Okay. I think we’re going to get started. Well, good morning, everyone. I am Rich Fowler, the newly podium-less and, therefore, noteless head of IR for Schwab. And those of you who know me, I know what you’re thinking. You’re thinking every time I’ve been here for years, Rich uses notes. Can he do this? Should he do this? Is his brain going to freeze? And, frankly, I’m kind of curious about that myself. So let’s see what happens. So, again, welcome to everyone here in the room and on the webcast, to the Schwab Winter Business Update. We certainly appreciate the effort to make the time today, particularly for the folks who’ve had to travel out here to be in the room, out here on the West or as we call it the Correct Coast. We’re relieved that we’ve got another nice day for you out here, what I would call a top-down day, although I have to admit that even for me, it was chilly enough on the way in this morning to where I was reminded to appreciate that we live in a civilization that is capable of producing heated car seats. So, again, a good start to the day. Let’s tuck in to what we’re going to talk about. I think as is pretty well understood by now, we run these business updates as a way of keeping the investment community up to speed on management’s perspectives and priorities as the environment evolves. I think it’s pretty fair to say that we’ve had a lot of dialog recently in some more sort of external input as it were of thinking around how to deal with what we call lower for longer. And in a fortuitous confluence of events, that’s exactly what we’re going to talk about…

Good morning. It’s a great crowd here this morning. I’m sure it has nothing to do with a weekend of sunshine and mid-60s here in San Francisco. Hopefully, some of you will travel, have a chance to stay the weekend and enjoy. I have to admit. When Rich said lower for longer, it’s the first time I’ve ever heard him say that without a string of four-letter words prior to lower for longer. But I think that’s probably a fair assessment. You may have noticed when we put the agenda up that Andy Gill is going to speak today with all of you. Up until Friday, Ben Brigeman is going to be here and speak about investor services. Ben has an issue with one of his shoulders and he was scheduled for a medical procedure actually scheduled tomorrow at the Cleveland Clinic, near where Ben lives. But he was under so much duress with it last week that they actually moved it to Wednesday, which would’ve been yesterday, and there was no way for him to fly from Cleveland to get here in time to make the presentation. So, Andy is going to ahead and present along with John. I also wanted to share with you what Ben would have shared with you if Ben had been here today, but it’s fallen to me because of his inability to do so. Ben is going to be leaving Schwab later this year. This is something that Ben and I had been working on for over a year. He and I have worked together for almost 16 years. We have a very, very close business relationship. As many of you know, Ben has done a wonderful job for us. He has traveled extensively over the last 15 years and certainly the last…

Sure.

Okay. And Chelsea, you have something from the Web that you may. Okay.

In terms of the 401(k) business, are we at a point, I guess, where the numbers are big enough to actually move the needle in terms of net new assets and in terms of the breakaway brokers you’ve described that is a long-term process? But, with the recent changes in commission rate, et cetera, any change in the movement of those assets?

On the 401(k) side, just to put a little more context on it, we not completely but to a great extent slowed our marketing and sales effort over the last year and a half while we invested a significant amount of time and energy in building the Schwab Index Advantage. So, we have paid the price, I guess, you could argue, in terms of our recent metrics in net new assets because of that. I would expect by the second half of this year you would start to see some building impact in terms of net new assets from the efforts around Schwab Index Advantage. Now, bear in mind that a lot of the early converters are going to be existing Schwab clients moving to that program. So it may not show up in net new assets, but the revenue that we capture per dollar of client assets goes up in the area doubled. So we expect to have revenue improvement that may not show up in the net new asset part as the initial grouping of many, many clients we’re talking with begins to convert. I think second half of 2012 to maybe see some NNA impact. And then we feel very confident we’ll move into ‘13 and ‘14 that it has potential to have an impact that is measurable. With respect to breakaway brokers, again, that is, as we have said for a number of years, a long-term trend. We continue to see them looking at going independent. Again, I just want to segment the brokers who’d go independent. I would categorize them into three groups. There are very, very small brokers who go independent. And although we look to serve some of those, we look to serve them within an economic model that makes sense for us. There is second population that looks to go independent and is not really ready to cut the entire cord from being commissioned. So they may want to retain a fairly significant commission waiting, 50% or 75%. That is not a segment that we spend a lot of energy targeting. We tend to target the third segment, which tend to be larger breakaways, usually teams of at least two or more. And they’re committed to going, principally, if not, entirely fee. That’s really the part we go after. So there’s three different types of populations who break away. And our emphasis is generally on the third segment. Howard Chen – Credit Suisse: Walt, Howard Chen from Credit Suisse. Walt, the company has been over the last couple of years (inaudible) and Schwab has been the preeminent asset gatherer within the United States. But that growth has slowed down certainly a bit. So I guess...

As a percentage. Howard Chen – Credit Suisse: As a percentage.

Yeah. Howard Chen – Credit Suisse: So, as you and the team kind of look out, do you still feel the vast majority of that is still disimbalanced between money market and bank rates? Is there less money in motion? Are you hitting the law of large numbers? We just love an update from your thinking and all that.

Sure. I think there’s a couple of things going on. There’s definitely the impact of rates. I think we’ve shared that if you track our net new assets historically against yield spreads between money market funds and bank deposit rates, there’s a high correlation – consumers making irrational decision to move cash to us if a money market yielded more than if they were to leave it in their bank, where often they receive their wealth from a sale of a house or a sale of a business or a bonus at work, something like that. That’s definitely hurt us. I think there’s another issue that we have executed on, is we have done a fair amount of de-risking within our business. And by de-risking, I mean we have stepped away a fairly large number of relationships that didn’t make sense for us, whether it’d be on the advisor side of the business or even on the retail side. We have made a lot of efforts to address an area where we didn’t feel that we were happy with the business model. And this is around the holding of alternative investments. So I would argue that there’s two issues, and you mentioned growth. There’s the issue of growth in net new assets, but there’s the real issue, which I think owners want to pay for, and that is growth with respect to revenue and earnings. And when we analyze the assets that we’re not capturing and the Roca [ph] underneath those, or assets that we’ve actually invited out the door and the Roca [ph] or revenue on those and compared to the revenue that we make on the assets we are capturing, I think our strategy is working. Now, I can go out and generate a lot more NNA. That’s not very difficult to do. But I’m not interested in NNA. We think we want to capture NNA that has strong revenue and earnings behind. NNA is the easiest thing to go out and capture in our business, particularly if you serve folks in the RIA side. So I think our growth rates are sound with respect to the environment. They’re not as high as a percent of some. But we’re pursuing a very different strategy. We have a strategy that emphasizes the revenue on the assets, not simply the assets themselves. Howard Chen – Credit Suisse: Thanks, Walt. And my follow-up. On the theme of just controlling what you can control, you all have done a great job of kind of re-engineering the expense base and the profile for low interest rates. But I get the question a lot about money market reform. I know there’s still a very broad of outcomes. We just love your latest thinking on it.

The interesting thing is, our money fund complex continues to grow. And in some ways, that creates frustration around the waivers. Why are the waiver is still at the level they’re at? Why don’t the waivers start to shrink? You’ve had a little bit of tick up in LIBOR, although most of that are scenarios where we’re not really investing much in money funds. But money funds continue to grow. I mean, consumers want money funds. They need a need for them. The other thing we have to look at is that, although we’re waiving significant amounts of fees and money funds, $600 billion or $600 billion plus, we’re still bringing in a significant amount of revenue in that business. And so, it’s not that it’s an unprofitable business. It’s that it’s less profitable than it would otherwise be. With respect to reform, there’s a lot of proposals out there. But all along, we’ve been saying that we felt eventually there would be under some of the more – even under some of the more, let me call them, aggressive or draconian measures, there would be carve-outs for things like treasuries or agency paper, maybe munis, paper that is very short-term, seven days and under. And in our communications, because we’ve done research with our clients, if we were to get a VNAV or we were to get an overly burdensome level of capital requirement against money funds, we would convert our money funds to guvy Treasury. And our clients have indicated that that’s fine. I suppose you could argue the worst thing that could come out of that over time would be that that yield spread between bank deposit rates and, say, a guvy Treasury, money fund versus a prime, you might get a smaller spread and it could have some effect on NNA over time. Although, to do that, to believe that, you’d have to also believe that bank deposit rates won’t also stay depressed. I happen to think that bank deposit rates will stay depressed if money fund yields are lower than they were in the past because more funds have moved away from prime and gone guvy Treasury. So I think we’re prepared for what would happen. If the capital requirements recently talked about are put in place, the capital for us would be very, very modest if we chose to go that way or, again, as alternative, we might simply convert the fund. So I think we have optionality around that that we feel very confident in our ability to continue to have that product for our clients and continue to make significant money on it and, of course, in an improving environment, make an awful lot of money managing money funds. Gaston Ceron – Morningstar, Inc.: Hi, Gaston Ceron with Morningstar.

