serving clients but in a way that has ended up being good for the clients as well.

Thanks a lot.

Thank you. Our next question is from the line of Rich Repetto [Sandler O'Neill]. Your line is open.

Good morning, Walt. Good morning, Peter. So I guess, I’m hearing an echo here, but that’s okay. So the first – the question I hear most often, Walt and Peter, is that how will Schwab going to grow the bank balance sheet. And you’re in a good position where interest rate hikes help, but cash is leaving. And one investor estimated its $10 billion to $15 million leaving each rate hike. So I guess, given that sweeps are now limited to that $33 billion that are left, and I totally get the NNA growth, but how do you grow the bank balance sheet and to offset, I guess, the headwind of cash leaving with the rate hikes?

Yes. Thanks for the question, Rich. And let me maybe just take a step back and provide a little more perspective on what’s going on with the balance sheet and cash dynamics because I know it’s been the subject of a lot of questions and a lot of commentary and say that what’s been happening, what’s been unfolding this year in 2018 is very much consistent with our expectations. If you go back to our February business update, we talked about we expected at least 15% balance sheet growth over the course of 2018. And we did that contemplating only a single Fed increase and relatively modest market appreciation. And of course, the year has unfolded a bit differently than that with three, – nearly four rate increases and the equity markets being pretty much a straight line up from March through the end of September. So a very, I would say, conducive environment for investors to get invested, to be engaged in the market. And despite all that, we’re at 12% balance sheet growth through the third quarter. We’ll have to see what happens in the fourth quarter, but we’re pretty close to those assumptions that we had, those expectations we communicated back in February. What’s really important to us is to make sure that, that cash is staying at Schwab. And we’re seeing that. We’re seeing that on our net new assets. We’re seeing that in our transfers to and from some of the online banks that are out there. And that maybe is a bit different than what you might see in a traditional bank where they don’t really have another place for that cash. And what’s happening here is a couple of things. One is clients are reassessing their asset allocation in light of what they’re…

Got it. That’s very helpful how you look at that balance, Peter. So I guess, the follow-up question, Walt, in the slides, you talked about how important net interest – or the percentage of revenue, especially cash, the cash portion of it when you include money markets. So I guess, would you – I guess, the question is would you ever entertain – it’s an M&A question. Would you ever entertain M&A that helps you grow the balance sheet and helps you grow cash? Is that one of the areas that you look at as a potential opportunity?

Rich, I think our philosophy on M&A is consistent, which is we look at every opportunity that may present itself. We do have a fairly high threshold for serious consideration. And often, it revolves around strategic capabilities that help clients. Acquisitions that are pure balance sheet oriented or financial engineering oriented, and I’m not sure that that’s what you’re referring to, but those types of acquisitions probably fall pretty far down the list in terms of things that we would give serious consideration to.

Got it. Thank you that’s very helpful thanks.

Operator, we’re going to take one from the webcast for a second here before going back to call. Just to follow on, on the thinking around pricing. Well, we do get asked versions of this. So given the philosophy is not being – not being undercut or not allowing things to get in the way of people choosing Schwab, is it possible that we could see a fee-free mutual fund or ETF from Schwab in the not-too-distant future?

Yes. So I think it’s – I mean, there’s a question of the relevancy of fee free. The difference between 2 or 3 basis points and zero is pretty small. That said, we know that there’s at least one competitor with a "free or at least zero operating expense ratio fund" out there. And we’ll continue to study it and watch carefully how clients feel about something that is categorized as free. We all know that every company that is for-profit is in the business of serving clients in the best way they can and making money. And so we are very careful in studying how clients feel about that in the day and age we operate in and of transparency and clarity with clients.

Thanks, Walt. Can we go back to the next call?

Thank you. And your next question is from the line of Devin Ryan [JMP Securities]. Your line is now open.

Great. Thanks and good morning. Just first one here on the comments around spending growth moderating in 2019. I guess, you should think about that. Should we still be contemplating a relationship between revenues and expenses? So essentially, if the revenue environment were to improve more than expected, then hypothetically, that could still pull expenses higher? Or is it really just an absolute drop in expenses year-over-year as you try to think about the relationship given that it’s normally a band?

