Executives at Charles Schwab say they hadn’t expected the company to expand quite this quickly.
After closing four acquisitions last year — most notably, its
Schwab is planning how to make money from these client assets by using its advice and asset management offerings — all while trying to address customer service issues both advisors and retail investors have been experiencing, executives said.
“Frankly, the volumes overwhelmed even our most aggressive projections,” Walt Bettinger, CEO of Schwab, said during the meeting.
Here are 10 things financial advisors need to know about what Schwab is planning:
1. Changes to third-party approach with asset managers
Schwab is tweaking its relationship with third-party asset managers — in terms of both how it partners with and monetizes those relationships, according to Bettinger.
“Moving forward, I think we want to provide more guidance and assistance to help clients identify what their objectives are and help them identify alternatives that might be more effective for them,” Bettinger said.
The new approach with asset managers will “better the economics” for Schwab while preserving its open-architecture approach, according to Rick Wurster, executive vice president of asset management solutions.
Schwab has been evaluating how to
2. Custody channel makes up 27% of revenue
Schwab’s custody division is a critical line of business at the company, Bernie Clark, head of Schwab Advisor Services, said during the meeting.
“This is core,” Clark says. “It will be incredibly important as we go forward.”
Schwab now has $3.1 trillion assets under custody, Clark said. Approximately 55% of Schwab’s net new assets last year were within its RIA custody division, according to a company
Clark questioned whether other custodians or new entrants into the space, including investment banks Morgan Stanley and Goldman Sachs, would be committed to open architecture.
“Many of these players don't necessarily have an economic model that's going to support that kind of structure,” Clark said.
3. Getting more competitive in the HNW market
Schwab’s wealth management division is a “tremendous growth opportunity,” for the company, according to Wurster. The company has been adding more services to attract and retain high-net-worth individuals.
The company has added new liquidity and lending solutions to these clients, according to Wurster, and has built out its wealth strategist group. In the future, the company plans to introduce a discretionary wealth management offering, he says, and is creating a new alternatives platform that should be available over the next 12 to 18 months.
Schwab Private Client had $148 billion in AUM at the end of December, Wurster said. Overall, Schwab’s advice business, which includes its robo advisor solutions, generates the
“We can monetize our business by growing our advice offering while increasing the satisfaction of our clients at the same time,” Wurster said, noting that retail advice clients also report that they are the happiest of all Schwab clients.
4. Schwab discusses concerns about competing with RIAs
Executives emphasized during the meeting that Schwab services a small share of the broader retail marketplace, and that there was plenty of room for both the company and the RIAs it custodies for to grow together.
Schwab has a “13% share of client assets in the industry. There's 87% that we don't have. I think collectively there's plenty of opportunity for us all to help clients,” Wurster said. “We want our clients to be helped in a way that makes sense for them.”
5. Service issues across RIA and retail investor channels
Bettinger acknowledged that its client service has been “uneven at best,” over the last year, particularly due to the sheer volume of requests in March and December.
This has been “disappointing to us as well as our clients, at times,” he said.
There were 4 million calls or chat requests in March 2020, according to Bettiner, and 3.5 million in December. Schwab employees answered service calls within 30 seconds, on average, in 2019. Last year, it took them two minutes.
“We are carefully reviewing some of the decisions around the TD Ameritrade integration, because we want to ensure that we don't take steps that would risk any further degradation in our service quality,” Bettinger said.
The company is re-evaluating whether it will move forward with plans to close some of its service locations so it can keep employing the staff members who work there
A wave of corporations have made changes to their PAC giving since a mob supporting President Donald Trump stormed the Capitol last week.
6. Adding more model portfolios for its advisor robo solution
Schwab is adding more model portfolio options to its robo advisor for RIAs, Institutional Intelligent Portfolios, according to Clark.
Clark said he has been working with Wurster to make the robo’s architecture more open.
“This is not about making them captive to anything as you might see in some other models,” Clark says. “This is about really giving them another opportunity for choice.”
7. More advisors utilizing APIs and digital processes
Last year, approximately 800 RIAs started using APIs, according to Neesha Hathi, Schwab’s Chief Digital Officer. There was a 40% increase in third-party technology integrations.
“What we saw in 2020 is that they really started taking advantage of more of the digital capabilities that we offer,” Hathi said.
About 74% of the accounts advisors opened at Schwab last year were opened digitally, as well as 62% at TD Ameritrade, she said.
“Advisors tend to use more paper than our retail clients, which is a real opportunity,” she said, noting that digital form filling has significantly reduced the forms that are not in good order to 4%, down from about 35%.
8. Further monetizing TD Ameritrade clients via advice offerings and proprietary funds
Executives see an opportunity for pre-existing TD Ameritrade clients to use more of their products.
“We believe there is hundreds of millions in annual revenue potential if we increase the use of advice in a meaningful way,” said Wurster, noting that about 18% of Schwab clients use an advice offering, while only 8% of TD retail clients do the same, while the rest of the company’s clients presumably get their advice elsewhere or don’t receive advice at all.
Additionally, the company has been trying to boost assets in its proprietary ETFs and money market funds on the TD Ameritrade platform. Schwab currently has a 23% share of assets in index funds on its own platform. Only about 2% of indexed assets with TD are held at Schwab, Wurster said.
The 20 categories with the biggest gains are home to nearly $10 trillion in combined assets.
9. Thematic investing capabilities coming in second half of 2021
Schwab is in building out thematic investing capabilities that would allow retail investors to invest in social or environmental causes or consumer trends.
The company is harnessing the technology it bought from Motif, which mined data to identify stocks with exposure to a certain topic, according to Hathi. Schwab will use direct indexing capabilities to keep the asset minimums low at a few hundred dollars, Hathi said.
Hathi expects thematic investing capabilities to be available by the second half of this year, and says Schwab will charge an asset-based fee.
10. Original TD Ameritrade integration timeline still in place
Despite some of the service issues, Schwab is still predicting it will merge the Schwab and TD broker-dealers within 18 to 36 months of the deal closing, said Joe Martinetto, COO of Schwab.
Even so, Martinetto said that Schwab is taking a second look at some of its capacity assumptions and had to make early adjustments.
Schwab will still likely achieve the same expense synergies, but “any spending going forward is definitely going to have to be adjusted for the growth that we have seen and volumes in activity,” Martinetto said.