Hi, Gus. Gaston Ceron – Morningstar, Inc.: Just reengaging a little bit with the Schwab story this year. So, forgive me if this has been kind of covered in previous meetings. But I wonder if you could help me understand a little bit more about where you see the distribution of the overall revenue pie. My understanding had been that the company, for many years, have been sort of de-emphasizing, for lack of a better word, the trading side and kind of putting a lot of its eggs in the asset side. And obviously in the last 12 months or so with the optionsXpress move, you’ve tilted a little bit more to that side. Do you want more exposure trading in a long term or are you at the right place? What’s the right balance?

That’s a great question, Gus. The reason why trading is important for us is because our clients who tend to trade a lot are also our most affluent clients. And this is where I think some of the confusion gets in around strategies. We’re not really pursuing trading to try to be number one in darts or number one in dats or something like that. We’re pursuing trading to the extent it is a product or service that our valuable, affluent, who tend to be our most profitable clients, are looking for from us, because if we don’t provide it to them, they’re going – the risk exists that they will move that money to someone else. So we’ve put a lot of emphasis in there. Our most valuable clients, we categorize it into retail side. We categorize as active investors. They have, on average, about $750,000 with us. Not only are they our largest traders. Interestingly enough, they’re our largest buyers of one-source mutual funds. They’re the largest client grouping as a percent in terms of who do their mortgage through Schwab Bank. When we offer the credit card, they were the largest users of our credit card. They are people who are highly engaged with their money, but also highly engaged with Schwab. And so that’s really the impetus behind our efforts to continue to invest in and enhance our trading capabilities, whether it’d be on the derivative side with optionsXpress. I think, this morning, Andy is going to give a little more detail on some of the things that have been teed up at our last meeting around our global investing capabilities. That’s really what’s behind it. It’s meeting the needs of our client as opposed to trying to be number one in darts with a large number of small value accounts. Oh, yes, Chelsea.

Hi, this is from the Web. Can you speak to retail engagement in January? How was that holding up?

I think it’s fairly consistent with what I shared around the way sentiment was in late 2010. I’d say pretty tough from a client engagement standpoint in January. We know the markets went up but you don’t get swings in retail client sentiment as fast as how a market moves within a four-week period. So I would categorize sentiment in January as still fairly consistent with the end of ’10, lacking in confidence.

Could you provide any early feedback or results on how the first independent branch is going?

Yeah, although I don’t know that I would draw any conclusions from one branch. But the first branch is well ahead of plan with respect to net new assets, prospects. They had a fairly small practice that converted over with Mary. But she’s well ahead of plan, which is exactly what we expect in one from our early pioneers in that program. Other questions? Michael Carrier – Deutsche Bank Securities: Thanks, Mike Carrier at Deutsche Bank. Just getting on the topic that you mentioned from the start in terms of managing for lower or for longer. If we look over the past few years, the balance sheet growth has been pretty impressive or pretty strong. A lot of that has been driven by the clients. But when you look at it from a capital standpoint, your options around the cash flow that’s being generated given where the stock is, buybacks, you can grow the balance sheet, and then probably, more importantly, just given this regulatory environment, going with a new regulator, when you look at your capital ratios, how confident are you, especially if the balance sheet just continues to grow?

Sure. I think we feel very comfortable with our cap ratios. Joe is going to go into a lot more detail. We voluntarily participated in very stringent stress test, which I think Joe’s going to cover details on. I don’t think any of us view that the change in regulator to the OCC is likely to have impact from a negative standpoint within our capital. Mike, the first thing you might have been getting at was we make that conscious decision of what do you do with capital. Do you keep growing the balance sheet, whether it’d be client directed or actually us doing transfers of money to the bank? Or do we use it to buy back stock given where the stock is? So we try to make that as a very conscious decision on an ongoing basis as to where we think the greatest long-term value is going to come. Of late, we have moved some money from, without getting too complex around the capital issues; we’ve moved some money from the broker reserve portfolio where, of course, our yields are very, very low, low double-digits to the bank. It has a very minimal impact to us from a capital standpoint only, delta is between balance sheet and bank, and yet you pick up significant incremental NIM in the process. But we try to make a very conscious decision with respect to what we’re going to do with that capital all the time. Do you continue to fund client balances moving onto the balance sheet or should we use it to buy back stock? Michael Carrier – Deutsche Bank Securities: Thanks. And then maybe just on the expense side. I’m sure we’ll get to this in a little later. The flat expenses year-over-year, I think, relative to the past makes a lot of sense just given the environment. If things do get more challenging, are there is that you can pull back if need be despite still bringing in the assets and organically growing like try not to make even to that.

There are probably opportunities, but there are fewer and fewer opportunities the longer this has gone on. For those of you who followed the stock closely since, say, ‘08, we have taken a fairly substantial amount of expense out of the company and you get – I won’t say we’re all the way to the point because there’s always opportunities to be even more diligent, more stringent and find expenses. But those opportunities are getting smaller and smaller without cutting in to the client implication. So I think what we’ve resisted is decisions along the lines of saying when we answer the phone on average in 21 seconds and we could create an extra penny of earnings in 2012 if we let that go to 29. Those are the decisions that we have resisted making because we’re not really sure that that extra $0.01 of earnings in a period in which our stock price seems to be somewhat disconnected from its long term potential is worth impacting the client experience in the long-term organic growth on the franchise. Those are the kind of decisions I think that you’ll look at given the extent to which we’ve reduced expenses over the last four or five years. But we continue to look at it and we’ll always do so throughout, no matter how long this four-letter lower or longer it is. Michael Carrier – Deutsche Bank Securities: Could you maybe just talk a little bit about how you think about ETFs and they’re long term impact on the OneSource franchise?

Sure. To date, ETFs have not been cannibalizing our OneSource growth. We continued to have success with OneSource, although in fairness, a lot of the OneSource growth occurs within some of our advised wrap-based programs. And of course, that’s really the strategy for ETFs. We didn’t come out with very low cost ETFs with zero trading commission because we thought we’re going to make a lot of money in selling pure ETFs to traders and investors. We did it because we wanted to expose retail traditional investors to the benefits of ETFs and help them become educated so that we could utilize them inside advisory wrap-based programs like Schwab Managed Portfolios, ETF and Windhaven. So that was the strategy behind the ETFs and I think it’s worked quite well given the growth that we’ve had in those two product lines. So I think we may have – I think in John’s presentation, he’s going to talk some more detail about the growth in those products particularly in Windhaven. So that’s really the strategy there. We’re not seeing cannibalization at any measurable level of OneSource as a result of ETFs. In fact, I recently met with a number of the CEOs from some of our OneSource partners and the ones who are delivering quality results for investors are continuing to get flows from us on a regular and consistent basis. Michael Carrier – Deutsche Bank Securities: Well, I just had a follow-up. Maybe in a little off the wall question. Just over the course of last year, particularly late in the year, you had a lot of questions in financial services about the viability of wholesale funded institutions, big dealers. And then tons it looks like your stock and your stories penalized by all the excess liquidity that you have. So I’m just curious from your point of view, do you see any way to kind of bridge that gap longer-term to kind of take advantage of that value that you have in all that liquidity? Is there something else that maybe can be done that we’re not thinking about?

My guess is we’re all thinking about it. As you would expect, look at on a regular and ongoing basis, all types of alternatives that might exist around the size of our balance sheet, our ability to continue to grow it organically, as well as the fact that we still have, unlike some of the other competing firms, we still $160 billion in money market funds that under the right scenario could potentially head toward a balance sheet that has exceptionally low funding cost associated with it. So we look at those things as – I’m sure you would want us to and expect us to – on a regular and ongoing basis. Now, in fairness, the environment is very different than what the environment was when some deals in the past were struck. And you also have to look at it, I think, very carefully, not just from a financial engineering standpoint. You have to make sure that anything that you would look at would make strategic sense, too, because as we all know, earnings generated through financial engineering in one environment tend to disappear like dust in the wind in a different environment. So, anything that we look at has to make sense strategically, not simply in the short-term might create some financial engineering upside. But we’re looking at those things constantly all the time and having conversations about them all the time.

Just a quick follow-up on the cannibalization question. How do you know that the ETFs and other funds aren’t cannibalizing your proprietary funds in the OneSource?