So Devin, I know there's probably a lot of eagerness to talk about 2019 in more detail. And I would say, we'll talk about that in more detail at the winter business update in February. And I do want to clarify, make sure it's clear what I said. What I was talking about was not necessarily a spending cut, but a moderation in the increase in our spending levels versus if you look at the last three years, our spending – our annual increase in expenses has been sort of 11-ish percent. I'm talking about there's a likely moderation of that level heading into – we're looking at it heading into 2019. But again, in terms of the exact – how that might flex or not flex with the environment, as we talked about back in this last February, I'll have tell you – you ought to show up in San Francisco in February to get more details on that.

Okay, great. And then just a follow-up kind of on the conversation around competition and appreciate some of the comments. Obviously, the cadence of pricing actions have been accelerating, and a lot of focus is being put on something that's free or zero, whether it be commissions or investment product fees. And there's clearly offerings that are at those price points and you're not necessarily at that for all of them. So is this something where the value of the holistic relationship where Schwab is maybe getting overlooked? And are there ways to, I guess, add new ways to monetize the relationship outside of just that maybe commoditized or more commoditized element, whether it be in trading or certain types of investment product fees?

Yes. Interesting there, Devin, and good question. I guess, first thing I would say is I don't know that it's being overlooked when you look at the flows that are occurring as well as the competitive position we have on TOAs. I think the consumer understands that there is nothing free. If it's free trading, it's being made up probably somewhere execution quality or other factors. Free investment funds might be being made up, sort of the typical grocery discount, the milk to some more bread-type thing. And even on our side where we offer intelligent portfolios without an investment advisory fee, we're very clear on all our disclosures that we generate revenue from some of the underlying exchange traded funds as well as the cash holding within those portfolios that that's the way that we generate revenue in the program that doesn't have advisory fees. I think consumers are pretty sophisticated for the most part. That's not to say every consumer. But consumers, for the most part, are pretty sophisticated in understanding that they're going to pay for things one way or another. It's a matter of how they choose to do so. And I think our organic growth results are a reflection that we're at a pretty nice point in terms of finding the right balances here.

Thank you.

Thank you. And our next question is from the line of Brian Bedell. [Deutsche Bank] Your line is now open.

Great, thanks. Good morning folks. Maybe just to go back to the balance sheet side and the bulk transfer activity. Just, Peter, if you can – you alluded to this on the last business update in terms of the process that, obviously, you're going to be slowing down the pace of that over the next couple of quarters. And you mentioned the timing of that and I think the need to make sure that clients were getting a better yield on their cash. So can you just talk a little bit more about what your thought process is around – in the next one to two quarters for those clients that are getting swept from the 150 basis point or so sweep money market funds to a 30 basis point deposit rate? To what extent are you reaching out to those clients to get them to have a better yield on that cash and sort of threshold for that – for who you would reach out given that?

Sure. So first, on the timing, our expectation is that we'll probably do about a few billion dollars of transfers in October and then likely pause in November and December just given the end of the year volumes and our client activity until early 2019. In terms of the process, it's a process that is – we definitely try to engage those clients in a conversation. It has proven to be, with many of our clients, a really good catalyst to have a conversation with them about their – about why they have that cash, how they're invested, what their financial goals are and so forth. We do written communications to them that are very transparent and upfront about their alternatives, about what's happening to them and about the alternatives if they are seeking higher yield. And then if they're working on the retail side, they're working with the financial consultants, the financial consultant will try to reach out to them and talk to them about – having a live conversation with them about that as well. On the adviser side of the business, of course, we don't talk to the end clients there, but we do talk to the advisers about it and make sure they understand what's happening. And typically, with the advisers, we typically try to move all the advisers account at the same time from an operational standpoint so – to make it easier for them.

So this process is ongoing, say, as opposed to sort of almost concluding? Or do you expect to continue to do this type of activity for the next few quarters?

