Schwab CEO Exults Over ACATS, Robos and Recruiting
Money is pouring into Charles Schwab’s retail brokerage franchise from rival firms, the San Francisco company’s chief executive boasted to investors in a recent presentation, though he quickly added he means no disrespect to those rivals.
“In the area that we believe to be the single most important measurement of our competitive standing, net transfer of assets, we are far ahead of the prior year, I think about 75% ahead of where we were in the first half of 2016,” Schwab Chief Executive Walt Bettinger said in a midsummer “business update” on Friday. It’s a “reflection of winning increasing volumes of business from the firms we compete with.”
Bettinger did not break out the level of so-called ACATS (automated customer account transfer system) assets that Schwab is booking in its direct investor channel, which includes call centers and some 300 branches. However, the ratio of money coming in versus money leaving is higher than the $1.15-to-$1.00 ratio the firm cited in an internal presentation in January, a company spokesman said.
Schwab has rarely been shy about , but now that is is promoting itself as a full-service financial advisory firm that does more than execute trades at a discount—and recruiting wirehouse advisers to its independent registered investment advisory (RIA) channel—Bettinger did his best to be politic.
“None of this conversation is intended in any way to demean or indicate a lack of respect, because we have deep respect for the wirehouse financial advisor and the relationships that they built with his or her clients,” he said.
He did not address Schwab’s effort to improve its record in retaining assets of high-net-worth clients, but said it has ramped up training programs to answer questions raised by analysts about its ability to develop brokers for its expanding branch system. “Maybe as a reflection of just how appealing a career at Schwab is as a financial consultant, we had almost 40 applicants for every single opening that we had in our Financial Consultant Academy,” he said.
The “academy” is a two-year training program for recent college graduates. Schwab also completed in May its first “FC University” project, a 90 day in-branch training program for new brokers that took place in Washington, D.C. I don’t have numbers on the graduating classes.
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The RIA channel continues to be the fastest growing business model for advisors, and a small but steady number of wirehouse brokers continue to “break away” to independence where they believe they can offer clients more competitive pricing and receive more for their practices when they retire, Bettinger said.
“They don’t have to spend time or energy on things that might be corporate strategic initiatives, whether they be around product usage or maybe something like lending,” Bettinger slyly said. Brokers at bank-owned companies like Merrill Lynch, UBS, Wells Fargo and Morgan Stanley sometimes grouse about pressures to sell loans and other bank products
Bettinger insisted that successful brokers can realize better “terminal value” from selling their books of business as independent advisors than by pocketing the “forgivable loans” dangled by wirehouses, which require them to remain for five to 12 years at less than optimal payout before they are fully amortized.
Schwab’s direct customer model, meanwhile, is moving in the same direction as its big rivals. Schwab prompts brokers in its 300-branch system to sell fee-based financial plans and managed accounts, veering from its founding model as a transactional discount broker. It also reaps handsome net interest margins from sweeping client cash into its own bank.
Schwab lassoes an average of $40,000 from every customer who does a financial plan and is eight times more likely to enroll a financial-plan client in a fee-based advisory account than a traditional customer, Bettinger said. “They bring us about three times the net new assets on average as does a client who is entirely self-directed,” he said, flaunting the almost 600,000 retail accounts that are now enrolled in an advisory program.
Schwab also will embellish its rapidly growing “Intelligent Portfolios” robo-advisor to continue attracting its traditional base of self-directed investors who “do not believe in the notion of hiring someone, or some organization, to manage money for them,” he said, but are willing to accept some nominal directional push.
Customers have plowed almost $9 billion into Schwab’s robo platform since its launch in March 2015, while Vanguard’s model has attracted more than $30 billion. Both offer nominal directional tools from human advisors, and Schwab believes that adding “an even higher degree of the human element” to the robos going forward will work in its favor.
Schwab has previously said it may extend its robo-investment choices beyond exchange-traded funds, add custodial and other account types and license its model to independent broker-dealers and advisors, an approach being tried by Betterment, Wealthfront and other pioneers of the robo model.
“We think it is a mistake to believe that this standalone robo advice or digital advice, by that I mean, without humans, really has significant growth potential,” he said. He did not name the firms, but executives at Wealthfront have criticized Schwab for lack of transparency on fees and use of client cash.