We look at the origin of the flow into the ETF where the money was before. You could argue. If the money was sitting in cash and went into an ETF, there’s some potential it might have otherwise gone to OneSource. But I think what the question you’re specifically getting at is, “Are people selling OneSource funds to buy ETFs?” And that’s not the case. They’re not doing that so we look at where the money originated before it went into the ETF. Actually, a lot of the money that’s gone in ETFs are proprietary ETFs is new money to the firm.

And then second question related to the bank. Do you target an ROE for the bank? And I guess how important is it to you to hit that kind of target without sacrificing profitability on the other side of the business?

We do target an ROE for the company, overall. I’d say more than just pure focus on the bank, because, again, for us, the bank is principally a tool from which to monetize yield in elastic sweep balances. It’s not something in and of itself. It’s a monetization entity for us to a great extent. So we look at ROE at the firm, overall. Now, we do, again, try to take the long term perspective because as you get, at some point down the road into an improved environment, the ROE of the company is so high as it has been in the past in better environments. The ROE is so high, we just want to be really careful not to be overly short-sighted about the fact that in the term it’s not maybe at the level that we would ordinarily like. It’s still, I think, very respectable where we are today but it just gets so high in an improving environment. We just want to be careful not to shortchange that upside. There’s another question here from...

Could you just walk through your different businesses and talk about any areas where you’re seeing fee pressure of any kind whether it’s in the mutual fund side or on the ROE side?

Yes. So, on the retail side, I’ll just go through the primary business points. On the retail side, we’re not seeing a lot of price pressure. There are a couple things that go on in the retail business. There are published prices and then there are discounted prices. And there is, I’d say, a reasonable amount of discounting going on, on trade commission pricing that is off the published price. So, although you don’t see sort of a visible price for going on, there’s a lot that goes on behind the scenes in terms of one off, hundred off, thousands off discounting. So, you see a bit of that there. We’re not seeing pressure around other revenue sources like one source fees, things along those lines. One the ROIA side, there’s been a long term trend over the last 10 years in which the revenue per dollar on client assets is going down as advisors have moved more and more toward beta-oriented type of products away from so much active management. And so you’ve seen that. And, of course, every time in retail you have to lower pricing from a competitive standpoint. You end up lowering the pricing for the clients of ROIA despite the fact you probably don’t have price sensitivity there. But we’ve been largely able to stabilize that in the last few years. Now, in fairness the ROIA business takes a bit of a hit from the money market waivers that’s just proportionate because their clients aren’t on the bank. We’re very careful to keep those clients largely out of the bank because ROIAs move money in huge volumes at once. And it can create a lot of complexities from a capital management standpoint but they have taken a bit of a hit from the money fund…

I’m just wondering when you do your pulse of customers, what’s the biggest reason they buy ETFs? Are they focused on fees, focus on tracking air? And second of all, does brand matter at all at that point? Have you been successful to sell Schwab ETFs with no previous brand in it?

Yes. I think cost in a confidence that they understand the product is probably the big issues behind the growth in ETFs. And with respect to brand, our strategy, when we roll them out was, as I mentioned, the big strategy was around awareness so that we could offer them an advisory wrap [ph] solutions. Our secondary strategy was we were and I think are remain the largest custodian of retail investors holding ETFs. I don’t remember exactly how much – I’m fairly sure it’s over $100 billion in ETFs. We felt that with the exception of the flows that were probably headed toward Vanguard, we could convert virtually all the rest of the flows into Schwab. Now, I exclude from that the ETFs that are the more exotic, the high leverage ones, which we, of course, chose not to build Schwab versions of. And that’s exactly what we’ve done. If you look at the flows in the ETF asset classes, where we built Schwab product, all the net positive flows end up between Schwab and Vanguard. And we have effectively taken all of the other ETF managers to either flat to negative flows in all the asset classes we offer Schwab product. It’s not a lot of revenue but 10 is better than 0 basis points, I guess, is the best way to put it. All right. I’m going to go ahead and turn it over to Joe. Thanks again so much for being here. I’ll be around through at least the first break if there are other questions that you want to talk about. Thanks again for being here today. Great to see all of you. Thanks.

Thanks, Walt. So, I’ll add my thanks to everybody else’s for folks taking the time to travel out here and be here in the room in person. Or for the folks that are attending on the webcast. So, thanks for investing your valuable time in hearing a little bit more about the story. So, for those of you who’ve been on the road, I wanted to be able to give you a weather upcast or forecast given that it is Groundhog Day. But I hear there’s some confusion between which groundhog is predicting which outcome for weather going forward. And given our conservative nature here about making forecast that we aren’t really too convince we’re going to be able to deliver on, I’m not going to be able to do that. I can tell though that I’ve got great confidence that I know Rich Fowler saw the shadow of a hedge fund manager this morning. So, I know we’re in for at least six more weeks of volatility. You can take that one to the bank. While we’re talking about volatility, yet again, I’m up here talking about trying to adapt the business model in the face of an economic environment that continues to evolve. And so, we are making changes in terms of how we think about the choices that we make in terms of managing the company, along with the things that we see in terms of our opportunities going forward. Walt’s talked a little bit and you’re going to hear it through the course of the day about some of the great opportunities that we see in front of us. And we want to be able to continue to make appropriate investment to drive the business forward while also acknowledging that we have some pressures here in…

Joe, could you tell us how you think about interest rate risk as far as how it affects the balance sheet whether or not what your targets are as far as duration on the asset side and how you think about matching?

Yes, we talked about this. We still target around a two-year duration on the bank portfolio. Our challenge of late has been with the pre-payments coming in we’ve actually been seeing that portfolio shorten up because of the high degree of pre-payments bringing cash in. So it shortened up the assets that are on the balance sheet as well as thrown more cash at us more quickly. So, in the past, I’ve talked about trying to buy 45% fix, 55% floating as a way of maintaining that duration of late. We’ve been trying to buy more in the way of fixed assets not to move the duration of the portfolio out as much as to get back out to the target duration on the balance sheet. So, again, it’s not that our philosophy around risk management or our targets have changed as much as it is. We’re just having to make some tactical adjustments in the portfolio management to try to keep ourselves in sync with the targets we’ve already set.

And is there any duration on the liability side? Is that a factor in any way?

It does. It absolutely does. We take a chunk of the asset duration part of the lending books so I only, generally talk about the investment portfolio because the piece people want to look at but there are also some duration assets inside of the loan book. So we will take all of the arms that are produced, the three ones, the five ones, the seven ones. We’re also taking the jumbo 15 year product that’s produced at this point. So, it looks a lot like some of the same types of CMOs that we’re buying in the market, it’s got a little bit better yield spread on it. So, we do take some duration also in the asset book so it’s the combination of the lending book plus the investment book that gives us the duration that offsets what we seen in the liability structure. The liability structure, I guess I’d sum if off, many of you I think probably also cover banks as well as brokers. We look at the interest-bearing sweep [ph] balances as moving about like you would expect to see in interest checking account. So, it’s got a relatively long duration to it in a relatively insensitive kind of re-pricing structure. So, it does give us an opportunity to push a little bit further out the curve to be able to put some duration on the asset side to offset the duration that we believe we’ve got on the liabitlity side. That’s part of the reason that the bank exist to be honest with you. The broker is forced into a couple of things. Money that sits at the broker that isn’t lent, the clients goes into a reserve portfolio for the benefit of the clients and you’re only allowed to invest it in U.S. Government Securities, domestic bank deposits or repo back by those instruments. You’re also forced into mark to market accounting and that’s probably the bigger impediment because it’s really hard to take duration at the broker dealer because once you’re in mark to market land, you’re going to swinging your income around. So, by moving some of the money over to the bank it gives us an opportunity not to just take advantage of a broader universe of investment selection but also to better match that duration characteristic that we believe see in the liabilities.

Thank you.

Chris? Chris [ph]: Thanks a lot. Joe, could you comment at all about the impact potentially of harp to on your portfolio, what percentage of your securities, I believe it’s somewhat low, would be impacted that, in terms of acceleration or pre-payment. And any differential in the yield versus for those securities relative to the rest of the portfolio?

Yes. So, it’s the good news for us as a lot of the growth in balance sheet has occurred in later times. So, we don’t have as big of a percentage of pre-2009 as we have post-2009 papers. So, a lot of the impact of part two won’t be as severe on our portfolios. Maybe on a more a typical portfolio. I’m sorry, what’s the second half of the question? Chris [ph]: I’m just wondering if it’s a small percentage though, is it there a meaningful differential between the yield on those securities relative to the rest of the portfolio?

Because again, it’s largely come in in large lumps in the past couple of years, I think the piece that isn’t a subject harp two really is the bulk of the portfolios to the yields that are embedded that you see are largely the yields imbedded on those assets.