So it's not like it – yes, it's not like we contacted them just a day ahead of the transfer. It is a process. We talk to them ahead of the transfer as the transfer is happening, and then many of these clients we're talking with on an ongoing basis as well just as part of the overall relationship with the client.

Right, right. Okay. And then just on the – back to sort of the competitive disruption that we've seen this summer, maybe just more to the point. Obviously, JPMorgan came out with somewhat of a disruptive online trading rate. It looks like it was mostly targeted at keeping Chase customers internal to their franchise and growing that internally. Maybe if you can talk about have you seen any impact to your transfer account activity in September and October as a result of that? Or do you think this is – I think, Walt, you initially said – do you maybe not view this as a "core competitor," therefore, it wouldn't influence your view on trade pricing behavior?

Yes. I don't know that I'd categorize anything that has occurred over the summer from any firms as really disruptive. I think whether it is pricing on funds or pricing on trading, trading with a zero trade cost or a temporary number of free trades for new clients or free trades for a year or if you maintain a certain amount of cash balances, you get free trades, I mean, that's been in our industry for years. So I don't know that I'd categorize anything that I've seen as disruptive. I don't really comment on individual competitors. We have respect for all of our competitors and pay close attention to everyone, small and large.

Right, okay. And then just on pricing in the future. I guess, you have been disruptive yourself in terms of trade price cuts. Is that something you still view as sort of a weapon and a competitive tool kit? And I guess, your organic growth is strong right now. The last move really did accelerate it dramatically. Would you wait until your organic growth ease to do that again? Or was that something you think you could do more in the near term?

Well, since we know there's no competitors on the phone, I can answer that directly. But I think the moves that we made in early 2017, we were removing a barrier to people coming to Schwab. When we had core competitors consistently priced underneath our commission rate, that was a barrier because we know that switchers in our industry struggle at the outset of a decision where to move their money to, and so the differentiation between firms. So therefore, they often default something as simplistic as commission rates. So I think the organic – the step-up in organic growth rate that you're referring to after the commission price changes in early 2017 was more a reflection of us just simply removing that barrier. I think everyone in the industry will probably look long and hard at additional pricing moves as to whether others will simply match and ensure that no gap is created again in the future, and therefore, have to evaluate whether there is market share gains to be achieved by that, whether that's us or anyone we compete with.

Great. Thanks for the additional color.

Thanks, Brian. All right. Next call.

Thank you. Our next question is from the line of Vincent Hung [Autonomous Research]. Your line is now open.

We talked a lot about competition on pricing, et cetera. And it seems to have manifested through commissions, commission-free ETFs, account minimums and all that stuff, but I haven't really seen any movement in things like intro benefits. Have you thought about competing for new accounts through higher intro offers, et cetera?

That's always been an area of competition, Vincent, where incentives are offered to new clients around possible cash or free trades. It's certainly not something that we necessarily like because it's not an ideal way to build a long-term relationship with a client. Unfortunately, I would say, in some ways, promotions like that work. And so therefore, as long as they are commonly utilized in the industry, it's difficult to take a hard stand that we're not going to have similar types of promotional offers. But they are inconsistent with our long-term approach of building trust-based relationships with clients.

Got it. And any indication of cash levels in October just given the recent market selloff?

No, it's really too early to tell. I mean, we see – when the markets sell off in that day, we typically see clients moving their cash. And then the market’s rally and they get invested again. So it’s really too early to tell. What we’ve typically seen in the past is it takes a bit more of a pronounced market sell-off, sort of a 10% kind of correction that really compels clients to rethink their asset allocation and move in a more significant way into cash.

Thanks.

Thank you. Our next question is from the line of Jeremy Campbell [Barclays Bank]. Your line is now open.

Hey, thanks guys. So I think you guys have previously mentioned that the advisory channel keeps somewhere between like around the high single digit kind of client cash allocation. Original channel is probably more like mid to high teens. But I think there’s this idea floating out there that most of the advisory cash is kind of migrating to money funds versus deposits. Can you just kind of comment at all about the proportion of cash versus money funds in the two channels and maybe kind of your understanding of adviser rationale for using one versus the other.

