CHARLES SCHWAB EXECUTIVE MEMO: NAVIGATING THE ADVISOR TRANSITION

Managing Margin Compression and Workforce Reduction

CONFIDENTIAL | Executive Leadership Only From: The 2030 Report — Strategic Assessment Date: June 2030

THE SITUATION

You're managing the most difficult transition in Schwab's 50+ year history: from a high-advisory-fee model to a high-volume, AI-assisted, lower-fee model.

Your current situation: - Headcount: 3,200+ financial advisors (down from 3,400 in 2027) - Advisory fees declining 8-10% annually - Net income down 11% YoY despite flat revenue - Stock down 42% from 2025 peak - Advisor morale is fragile (they're watching the company launch AI products designed to replace them)

Here's what needs to happen:

THE BRUTAL MATH

Current model (2025): - 2,800 advisors managing USD 6T in assets - Average advisory fee: 0.8% - Advisory fee revenue: USD 4.8B - Advisor compensation: USD 2.2B (46% of revenue) - Net margin on advisory business: 28-30%

Target model (2035): - 1,200 senior advisors (high-net-worth focus) managing USD 3T - 800 dedicated AI + support roles managing USD 5T (hybrid advisory) - Average advisory fee: 0.25% on hybrid, 1.0% on high-net-worth - Total advisory fee revenue: USD 3.3B - Advisor compensation: USD 1.1B (33% of revenue) - Net margin on advisory business: 35-40% (higher per-unit despite lower total fee)

What this requires: 1. Reducing advisor headcount from 3,200 to 2,000 by 2033 (38% reduction) 2. Shifting 40% of AUM from high-fee to AI-hybrid model 3. Improving per-advisor productivity 30-40% through AI tools and automation 4. Migrating 50-70% of current advisor responsibilities to AI + support staff 5. Accepting 30-40% revenue decline from advisory fees, but maintaining margins through mix shift and efficiency

THE FOUR-STEP TRANSITION PLAN

Phase 1 (2030-2031): Foundation - Launch AI Advisor (done - Q4 2029) - Establish "AI + Advisor" as the standard service model for USD 250K-5M clients - Begin "early retirement" programs for advisors 65+ - Retrain advisors to specialize: high-net-worth focus vs. AI integration/support

Phase 2 (2032-2033): Acceleration - AI Advisor captures 30-40% of retail AUM - Senior advisors focused exclusively on high-net-worth (USD 5M+) - Support staff (non-advisor roles) expand 20-30% - Mandatory headcount reduction of 800-1,000 advisors (through combinations of retirements, exits, and layoffs)

Phase 3 (2034-2035): Stabilization - AI Advisor captures 50%+ of retail AUM - Advisor headcount stabilizes at 1,200-1,500 - New advisor hiring paused; vacancy rates managed down naturally - Advisory fee revenue stabilizes at USD 3.2-3.5B

Phase 4 (2035+): Profitability Recovery - Per-advisor productivity 50%+ higher than 2025 - Margins on advisory business return to 35%+ - Company focuses on growth through improved AI capabilities and expanding AUM

THE COMMUNICATION STRATEGY

To your board: "We are deliberately transitioning from a high-fee, low-volume advisory model to a high-volume, AI-assisted, medium-fee model. This requires reducing advisor headcount 38% by 2033 and shifting 50%+ of clients to AI advisory. Advisory fee revenue will decline 25-30%, but margins will improve due to efficiency gains. By 2035, we'll have a more resilient, less labor-intensive business model. The transition is planned and controlled, not reactive."

To advisors: "The advisory business is changing. AI will handle routine portfolio management, rebalancing, and financial planning. Your value will shift to complex advisory, relationship management, and high-net-worth specialization. If you want to specialize in high-net-worth advisory and evolve your skills, you have a future here. If you want to continue traditional advisory without AI, we're offering voluntary separation packages. This is your choice: evolve or exit gracefully."

To clients: "We're launching AI Advisor to give you 24/7 access to professional-grade portfolio management and financial planning. You can use AI Advisor alone, or pair it with a human advisor for complex decisions. For high-net-worth clients, we're dedicating specialized advisors to work with you. Either way, you get better service at lower cost."

To investors: "Schwab is transitioning to a hybrid advisory model. Near-term (2030-2032): advisory fee revenue declines, margins compress, headcount reduction begins. This is temporary and planned. Long-term (2032-2035): margins expand as efficiency gains offset fee compression; by 2035, we'll have more profitable, more scalable advisory business. We're investing for sustainable profitability, not short-term earnings."