Hey, Joe. Could you just give us a broad update on your transition to the Feds?

Our transition to the Feds is going well. We were a little different animal than what they normally see. So, I think there’s learning going on on both sides as we’re trying to bring them up to speed in the businesses we run, how we view them, how we run them, how we control them. That’s really important from their perspective. Participating in the stress test exercise voluntarily is a way of continuing to further some of that dialogue. So, I don’t think anything has come up that’s been particularly surprising or alarming at this point, but we’re still working on building that baseline of understanding. They have largely completed a lot of their discovery reviews and now they’re starting into their more normal cycle of examination. So, we’re moving forward in that process but really nothing material to report on that front. With respect to Basel 3, that’s still a bit of an evolving picture. So, the liquidity requirements, we were actually, we believe today fully compliant with fully phased in Basel 3 liquidity measures. That’s largely because of the type of balance sheet we run. We have a very large investment portfolio both at the bank and at the broker. Significant liquidity already available and that’s not really a challenge for us in the near term. And quite frankly, I’d love to see loan generation get to a point where it actually did become a challenge. But we’re ways off from having to make changes of the business model to continue to meet those ratios. From a capital perspective, I think we’re probably still a little cautious. I mean, we haven’t seen yet the final proposal of rule-making as to how the Fed is intending to implement their version of Basel 3. We keep hearing rumors that it’s going to come out. I think the last version we heard was late Q1. So, we’re in a little bit of wait and see, I think, along with others. We continue to have that pressure point and dynamic of trying to watch that leverage ratio because I think we believe the Fed is going to continue to view that as one of their core measures while being well in excess of anything on a risk adjusted basis. So, we’re trying to walk that fine line of negotiating a number that we think is consistent with our risk profile, consistent with regulatory standards, but not carrying a lot of excess capital that we can’t adequately deploy on a return on.

That’s great. And my follow-up, just a helpful update of NIM. I just want to confirm a couple of things. One, that 160 does that incorporate the additional transfers that you spoke of throughout the year?

Yes.

And then two and three, could you provide a sensitivity if these pre-payments stay elevated around this 25% to 30% and what that might mean for the NIM.

Well, I think to stay elevated, we would probably have to see continued movements down in treasuries because you’re going to have see a continued movement down that’s going to spark additional pre-payment activity. So, it’s a little inconsistent to say, “Treasuries are going to flatten out and we’re going to see pre-payments at this level.” I don’t think that’s how the structure is going to work. So, we do expect that we’re going to see relatively higher pre-payments in the first half of the year as we continue to process through that boomlet that came with the most recent move down as a result of Operation Twist. But we also believe that as we get to the second half of the year, if rates stabilize that pre-payment activity will also stabilize. So, that’s how you get to the 160. The 140 is more of the case where we do see rates continue to move down. We continue to see elevated pre-payments. That continues to force us not only to pull some of that premium forward, but more money into the market at lower and lower rates.

Makes sense. And then the final one. To Walt’s point about just cautious retail engagement, what are you kind of thinking in terms of margin, balance growth, and utilization for that NIM?

You know, that’s – we talked about this before, margin is really an optimism product. So when times when markets are better, and retail engagement is higher, we’ll talk about greed versus fear, all right? That’s the dynamic. People see opportunities in the market, and they’re willing to borrow money to take advantage of them. And when we got period of pretty extreme volatility like what we’ve come through, it’s harder for retail investors to get that sense of confidence that they want to be in the market in a leveraged kind of way. So margin, unless they’re stabilized, right around that $10 billion kind of level, and they’re still sitting there. I expect if we get to a period of relative stability and a healthy level of valuation in the market, that we’ll start to see them take back up again. I think we need some period of sustained consistent kind of returns that isn’t characterized by the kind of volatility we saw in the second half of last year. Not a lot of material picked up the margin.

Could you just reconcile for me the year-over-year flat expenses with that slide that showed the 6% up expenses, is that 6% match the flat including options expressed? Is that...

Yes, it’s overlaying options expressed on top of flat Schwab.

So 6% reported flat including (inaudible)?

Well, flat Schwab prior to options expressed, 6% including options expressed, and that will be the reported.

Okay.

Questions on the line product, and I wasn’t – I wasn’t following Schwab when you guys had the credit card portfolio, but why wouldn’t you – you know, have credit cards because I would obviously help them a lot and further engage your clients if you’re doing it with inside of your clients, and then also just other line products, you know, it seems that you have all these banks that are really struggling and you guys have your clients love you, they want to be more engaged, why wouldn’t you invest a little bit more maybe on your line of credit, credit cards and stuff like that?

Yes, so we’re not making investments in lending products and trying to broaden this into things that we know. We are comfortable being a secured lender. And that’s where the bulk of our experience is. There’s always a trade off, trade off in expenses, there’s also tradeoffs in terms of how you structure your balance sheet and how much capital you’re going to hold against that, and the kinds of returns you expect to earn. We’re able to operate the bank at a very low efficiency ratio because we don’t do a lot of things that aren’t part of the way we view the business. We have fairly low credit charge offs, which again allows us to produce superior returns in the face of maybe a lower net interest margin that we’d have if we took on some riskier products. So we’re trying to balance that credit exposure versus what the return dynamic looks like. Credit cards in particular is, you know, credit card is a scaled business, it’s really controlled by a few players, and it’s very hard to jump into that market and be able to compete effectively against people who have some massive investments in scale. So that’s one where I think we look at it and say from a payments perspective, we may find a way to offer a product like that down the road, but I wouldn’t expect us to carry that portfolio or build that business internally. It’s just – you know, it’s too hard to break in this far behind the scale curve. I think Chelsea got one from the Web.

Two-part question, what are the considerations you think about when deciding between issuing common preferred or debt from new capital. And then on the recent preferred, how did you take into account return on capital when evaluating that capital raise?

The different forms of capital served different purposes. Debt is long terms liquidity, it gives you operating flexibility, but it doesn’t help your regulatory capital ratios. If you’re looking for flexibility in your regulatory capital ratios, you have to move into things that count as equity in that regulatory scheme. And that’s basically common equity. And you know, we hope and believe preferreds are still going to qualify. We did a pretty plain vanilla deal with some degree of comfort, but we also put a regulatory call in it just in case for some reason, it’s not deemed to be good capital. But you have a limited number of choices at this point in things that count as capital from a regulatory perspective. So when we were looking at trying to build a little extra flexibility in case we did see some movements on the balance sheet, we were limited in terms of looking at preferreds and common as opposed to considering debt. So now, you’re down into basically a cost in return kind of trade off. And that 7% preferred is a relatively lower cost form of capital that we wanted to be able to lock in at point in time that we think the rates in near historic close and that we’re not going to regret having that capital for a substantial period of time. Common equity, if you just do the basic math, it ends up being a higher cost form of capital. So, in essence, it’s a way to put a little bit of leverage inside of that common equity without resorting to debt financing, which doesn’t help the capital ratios. So, that’s the basic trade-offs that we’re evaluating as we were thinking through preferred versus debt at this point in time. Thank you.

Hi. Just a more peculiar question, the security or health maturity balance line, that’s – and again, forgive me if you’ve mentioned this in previous updates, but that seem to have healthy fair study. What can we kind of expect going forward whether – which is available for sale?

I would expect at this point that it’s going to move basically in line with the overall size in the balance sheet of the bank. So, as the bank grows, that takes a chunk of the investment security portfolio. Again, we’ve got – because we have such a large investment portfolio, we’ve got a tremendous amount of liquidity and we’ve got the intention and the capability to hold a significant amount of those assets to maturity. So, we take advantage of – to hold the maturity classification for that core chunk of the portfolio. There are some shorter-dated papers that we use and think of more in terms of the liquidity management context, and that tends to be what falls into the available for sale portfolio. But those core long-term holdings tend to be held, and they hold the maturity portfolio. Closer to the mic here.

Hi. What’s the 10-year and yield you’re seeing on the incremental agencies are adding to the investment portfolio right now?

Yes. I’m looking at the bill right now just to make sure I’m entirely current because our markets are moving around. So. I’m sorry I can’t hear you up here. So, 135 and 120 on average, does that include the mix and fix in floating? So, if the fix rate paper is going to be still up in the high twos and the average maturity – the average that lies on that, four years? Okay. Justin [ph]? Justin [ph]: On your preferred offering, I believe you originally filed to do closer to 700 million. I believe the price is 400 million and the trade-off ended up at 103. Should we expect to issue some more later in the year? And why didn’t you do close to 700?