So good question, Jeremy. The adviser probably is more diligent at moving longer-term cash into higher-yielding investments, whether it be purchased money funds, bonds, treasuries, things of that nature. But the reality is advisers need liquid cash also. And in general, it has averaged somewhere around half of the overall client cash balances that are as hold. They need it for everything, from transactions they have going on. Their clients are spending some of the money they have, of course, particularly those who are retired or close to retirement. They need it for the collection of their own advisory fees. So the notion that, that 50-50 type ratio is either broken down or no longer applicable is just simply not correct. That ratio is generally holding true.

Great. And then just on a big-picture perspective, I think you guys had done a study a while back where you thought I think maybe – from remembering correctly, like two thirds of your kind of cash – overall cash balances may be in the deposit side and one third may be in the money funds side. Do you guys still feel like that might hold up? Or has that changed over time?

Yes. So we have nothing that suggest that, that won’t hold up in the future. It may take us a bit of time to get to that equilibrium state, if you will, but that has been historically the ratio. And I don’t think there’s anything to suggest that it won’t be the same this time around.

Great. Thanks a lot.

Okay. Let’s take another question from the webcast. We haven’t had a question like this actually for a while, interesting. So would we expect our group of core competitors to remain relatively unchanged going forward? Or what do we think about new entrants potentially moving in overtime.

Yes. So I mean, time will tell, of course, right? But it isn’t easy in our industry to move, I would say, into what we consider that core competitor group because there’s a very small number of investment firms that really serve $1 trillion or more of client assets. There’s certainly large organizations or large institutions that would like to get into that core competitor space that may have a lot of other assets. But to really move into that grouping and investment services is a pretty high hurdle. And so that group of core competitors probably doesn’t change very often.

All right, thank you. So let’s go back to the calls.

Thank you. And our next question is from the line of Steven Chubak [Wolfe Research, LLC]. Your line is now open.

Hi guys, good morning. So I wanted to follow up just on the discussion around organic cash growth. And Peter, given expectations for rates to continue to run higher from here, the uptick you described in terms of yield-seeking behavior, is there a catalyst that you see that can help spur positive organic cash growth outside of a sustained market correction? And how should we maybe be thinking about the impact of equity market sensitivity on the other parts of your business?

So I mean the catalyst for stronger balance sheet growth is growth in our core business. It’s growth in our assets. It’s bringing on accounts. It’s bringing on new assets, bringing on new clients. That, over the long term, that is what we believe, and history would suggest that, that is what drives balance sheet growth. And those two tend to move concurrently. In terms of the near term, how that evolves over the next months, quarters, I think time will tell. As I mentioned, we see an equity market correction. In the past, it’s been sort of in the 10% range. That tends to be the kind of thing that moves clients more heavily into cash. I want to make sure I emphasize a little bit, the rate increases – Fed increases are still a meaningful positive for us. There’s still a meaningful revenue lift associated with each subsequent Fed increase. The lift may be a bit less than what that number we communicated two, three years ago, but it’s still quite meaningful. And so we’d certainly view that as a positive.

Okay. And along those same lines, as we start to think about the excess capital that you’re building, especially if the balance sheet growth begins to slow, I know you’ve managed longer term that 6.75%, 7% target. Now the balance sheet is considerably larger. I’m just wondering in the event that we do see a market correction, do you have to tweak some of those targets to maybe account for additional cushion have significant amount of cash have to move back on balance sheet.

Yes. So it’s a great question and one we get a lot and certainly one I think about quite often. And the short answer is, no, we don’t have to rethink those targets because those targets themselves build in cushion. I mean, as you know, those are well above the regulatory minimums, and they’re actually well above our internal limit that we have for our capital levels. Even operating at that 7%, even going down to 6.75% would allow us to – obviously to add another, what, with our company four percentage points in balances. We also have the opportunity to access the preferred market. We target 15% to 20% preferred to total capital. We’ve been running at the lower end of that range. We could bump that up closer to that 20% level in an environment where we needed to have more capital. And then we have a mechanism. If we see a significant market correction and a huge lot of cash onto the balance sheet, we do have kind of a release valve that essentially will allow us to move some of that cash back on into money funds. And again, that’s something we’ll only do in an emergency situation, but that allows us to manage that – at that 6.75% to 7% level.

