Charles Schwab’s net new assets under custody from registered investment advisor firms have dropped significantly from last year, but chief executive officer Walter Bettinger is seeing a silver lining in smaller RIA firms.

Net new assets under custody from RIA firms reached around $94 billion at the end of June, according to data from Schwab.

“Our largest share of net new assets year-to-date have actually come from smaller advisors, those who manage less than $500 million,” Bettinger said Thursday, referring to its custody business, during a summer business update call with analysts.

RIA firms with less than $500 million in client assets made up 42% of Schwab’s net new custody assets at the end of June, up from 39% at the end of October last year.

In contrast, the share of net new custody assets from RIA firms with more than $5 billion in client assets fell to 17% at the end of June from 21% at the end of October last year.

The latest net new assets under custody total is sharply lower than the $200 billion Schwab had at the end of October last year, however.

Still, Bettinger touted Schwab’s efforts at growing its custody business.

“[W]e aim to provide the best platform for every RIA, regardless of size or business model or specialty, and our success in winning clients of all shapes and sizes clearly indicates we're succeeding,” said Bettinger, who is now also co-chair at Schwab.

Schwab has also been increasing engagement with smaller RIA firms. Schwab Advisor Services organized a new conference for emerging RIA firms with up to $300 million in client assets in April called Engage. The plan was to expose attendees to the tools, resources and best practices to run and grow independent practices, according to Schwab.

Schwab Wealth Advisory

Meanwhile, Schwab president Rick Wurster said the company is investing in Schwab Wealth Advisory, which was renamed last month from Schwab Private Client.

The investments include “enhancing our digital experience, providing resources and support to advisors to ensure even greater advice and service and bringing more of our wealth expertise at Schwab to the client,” Wurster said during the call.

Investing solutions are also top of mind, Wurster said.

“[W]ith the increase in interest rates, we’ve seen record flows into Wasmer Schroeder on the Schwab platform,” Wurster said, without giving amounts. Wasmer Schroeder, a fixed-income manager specializing in taxable and tax-exempt municipal strategies and municipal separately managed accounts, was purchased by Charles Schwab Investment Management in 2020.

Schwab has also expanded its environmental, social and governance tools with the introduction of MSCI ESG ratings for individual stocks, Wurster said.

Meanwhile, Schwab Personalized Indexing has “delivered for clients in a volatile market, and has delivered on the promised tax savings,” according to Wurster. This tool aims to bring tax and portfolio management capabilities to RIAs and retail investors.

Direct indexing gives clients broad exposure to an asset class, such as large-capitalized equities. But rather than buy a mutual fund or exchange-traded fund, investors own the individual stocks that comprise an index. The customization comes in when advisors tweak which index components they buy — or don’t buy — and in what proportions.

Meanwhile, Bettinger said he will consider mergers and acquisitions but noted that there’s a “meaningful threshold” to those decisions.

“Given our strong profitability and capital creation, we would want to weigh any possible M&A activity against the other alternatives for deploying capital, including buying back stock in a company that we know very, very well and have tremendous confidence in its ability to continue to grow organically,” he said. “Of course, I'm talking about Schwab.”

Schwab’s total client assets fell 13% to $6.83 trillion in the second quarter compared to the first quarter, and by 10% year-over-year, according to its second-quarter earnings report.

Despite lower assets, Schwab’s net revenue in the second quarter was $5.09 billion, up 9% from the prior quarter and 13% higher year-over-year.

As a result, Schwab’s net income based on generally accepted accounting principles during the latest quarter was a record $1.79 billion, up 28% from the first quarter and 42% higher year-over-year.

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