We didn’t file for a size. We were trying to take advantage of a point in the market where we’re seeing a couple of deals get done and we’re trying to come in at the back with some of that momentum. We would have taken a little bit more size if we could have found it at the price. I think we ran in to a little resistance because we’re not a frequent issuer in that market. We’re trying to get in and out of the market in a day at the price. We got pushed back a little bit and took what was available at the right price point. So, we’re’ happy with the 400. We saw an adequate capital and we’re still looking at the opportunities. It’s hard to say whether we’re doing more or not. We’re a little bit opportunistic in terms of thinking about that market. Chelsea, you have another?

Could you explain how you can get to the 8% revenue growth? We understand that option expresses part of it and darts are up, but what else factors into that specially given the 10-year currently trading less than 2%?

Yes. So, again, you hit the bottom and that interest margin here pretty fast, if you can hold on to 160 basis points. So the growth that we’re able to drive in the client balance is, of course, the year actually helps as we move forward as earning assets improve. We’re also getting help in the asset management fee line. So, to the extent that we’re able to move people into more advisory services, the advice component of that asset management, fee line also contributes to the growth. The darts are up 20%. So if you put it all together, that’s where you get to that 8% revenue growth. But it’s a little bit of help from all of the line items as we move forward. Oh, another one.

How are you thinking about capital management in 2012 in terms of buy-back, repurchase possibility?

Yeah. At this point, I’d say it’s still too early to commit to any kind of buyback that we’re not generating a lot of excess capital. Our expectations for growth at the bank would have us deploying the bulk of the capital that we expect to generate to continue to support the growth in the balance sheet overall. So, maintaining that 6% leverage ratio with a little bit of buffer is really the primary objective for capital management today. We’re not to the point yet where we’re generating excess capital that we’re thinking about being able to repurchase substantial amounts of capital. So, unless we can get some clarity out of the regulations that allow us to look at those targets and approach them a little bit differently, that’s the answer for now. Okay. Another one? You should call (inaudible) sooner, you wouldn’t have to do them all in a row.

Can you provide us with some thoughts on where we stand with the regulators on being a SIFI, systemically important financial institution?

So there’s not really anything I can provide in the way of update. We are not captured in the reg. We have not been notified that they intend to look at us as a SIFI. The guidance that they provided in terms of some of the statistical measures doesn’t look like we trip them. So we don’t have any reason to believe that we’re high on their radar screen for classification as a SIFI at this point in time. Mike? Michael Carrier – Deutsche Bank Securities: Just maybe one follow-up on that last question on the capital. Yeah, maybe if we look at 2013, because 2012, it seems like you’ve got the transfers going on. You got a lot in terms of capital use. But in an environment where, say, that tenure is at 2%, the balance sheet, it starts to come down and take maybe 5% growth, in that environment when you look at the cash flow that you are pushing off, could you envision potentially doing buybacks, obviously, if you get the regulatory approval? But if the balance sheet is not growing and you’re still putting off the – you guys will?

Yeah. If the balance sheet growth slows to that kind of a range, we could absolutely envision it. And nothing has changed philosophically around our intent to manage capital for the benefit of our shareholders. If we’ve got excess we’re generating, we’ll look to return it. Now, again, we’ve had the conversation with many of you. We’ll debate what’s the right form of return. So should we look at buyback? Should we look at enhanced dividends? How does the market compare those things? What’s the tax structure at the point in time? So we’ll debate all of those things actively. But the core belief that we should return excess capital to shareholders, if we’re generating it, we’ll do it. Michael Carrier – Deutsche Bank Securities: And then maybe just a follow-up on that because it seems like over the past two years, the transfers every once in a while they come up and there’s another 4 billion or 5 billion that you can transfer over. Not just you guys, the whole industry. But when you think about where that money is coming from or what could take place in the future, how do we think about that? Meaning is it after these transfers is that most of which can be brought on or is it just as the cash continues to grow, as the client balances growth, then there’s more opportunities to come in.

Yeah. You’re probably not going to find this to be a completely satisfying answer. But we are pretty well executed against the core strategy that we set out years ago. So, clients with less than $500,000 in household assets, their sweep option is one of the balance sheet products as opposed to a sweep fund. And so the sweep fund movement over to the bank is largely completed. We’ve got some things that we’re doing around optimizing the broker versus bank split and that’s what you’re seeing and that could go on in small sizes over time. But that core strategy that we laid out years ago is pretty close to complete. So if we didn’t change that or if the environment didn’t change in a way that forced us to change that, then you would expect to see that the balance growth would probably move more in line with what we see in terms of client acquisition. That said, if we see money fund reform that makes it more valuable to hold more money on the balance sheet as opposed to in the form of a money fund or if we decide that for whatever reason we want to make choices to try to change where we’ve drawn those lines and moving more balances, we still could see substantial balances move over time. But it’s going to be a balancing act of what are we hearing from clients, what’s going on in the environment, what do we have the capacity to process. So I’m not going to be able to give you a hardened, fast answer that says, “All of the money funds will move on to the balance sheet” or “None of it will move on to the balance sheet.” The fact of the matter is, over time, we’re going to continue to look at the environment and try to optimize as best we can.

Joe, just a follow-up on a different topic. Any places that you see where value propositions can be tweaked or places as we look out in 2012 where you might have been waiving fees to kind of attract new business that are now coming off just an update on some of those broad initiatives will be helpful.

I might just defer that question because there’s a whole bunch of that commentary in a number of people’s presentations that are already coming up. So, if we don’t get there, you can call me on the conclusion but I think you’re going to see a fair amount of that topic covered over the course of the next couple hours. Chelsea, I think we got time for one more so let’s see it.

How can we think about net interest margin longer term if rates are near zero in the late 2014 the way the Feds commentary?

Yes. We haven’t produced those numbers for public consumptions. So, generally, I would expect that we would see some ongoing continuing pressure but it’s going to slow pretty dramatically the same way that we did see when we saw the new stabilized more in that three and a half kind of area. We saw the changes in the net interest margin stabilize to the point where the growth in the balances were more than offsetting that impact. So, generally, I’d say that we’ll follow a path that’s fairly similar to that but at this point, we’re not ready to put out a number for 2014, that interest margin, okay? So with that, I think let’s get – send everybody to break. It’s about 10:10 now. Let’s plan on being back about 10:25. Thank you.

Let’s go ahead and get started here. I hate to cut short a break. Great. Well, I’m Andy Gill and I’m excited today to talk to you about the Investor Services business. What I hope to provide is a little bit of context around 2011. The significant investments we made in the client and how those will help propel our growth for 2012, the additional investments we’re going to make in 2012 and how we are delivering growth in spite of a low interest rate environment. So let’s go ahead and get started. Just as a review. And I think many of you already know this. Our retail investor enterprise is about 6 million brokerage accounts, 661,000 bank accounts, about 700 billion in assets. We have 305 branches across the country and we represent approximately 68% of our overall revenue and 67% of overall firm pre-tax profits. So I promised a little bit of context around 2011. We had a pretty significant year of delivering business growth. Assets, 25 billion and net new assets up 90%. That includes 7.3 billion from optionsXpress, which obviously is a one-time event. Revenue up 12% to 3.1 billion, almost 3.2 billion. That includes four months of optionsXpress results and pre-tax profit of 928, 29% margin up 19%. And again, that includes four months of optionsXpress. Obviously, we’ll have a full year of those results in ’12. What’s important behind the numbers, and I want to talk a little bit about, is the client highlights that we delivered and the initiatives that we deliver, which we think are significant and will help us propel growth for 2012. First, we added 160,000 new households delivered through our advertising, delivered through referrals from our current clients and delivered from our acquisition delivery out in the branches. And…

It’s been awhile since we got an update on you know, the initiative to attract younger customers, I know probably a lot of what you touched on, mobile, the banking and checking stuff, you know, goes down that effort, but I was just hoping for a bit of a fuller update there.

Well you hit the key high points. We continue to attract younger investors, that’s been a significant part of the growth of the 160,000 households that I talked to you about. And the things that they are responding to, are things like mobile, things like the new website, client speaks is a good example, that’s where they like to get information, and things like our Schwab manage portfolio’s mutual fund, ETF and Windhaven. We’re seeing many more of those clients want more help and guidance, want the ability to understand Schwab’s point of view, and understand how we can help them make decisions on how to get invested, even things like financial planning, how can, you know, where am I in my plan? How close am I to reaching my goal? We see engagement among our younger investors in our portfolio performance reporting? So once they are invested, how much risk am I taking to get the return I’m getting.

My second question, just on the derivative front, can you discuss maybe what’s changed post the MF global fall out in terms of both, you know, opportunity or types of questions that you’re all, you know, fielding from, from your clients?