It’s great. Thanks very much for taking my question.

Okay. Next call.

Thank you. Our next question is from the line of Craig Siegenthaler [Credit Suisse AG]. Your line is now open.

Hey, good morning Walt, Peter.

Hi Craig.

I just wanted to dig a little deeper on the free fund or ETF question. Why wouldn’t you launch a new free index fund that is only available on the Schwab platform? I just don’t see any big issues with that strategy. But I think there are obvious issues with a free ETF can be purchased at your competitors’ or maybe by cutting fees on your existing products. But launching a new product wouldn’t have those issues if it was only available to Schwab clients.

I didn’t say we wouldn’t. I just said that, that was something that we are studying and looking to understand client reaction to and where it would fit. You accurately identified some of the complexities around – being done in the ETF space. And I think this is one of those things that we’re looking at very carefully, and we’ll make a decision potentially to do so or not over the coming months. I think the point I just want to make is that the delta between two or three basis points and zero is really, really small. And so to do a free – free is not the right word. To do a zero operating expense mutual fund or mutual funds is really a different strategy. It’s really sort of a strategy to entice people with something and then hope that you monetize that relationship in other ways. That was the only point I was trying to make.

Got it. Thanks a lot.

Okay. Let’s go to the next call.

Thank you. Our next question is from the line of Chris Shutler [William Blair]. Your line is now open.

Hey guys, good morning. Maybe if we assume stable NIM, assume kind of flat markets going forward, I mean, how do you think about the long-term sustainable revenue growth and kind of margin expansion profile at Schwab? Just thinking about the long- term growth rate of the business, we’re increasingly getting that question.

So I do think – I think in terms of long- term growth rate, the business is going to be dependent on organic growth rate. We’re growing organically at 7% as well as continuing to find ways to monetize the relationship with our clients. I mean, it's not like net interest revenue is the only way that we monetize those client relationships. If you look at the graph that was in the business update, the proportion of our revenue that comes from asset management fees, ex money funds, has actually gone up. I think there's a lot of opportunity within the advice opportunity and as an example. So we believe there's definitely meaningful ways to grow revenue, keep – maintain our discipline and grow expenses at a lower level than revenue, which allows us to grow earnings; and through continued ongoing capital return, drive very attractive returns for our shareholders over time even in an environment that might be characterized by flat interest rates and sort of the typical long-term equity market appreciation.

Okay, thanks. And then the marketing cost, the extra, I think, $25 million or so in the fourth quarter, what's that going to revolve around, what products? Just any more detail there.

So, it's really around a lot of – basically, it's around what works. The wonderful thing about marketing, four, five years ago, if the CMO, Chief Marketing Officer, came to me and said, he wants another million dollars, I'd have to sort of take it on face that, that was actually going to have a good ROI. Nowadays, we have a lot of analytics that show that, that is a very positive NPV, high IRR investment. And we're able to very much target the marketing to the channels, the messages and the audience that we want to make sure we maximize that lift, if you will, and maximize that payback for it. So it really is around what works. There's a lot of heavy focus on digital since that's worked very, very well. That's an increasing portion of our overall marketing mix. But it's not necessarily a particular product or a particular channel or anything like that.

Perfect, thank you.

Okay. Operator, I'm going to take one last from the webcast. And then we'll probably have time for one last from the callers. The question on hand, "Is there anything we're actively doing to prepare the firm for a market downturn? Are we prepared to take advantage of a down cycle to create excess value for customers and stockholders?" I'm going to add on to that. The questions that we will – we also get fairly frequently kind of along these lines are, as we think about – whether or not it's actually happening, as we get deeper into a cycle, maybe closer to the end of cycles, do we think about changing we'll call it, risk parameters, for example, going further out in duration or credit or et cetera to try to further optimize returns as a way of sort of hanging on to that as we – again, as we say, sort of get deeper into the cycle. So your thoughts on that?