THE SPECIFIC OPERATIONAL PRIORITIES

Q3-Q4 2030: 1. Announce voluntary separation program for advisors 60+: Offer enhanced packages (12-18 weeks severance, benefits extension, continued vesting acceleration). This reduces headcount gracefully and creates openings for younger advisors to transition to new roles. 2. Establish "Advisor Academy" for AI integration: Retrain advisors on how to use AI tools effectively, how to position AI advisory to clients, how to specialize in high-net-worth segments. 3. Define clear career paths: Clarify that future growth is in high-net-worth specialization, not in managing USD 250K-2M clients (which will be mostly AI-driven). This allows advisors to self-select: evolve into HNW specialist or exit.

2031-2032: 1. Execute headcount reduction: Target 500-700 advisor departures (combination of retirements, voluntary exits, and managed layoffs). 2. Expand AI Advisor penetration: Market heavily to institutional clients and advisors managing multiple USD 5M+ accounts (they don't want routine work). 3. Invest in support staff: Hire 200-300 "AI-Advisor Coordinators" who handle client onboarding, document collection, escalations to advisors. 4. Monitor advisor churn: Track which advisors are departing, why, and where they're going. Retain top talent.

2033-2034: 1. Complete first wave of headcount reduction: By end of 2033, advisor headcount should be 2,000-2,200 (from current 2,840). 2. Declare success on AI Advisor transition: By 2033, AI Advisor should be managing USD 1T+ in assets, generating USD 200-300M in spread/lending revenue while reducing advisory fee pressure. 3. Prepare for profitability recovery: Model the 2035 margins (22-24%) and prepare investors for the transition outcome.

THE HARDEST PART: MANAGING YOUR ADVISOR BASE

Your advisors are terrified. They're watching the company launch AI products designed to automate their core work. Some will leave. Some will fight. Some will adapt.

What you need to do:

1. Be honest about the future: Don't pretend that advisor headcount won't decline. It will. Make it clear: if you're good at high-net-worth advisory, you have a future. If you want to manage USD 250K-1M accounts manually, you don't.

2. Offer clear choices:

3. Path A (Specialist): "Become a high-net-worth specialist. Manage USD 5M+ accounts. Work with AI tools on the technical side. Your comp is stable or increases."
4. Path B (Coordinator): "Transition from advisor to AI-Advisor Coordinator. Support AI advisory clients. Manage escalations. Good stability, moderate growth."

5. Path C (Exit gracefully): "Take a voluntary separation package. We'll give you 12-18 weeks severance + benefits + outplacement."

6. Make the economics work: Advisors in Path A should be earning the same or more than they are today (even though they manage less AUM per capita). This requires comp restructuring: move from fee-based to salary + performance bonus + net revenue bonus.

7. Invest in the top 20%: Your best advisors (managing USD 50M+ in assets, USD 1M+ annual comp) are going to be recruited by competitors. Keep them through:

8. Higher comp and upside
9. Equity/partnership opportunities
10. Specialization in interesting/complex advisory
11. Clear path to senior leadership

THE FINANCIAL PROJECTIONS YOU NEED TO SHARE

With your board, be crystal clear on the numbers:

This shows the story: painful 2030-2032 (headcount reduction, fee compression, margin pressure), but strong recovery 2032-2035 (efficiency gains, margin expansion, profitability return).

THE RISKS YOU CANNOT AVOID

1. Advisor exodus worse than planned: If more than 40% of advisors depart (vs. your planned 30-38%), you lose institutional knowledge and client relationships. Mitigation: competitive comp for top talent.

2. Client asset flight: If clients leave Schwab because they perceive "AI is replacing my advisor," that's bad. Mitigation: strong communication that AI enhances advisory, not replaces it.

3. AI model underperformance: If your AI Advisor significantly underperforms human advice, clients will churn. Mitigation: rigorous testing, continuous improvement, transparency with clients about AI limitations.

4. Regulatory scrutiny: If regulators question "conflicts of interest" (Schwab pushing AI advisory to reduce costs), that's a problem. Mitigation: clear disclosures, compliance framework, third-party validation of AI advice quality.

THE BOTTOM LINE

You're managing a controlled transition from one business model to another. It's painful in the short term (2030-2032), but it's necessary for long-term profitability and resilience.

The company that emerges in 2035 will be: - Smaller in advisor headcount (1,400 vs. 2,840 today) - More profitable (24% net margin vs. 15% today) - More automated (50%+ of routine advisory done by AI) - More specialized (HNW focus for human advisors) - More resilient (less dependent on individual advisors, more scalable)

Your job is to execute this transition calmly, communicate clearly, and keep your best talent. Do that, and Schwab thrives in the 2030s. Miss on any of those, and you face a painful restructuring that lasts a decade.

The 2030 Report | Confidential Strategic Counsel | June 2030