Well obviously, MF global is in incredibly unfortunate situation for the whole industry. Options expressed has a futurist [ph] business today, clears through R.J. O’Brien, so those clients were not impacted. We continue to see very good interest from Schwab clients opening up options expressed to clients – or options expressed accounts, and wanting to trade futures, as well as continued growth in the options expressed sort of core business. I think that clients will continue to ask good question around the segregation of funds. Certainly the regulators are asking good question around the segregation of funds, but fundamentally, we don’t see a diminish in interest in futures. In particular, I think, derivates traders look at options and futures together, they open up two accounts, they trade them, looking at the strategies, which product best delivers against the strategy that I’m pursuing. Michael Carrier – Deutsche Bank Securities: Thanks. Two questions, first, you know, when we look at asset managers, there’s not a lot of flows in the industry, but they tend to focus on the products that work, so in this environment like equity income, dividend-type funds, there’s a lot of campaigns around those products. You know, in the past, it’s been international, so you know, when I think about which Schwab can do, or what you do from an advertising stand point, not necessarily Schwab’s products, but just in terms of what’s working, you know, in the industry. Like what do you do on that front? And is there a more, you know, that can be done, whether it’s, you know, on the website, to the clients, to the advisors, you know, to try to attract the products that you know, they might not be as risky in this environment, but they still offer attractive yields, you know, and you still get some equity exposure.

Yes, so we typically do not take a product centric approach. We start with, what do the client needs? And then what are the solutions that we have that can deliver against those needs, rather than saying, here’s a hot product and we’re going to advertise that because we’ve got it. But I think where you are going is, as we think about tilting that advertising towards the affluence space, what are some of the things that we can do to attract there? One is, believe it or not, and John will talk a little bit about this, there is pretty low awareness still that Schwab offers advice. You know, we’ve had a history of being a discount brokerage, and we’ve moved well beyond that, you know, I’ve shared earlier, 16% of our assets are in fee based advisory solutions. But we need to build awareness of that. And so we’ll pick some of the – you saw us this year, advertising Windhaven as an example of a solution that really delivers against that. John will talk a little bit more about that. We’ll advertise those solutions, and market those solutions, but more importantly, because I do not believe advices is really advertising, people come in saying, “I got to have this advice solution.” We’ll have those in conversations with our financial consultants, whether it’s through a financial planning conversation, or portfolio conversation. Michael Carrier – Deutsche Bank Securities: Okay, and then one other product area, there’s like risk manage products, but they tend to be – that partner up, not you, but like an asset manager, we have to partner up with an insurance company, just to protect, you know, the downside.

Sure. Michael Carrier – Deutsche Bank Securities: So anything, you know, out there that you know, you’re seeing interest or you can offer, you know, where – you know, clients at least, you know, have some protection on the downside?

Sure, Mike you know what, because I really like John and this would steal a majority of his thunder, I’m going to let him answer that question. But if he doesn’t answer it, you come right back at him. Michael Carrier – Deutsche Bank Securities: Okay.

Chelsea?

From the Web, can you provide more detail on how the business model with Quicken, loans and structured? So does Schwab get a referral fee, or what other economics are involved. And then how do we expect this to impact our balance sheet growth.

Balance sheet growth, I’m going to let Joe answer it some point in time, and in terms of the business model, we are – we will take interest from the clients, or if the client comes to us through the Web, which many of our self-directed clients will look on schwab.com and find the information. They then call Quicken Loans directly, and it’s Schwab bank from Quicken Loans. So we are referring the client to the Schwab offer at Quicken Loans, and Quicken is doing the servicing of those and underwriting of those. You want to answer the balance sheet question?

Give me a second, I’m up? Okay, so – webcast, I guess I have jumped down to the – at least get me on the Web – the balance sheet, from a structural standpoint, we are not – so we’re going to be paid a marketing fee for entering into the arrangement. And so it’s going to show up in a slightly different line, but the economic should look similar to what we had with our – previous arrangement with PHH. So you’ll see that, it’ll move a little bit in the lines, but the economic impact should be fairly similar. From a balance sheet perspective, we have the right to basically buy the same – to get acceptance with the client community.

Okay, just a quick one on the financial targets Andy, the broker expansion that you’re thinking about in 2012, is that a function of just more fee based advice moving up? Or is that just...

That’s things like business process management. We’re not going to get up here and talk about those as highlights, but those are going on in order to be able to provide additional services to clients. So those will be the primary ways we do it, fee-based advice. I was agreeing with you. Yeah. So, fee-based advice tilting towards affluent and active trader. And then, third, always looking for those opportunities to wring more cost out of the processes that we have so that we can invest back in the client.

All right. At this point, I’d like to bring John Clendening up on stage. And he’s going to take us through our advisory products. John?

Thank you, Andy. Good morning, everybody. Great to see you here. I wanted to get us rolling by asking you to put your mindset back several years, to 2001. So, 2001, I think it’d be pretty fair to describe Schwab’s retail franchise with just four words – self-directed discount broker. Of course, in 2011, the dot-com bubble had long burst and investor services were working really aggressively to try to figure out how to respond, how to respond to the new economic reality that was taking root at that time, but also respond to a fairly decided and swift shift in client mindset. Clients have figured out that long were the days where they can invest in just a couple of equities sort of sit back and watch those equities appreciate. And so, at that point, the case for a new approach or for some change was really, really quite clear. In terms of our value proposition, the value proposition that had served us so very well during that bull market had become a little bit less differentiated. And on top of that, that same value proposition, it’s also become less relevant to a number of our clients. If you think about one key aspect to that, Schwab had always been known for terrific service, and we still were. From the standpoint of schwab.com, we’re very happy with the self-service we’re providing on schwab.com that was terrific for clients very well-received. But we think about the rest of our service model from a phone point of view and also from an in-branch point of view, our service model really was almost purely reactive. You put all that together and the state of the business actually was not that healthy at that time. We’re competing for a very, very narrow segment…

You bet. So, couple of principles that we put in place are the following. First is we try to look at what we think price – we might be run a particular offer relative to convincing a sufficient number of clients to be attracted into the offer and to make it economic sense. We’re trying to weigh certainly margin but also uptick in the offer. Second is we look at competitive reference points and, of course, we’re really mindful to what we believe is a fairly strong cost advantage in this industry. So, in some ways coming from where we were in 2001, we felt like a penetration pricing type approach made the most sense and that’s why you see some of the of the offerings at a pretty sharp value. And it’s worked as we would have thought it would have worked. So we try to combine those elements and thinking about how to end up pricing a product. Howard Chen – Credit Suisse: And maybe just a follow up to that. Can you talk about how you’ve evolved some of the approach of maybe giving kind of a teaser like you did? I think maybe two years ago you would have to go on to manage fee accounts and then when you stop that teaser program, the retention that you see or don’t see.

You bet so. What Howard is referring to is there’s a time period, I believe it’s particularly focused on SPC, is that right? SPC. So, we’d essentially had a year or 12-month fee waiver or six-month fee waiver. If you put yourself back into when we did that and what was going into the markets, i.e., they were imploding and investor confidence may have been even lower than the charts that we just saw, it made a lot of sense to us to try to add, again, another bit of momentum around a penetration-type strategy by taking away price as a barrier. We’ve done a couple of look backs into, “Hey, what did that do for us?” And we found that, “You know what, it made economic sense for us.” But that was a particular time of the market. I don’t know if we’re at that time right now. We would certainly evaluate that going forward but I think the headline would be, you know, we did it; it made sense when we did it. And looking at the economics, it made sense. Have we seen some clients coming out of those offerings we have? What we tend to see that it’s really within the bounds of having that then an effective offering for us. Howard Chen – Credit Suisse: And then a separate other quick question. In terms of that share in the in-house market share that 6%, I mean, have you looked at that if you just looked at households that had over 250,000? What would that look like? People who actually would qualify for some of your advice or...?

Sure. So, a couple things. So, if you think about that bare minimum at $25,000 in an IRA for Schwab managed portfolio’s mutual fund and then lift that up to just $50,000 for brokerage in that product, the vast majority of our assets actually do qualify for one of these offerings today. And so, the number would be I’d say 80 something percent, 90% even potentially would qualify for one of the offerings that we have today. The available market from that point of view is quite strong. Certainly the penetration rates are higher with affluence. Walt made the pointed earlier that our affluent clients tend to be our heaviest users to kind of use that expression. And we do see the uptick is higher just like we saw in the bank, the uptick is higher for these sort of solutions. So, it’ll be higher than the 15%, 16% number but certainly not approaching the full commission broker certain number. Next person in the middle.