So, we recognize that when you're in a strongly – strong positive environment like you're in now, it lifts all boats. And that's also I think in part why you've seen some of the pricing moves in recent months. But as we know, companies separate themselves from a market share standpoint usually in difficult times. And at Schwab, we have a long history from a risk management standpoint of being very diligent, very careful. We know what our balance sheet, it's OPM. As we like to say, it's other people's money. And so we continue to invest very conservatively with approximately 70% of our balance sheet in U.S. treasuries and government-backed paper. We think we're positioned to withstand a downturn well. And my assumption will be if we go into a downturn, that is when Schwab tends to really shine. And we will put our foot on the accelerator at that point in time to take advantage of possible competitor missteps that they may have gotten themselves positioned into during these much stronger environments. From a client standpoint, it's really all about diversification and helping ensure clients are thoughtful in the way they invest, not just investing in what is the hot thing of the day. We're a long-term investment services firm provider. The RIAs we serve take long-term views, and I think that positions our clients well from their perspective for potential downturn. Peter, do you have anything you might want to add to that?

Yes. Maybe just to add, and Rich asked a little bit about duration and our asset/liability management and why we've changed that at all. And all I'd say is we're not in a business that would try to make a market call and time the market around what's happening with interest rates or the expectations around interest rates. What I could see us doing at some point, once sort of this whole cash settles out and we get to kind of an equilibrium is taking a look at the duration profile of Bank Sweep and think what that looks like and maybe that's an opportunity to extend duration or to adjust our profile a bit on the margin. But in terms of actively managing that through the cycle, I don't think that's something that we're going to be looking too hard at.

All right. Thank you. So, let’s go to our final call.

Thank you. And our last question is from the line of Bill Katz [Citigroup]. Your line is now open.

Okay. Thanks very much for taking the question. So, coming back to your sort of preliminary view for expenses for 2019, thank you for that. Obviously, haven't sort of put together the sort of revenue framework quite yet, but does that infer a little more flexibility even if you have a little bit of moderation in the absolute level of spend? Kind of assume you have some baseline view for revenue growth to get to that moderation of the elevated expense growth.

So, Bill, I wouldn't infer that necessarily. I wouldn't make any statements or any – draw any conclusions around what that means from a revenue growth standpoint. We're still working on that. As I mentioned, there's still a lot in flux. We tend to set our plan in January and get it approved by the board in January and then share it with you in February. And there's a lot that changes between now and then. So we'll be coming back with you in more detail around what that looks like. And I hate to have to tell you to hold tight for a couple of months, but I'm afraid that's where we are.

Okay. I appreciate that. And just a follow-up question around capital management. So you laid out in one of your charts a bunch of things that you're considering. Is that a ranked order of priorities? And the broader question I have is, how do you think about the business mix at this end of the rate cycle? So to come at it the other way is when we look at your slide, and we've talked about you getting things from spread has come up a little bit, but also asset management trading, are you at a point now strategically where you might look to broaden out the asset management revenues through acquisition to maybe counterbalance just the flattening of NII from here?

So, yes, the priority is from my capital management standpoint are to use capital to fund and support the growth, the core business. That is our top priority from a capital standpoint. Always has been and will continue to be that way. To the extent that we have capital left over, that's when we look to return that to stockholders. This doesn't suggest any difference from an M&A strategy. It's not like we've got money burning a hole in our pocket and then we're saying let's go buy something. We've got nothing else to do with it. We are still – we'll maintain our discipline, our very, very selective approach to M&A and thinking about whether it's good strategically, as it's financially and so forth.

Peter, I think it's fair to say we weren't trying to suggest that between regular dividend, a fifth or a discretionary-type dividend and buybacks that there was any particular ranking and precedence on that front, is that right?

Sorry, that’s correct. I mean we’re looking at all of those and taking a look at all of those methods of capital return and figure out the exact optimal mix, and that's what we’re talking about with the board.

Okay. Thank you very much.

All right. Thanks, Bill. All right. So, we’re going to turn off Q&A and turn it back to Peter for some final thoughts.