Of the billion and a half dollars that you’re seeing flowing into this segment every month, can you break down how much that is from new to the program versus existing having tried it and adding to it? And then so the second part would be if you went back and looked at it like an aged account basis what do you see as far as, for instance, if you never grew another sort of new client how much additional penetration would you expect based on the sort of the sort of aged clients if you will in terms of just where they are at versus where they tend to get to?

Okay. Let me tackle the first one. I think I’m going to come back and ask you to clarify the second part I’m tracking with you. On the first, the number that we shared is actually strictly new enrollments so new to offer dollars. And on top of that, there’d be a benefit of the client that is already in the service and chooses to bring more into the service. That’s actually top spin on that number. We’ve got a pretty fair opportunity there. I would also share with you one of the experiences that we’ve had relative to having an attracted minimum is, is it oftentimes the client does start near the minimum. And so, Windhaven is a good example of that where you see a lot of – the average, you know, the couple of hundred thousand range but if you sort of look at those that choose to start with $100,000 is a pretty fair number. And so, one of our major initiatives is to make sure that we capture more and more of the share and essentially resell the client into the portfolio. So to strictly answer your question, that didn’t include new money of existing clients from the offer. And the second one if you don’t mind, if you would mind just restating the question in the second.

I guess the basic question is where are you if you didn’t add any new customers based on what you...?

To the offers?

Yes. Forgetting new clients to the program. If you just looked at based on your history with the existing customers and where they tend to get to versus where they’re at. How penetrated is that or what’s the sort of upside?

Okay. I think you can characterize in a couple of different ways. So, when we look at share of wallet of these sorts of clients, we know that there’s a fair amount of assets yet to consolidate. And by the way, when a client signs up for an advisory solution largely due to the conversation that’s been happening at that time that’s also a catalyst for bringing in assets from the outside. And so, when we look at share of wallet for this clients there’s ample opportunity to continue to win more client assets from that point of view. In addition, we will look at sort of the organic growth rate if you will, that we’re seeing in these offers so the net new money compared to net new money you get in a none advisory solution, there’s a fair multiple in terms of that number not prepare to share the number itself but it’s a fair multiple when compared to folks in a non-advisory offer. Let’s get the next question. Okay. Oh, sorry, one more question.

It’s actually – just two questions. First, you know, when we look at that 16% new in terms of the advise assets when you look at that relative to the full on service brokers so that 25%, I guess like two things there like is your client base just given you know, the mix, the diversification versus – can you get to the 25? And then maybe more importantly, when we look over the past 10 years, either you’ve been able to do that on average maybe 1.5% a year if we just take the 15 or 16 versus zero. Is there anything that can make that either faster or slower meaning 10 years, no returns in the equity markets or clients, more eager to get that advice? Or how does that play out when you get to that 25% low.

You bet so. On the first question, there are clearly some differences in the mix of clients with a full commissioned broker versus at Schwab. We are going to have some of that hardcore self-directed investor here. But what’s interesting around our client base and I just want to emphasize, Walt had said about this earlier. What unifies in a lot of ways the acceptance of the various services that we provide or maybe better said what sort of signifies the adoption rate often can be around the client type itself. So, we see there are clients that are active traders. So here’s our active trader roster. What’s their penetration rate or what’s our penetration rate of advisory service into that active trader client base. We see the adoption rate. That’s not as high as others but it’s pretty darn high too. And so, we don’t see that the industry sort of hard definitions around client decision making like self-directed, validator and delegator actually hold in reality with the client. That tells us that we probably can get to a pretty high increase in the penetration rate that see today. And of course they’ve been left in their penetration rate as well just like we asked. That 25% is not a ceiling for them. I wouldn’t imagine that they would talk about in that way. As far as what are the kind of the macro drivers that end up influencing demand, is that the second question?

Yes.

So, this cuts first in a couple of different way as we recently did an investor sentiment survey and there’s an interesting gap right now between the majority of clients and I’m going to focus just on them but the majority of clients still would put any incremental dollars into the markets. So in spite of what’s going on, in spite of their lack of confidence they’d still put incremental money into the markets. The gap that’s created is, the question is what do I do with it. So, in – certainly in the environment now we’re more than two-thirds or so of clients are not confident and are looking for help and guidance. This is a bit of a sweet spot for us. Windhaven maybe a really good example of that. So we’re having a conversation with a client in Windhaven and you’re speaking about the approach that Windhaven takes around, “Hey, we’re focused on downside risk protection. Let me give some context around how we manage portfolio.” Bear in mind that you need to be thinking about this portfolio in the context of a cycle but these things all seem to strike a better resonate cord in the markets when sort of the markets sort of going this direction. I presume a little bit of counter cyclicality to it as well. On the other hand, markets are doing this. I think you’d see the NNA numbers also improving so we have more of a – efficient if you will.

And then just on the variable annuity, I know you said you don’t want to get into many details but would that be something that Schwab would be offering or you would pair up with another program. I guess I’m asking because some of the insurance companies have stopped taking new money because of the rate environment and like some of the risks. You’ve had in the past like all the certain other products like a lot of the broker dealers offered them with the structured notes which were competing products with the variable annuities and those ended up too. But is it something that you guys can compete maybe on price or something that’s a little different than a variable annuity or is it in the same concept?

Well, let me get to the first part of the question. So, we would imagine, we got to build this out. So what we’d imagine that we’d make available of variable annuity with a partner. We’re not going to go and create an insurance capability be somewhat akin to how we’ve been or done the bank if you will. As far as product details I’m not at a state where I can get into those now, except for reiterating that we look for a better value, we look for more transparency and some of that means more simplicity than what’s been on the market today. That will strike a better cord in the context of that planning conversation that I referred to earlier. So with that, I think we need to go to break, Rich? When do you want folks to come back up? Fifteen minutes? Ten off. Thanks, everybody.

Give me a minute or so to grab this great lunch. I probably should ask – we should feedback to Rich, are we feeding you all well? You know, for a good – day here. We need (inaudible). Good California, healthy. Okay, welcome back, Jim McCool, and I’m going to spend the next 20 minutes or so, talking about the – sharing with you some facts about our accomplishments and our continued story of growth and momentum in the institutional services business that we saw last year, number one. Number two, I want to spend some time highlighting and talking how we think about some of the initiatives that we began in many cases in the last several years, and how they can play out in our growth plans for the future. And then following Q&A from all of you, I’m then going to bring up Steve Anderson who will then take you through a deeper dive on our most recently launched Schwab and those advantages. And then he’ll come up in the stage and continue to take your questions as well. So that’s the agenda. Many of you have seen this slide before, this is again a recap of who we are, institutional services, almost a trillion in client assents in total between the businesses that make up institutional. Our largest component of institutional is the Advisor Services business, we serve the registered investment advisors, we serve companies with their 401(k) stock plan components and programs. And all total, those are the businesses that make up that nearly one-trillion in assets. One and half million direct serve and the 401(k) business today, relatively flat number over the last couple of years, and we can talk about that perhaps later. But that’s a little bit who we are, and who…

Jim, can you just walk through what are the economics on the Pledged Asset Lending side? And then, secondly, what do you see is maybe the revenue potential for that product?

So the economics of that would get back into what we earn in the bank, in our portfolios there. So I’m not sure that we’re going to be publishing prices and yields on that. But this is a positive spread that we earn and is one that helps us monetize and increase the revenue over what we earned today in the Advisor Services business.

(inaudible) the rates on the PAL product to be roughly akin to what we earn on margin. So it’s a margin alternative and looks very much like margin in terms of yield.

Do any of your RIAs feel like some of the things that John spoke about are competing with them and their products? Or do they not see it that way at all.

Yeah, there are Advisers that compete in the same zones of clients that we serve in retail that the advisors themselves often roll in the industry with the Schwab Advisor Network. So it’s a way of bringing all of us together that we think helps manage that tension. But on the total balance, we only have it on the edge within some.

Thanks.

Hi. Does your next-generation trading platform on the institutional side have the same derivatives and global trading capabilities as what you’re building out on the retail side?

We’re going to be following. After that gets built in, we’re right behind kind of. And right now it doesn’t.

On the backend, is it the same team that works on both platforms?

We share all those technology and resources in one technology group here at Schwab.

Thanks. Howard Chen – Credit Suisse: Jim, last year you shared with us just, I think, a bit of a renewed push on the $10 million to $50 million emerging advisors program. What’s going on with that customer set and some of your initiatives there?

Yeah. Thanks for bringing that up. I didn’t talk about that. First off, the reason why we’re going after that or accelerating our efforts or increasing our efforts, I should say, in the core advisor segment $50 million is the economics are strong. They tend to use higher revenue generating assets, a better revenue flow for us. We’ve built a very good service model there. And by the numbers that we have, we believe we have a leading share of those advisors already. And so, our message was to increase the awareness within the rest of the industry, particularly the breakaways, that this is a good place for them to come. We wanted to overcome what we heard with some barrier out there that advisors were breakaways, especially we’re thinking, well, if you’re a really big advisor, Schwab is really good, and we are. But we’re also really good at helping the emerging advisor, if you will, to grow their practices to become quite successful. In terms of growth rates, I don’t know, Bernie, if we’ve – Bernie I see in the back – I don’t know if we’ve had growth rates we had published on that segment publicly. Do you have anything to add to that?

It remains one of our faster-growing segments, is we’ve talked about frequently advisors on our platform tend to grow faster than the industry norm. In fact, they tend to grow mid to high-teens. And often in the emerging segment at different periods of time, we’ll see them even exceed that growth rate. So we’ve been quite pleased. But Jim mentioned something that’s very important. We’ve been industry leading in that segment as well. In fact, you can carve up almost any delineation of asset size and you can see that we’ve led into those places. So we call it core now. It’s something that we’ll continue to have prominence in what we’re doing and again addressing their needs for their size and what they have. That small segment has a specialized need with the emergence of a lot more regulation. And we’re going to have to help them think about that. And in many cases, we’re going to have to think about how we will help them to consolidate or use their parties in that capability. Howard Chen – Credit Suisse: Great. Thanks. And then, separately, Jim, on the lending initiative to help facilitate RIA succession now, is the strategy that a term loan will make the Schwab advisor relationship sticky? Or is there some greater contractual relationship over time in terms of...

Well, first off, we’re in pilot, Howard. So we haven’t formalized all the terms and conditions on this. We’re working. We’ve already done one and we hope to be doing more this year and working together with the bank. I would first offer that when we would be offering the service, I think we already have a relatively sticky stable relationship. Otherwise, we wouldn’t be comfortable in offering this. So the opportunity here is as it passes through different generations or different owners, can we continue to maintain that. Keep it all, quote, “internal” to their successful leadership team. Okay. Topic, Steve Anderson, I don’t think you’ve met before on the stage at least. And Steve and I and his team have been working on this whole 401(k) initiative. We call it Schwab Index Advantage. What I want Steve to be able to share with you is how we not just are talking about it, but how we expect it to change how 401(k)s are thought off. This is not a marginal, at the margin type small change in the industry. This is moving the 401(k) needle to a whole different perspective – changing the focus to that off low-cost, simple and with advice, and the impact of those. So, at this time, I’ll bring up Steve to share with our efforts and progress on Schwab Index Advantage.

Thank you, Jim. And greetings. It’s a real privilege for me to be here representing the team that’s been working on Schwab Index Advantage for, gosh, well over a year. It’s about a year ago on this very stage that Walt introduced the concept as far as the major investment that Schwab was making in the 401(k) industry. And what I’d like to do today is talk a little bit about, first, the nature of the buying community, our clients; looking at our clients and how they view the market through their eyes, both plan sponsors and participants. Secondly, I’d like to get into a little bit of detail in regards to the product. And then, third, probably most important to all of you, how we view positioning this product and our strategy going forward with our existing business and also our growth strategy going forward. To set context, we’re in a market where there’s about just shy of $3 trillion of assets in play, 15 million participants. And if I might reflect on the gentleman who, so to speak, is the father of the 401(k) and refer to a quote that took place in November of last year, Ted Benna, back almost 30 years ago, a little over 30 years ago is credited with finding that aspect, that provision in the IRS quote from Ted in November – “I would blow up the system and restart with something totally different. Blowing up the existing structures is the only way to simplify them.” Pretty powerful statements from the individual accredited with starting that, which is now a major savings vehicle within our society. Let’s explore why Ted is making that comment and where Schwab Index Advantage comes into play as we address some of those concerns that he highlights so…

Steve, I think most – everyone would agree this is a pretty revolutionary idea, it makes a lot of sense economically, but sometimes, the inertia of these markets can be very, very powerful. So I guess, you know, if we come back in a year, how would you define success as we kind of see this play out?

You know, it’s a question that I’ve been wrestling with because I know it’s a new offering, but inertia – there’s a flip side to inertia, inertia is individuals not wanting to take the action. The other thing that can happen in the market that we’re in, is, if something gets traction, it can get traction is a hurry, and our hope is it would. I’m going to probably measure success more in terms of our sales pipeline because the sales cycle in our business is typically anywhere from six months on the short side up to a year or more on larger opportunities. So I’m going to measure it more by how do we look at our pipeline? How many plans do we have in that pipeline, how many assets, how many participants, and really building the momentum because as I stand here now, we’ve got a pipeline now, a very healthy pipeline of plan sponsors that are looking at our traditional product, and we’re going to do the best job we can to introduce our new product in their decision-making mode. So it’s going to be a transitional aspect in terms of how do we build that pipeline, get the word out because this is an organic growth play that we feel as though it can gain momentum over years. And we actually feel that with the ETF version that we’re going to roll out next year, that’s going to be even more disruptive because there’s nobody that plays on our space that will have that capability of trading during the day with ETFs driving cost down even lower, with the same features I just talked about. So we feel a gain in momentum as time goes on. And to the extent, we get some great traction over…

Sounds good. And then my follow up, given the product is fairly disruptive, Steve, I mean how are you preparing for any potential disruption in terms of either that, you know, traditional 401(k) offering, and second, just broader one source relationships for the company and what are you hearing, you know, in real time from folks?

With any partnerships, such as with our one source, I think open communication is the best policy. They have known for a year as the strategy, what we’re doing. There is certainly a place for active management with the advisors, with our retail offering, but if you think about the nature of 401(k) plans, they’re a long term buy and hold. And to the extent, over a long period of time, how many active managers are actually going to outpace their benchmarks. And if you can put that 65 basis points, or maybe even more in your pocket, just be lowering your cost, and having a very diversified approach in an institutional product, I think plan sponsors are going to be very interested in that type of approach. So communication is paramount with our partners there. Disruptive? We want it to be disruptive, we absolutely do. But disruptive to our competitors, not to plan sponsors, not to participants. I think the hallmark of a lot of what you’ve heard today when it comes to the product side is, what’s in it for the client? And there’s a lot in this for the client. There’s still – for those that want to do it themselves, they’ll have every opportunity to do so at a much lower cost. For those that need the help, and many do, it’s going to be a very comprehensive service. Over here in the front? Justin [ph]: For this segment, I guess in ’06 and ’08 when you used to break out the corporate and retirement services as a separate entity, operating margins were probably in the mid 20%, I’m assuming you’re not there now. Is there kind of stated target or what it realistic for this segment to get back to?

Justin [ph], this is my first time on stage, I’m not going to make a mistake answering that question just yet, I’m going to look over to Joe. Joe, to what extent do we really break that out? As far as I know, we haven’t. So I want to be able to be invited back up by the way.

So you’re right, we don’t break that out in terms of segment information anymore. It is fair to say that much like the rest of the business, the retirement business is impacted by the low rate environment, there’s a chunk of the client bounces the sitting cash, cash spreads are depress. So we definitely felt some margin pressure in that part of the business over this part of the cycle. I think it’s important to note, and Steve has given you a couple of reference points, one on what the revenue yield looks like, and basically, an almost doubling of our take on those fees. Two is, some of the commentary around cost. This isn’t a markedly more expensive offer to deliver to market. So we do expect over time, we’ll see better margins in this part of the business which will allow us to be more aggressive in terms of how we go to market, but we’re not prepared to make predictions or break that segment margin out today.

Joe brings up a good point, I mean let me just add a comment here more on our market. With this offering, we can be more aggressive going up market, going after some major corporate players that are interested in moving in this direction. And there had been some significant, multi-billion dollar plans that have moved to an all passive approach in recent months, and we think we can lead that. And we can do so with plan level economics and revenue, that allow us to do it in a sustainable way which would be very difficult today. To compete in that space today, you almost – you have to do it at the expense of your other clients, and we have just chosen not to go there. Chelsea?

What are the advantages or disadvantages of a plan sponsor choosing the 100% mutual fund version versus the 100% ETF version that’s going to be coming out?

We’re really fairly indifferent on whether it’s indexed, 100% indexed with mutual funds or with the ETF. I think the advantage with the ETF is going to be being able to drop that cost down that much further in terms of the underlying cost. And that’s one of the key elements of this, dropping it down. An then for some of those plan sponsors that may want to have that inner-day trading capability. Joe, do we need to wrap up? All right. Well let me bring Joe back up. Thank you so much for the opportunity to be with you today.

Thank you, Steve.

Thanks, Joe.