Schwab expanding one franchise at a time

Feb 17, 2013 @ 12:01 am

By Dan Jamieson

About two years ago, Brian Carpenter, 44, then an adviser with RBC Wealth Management in Eau Claire, Wis., decided it was time to go out and start his own practice in a new — and preferably warmer — locale.

“It was a personal decision. I wanted to own my own business,” he said. “I was born and raised in Wisconsin, but my wife and I despise the winters.”

He researched his options but found that the anticipated startup costs for a new advisory firm were “egregious.”

Instead, Mr. Carpenter last August opened a brand-new franchised branch for The Charles Schwab Corp. in Dripping Springs, Texas. He left behind the clients he had served as part of a $3 billion team at RBC.

Mr. Carpenter's branch is one of the 13 franchised outlets Schwab now operates under its Schwab Independent Branch Services unit, which was launched in the summer of 2011. The newest office opened last Friday in Novato, Calif.

In addition to Texas and California, the company has franchised branches in Florida, Indiana, Iowa, Missouri, New Hampshire, New Mexico, New York, Oregon and Wisconsin.

Several more offices are set to open this quarter, said Craig Taucher, senior vice president and national network leader of Schwab Independent Branch Services, who is shooting to have a total of two dozen franchises by the end of this year.

Schwab looks for experienced advisers to run franchises in suburban locations where it has no existing branches. Its first batch of franchisees has come from wirehouses, independent broker-dealers and discount brokers.

The firm has faced a number of hurdles, including finding the right advisers and office locations, and a less-than-favorable revenue agreement, according to some observers.

“Schwab has probably found that the courtship period is very lengthy” for the type of person they want, said Ryan Shanks, chief executive of Finetooth Consulting LLC and FindAFirm, an adviser matchmaking service.

Mr. Taucher, who took over in November as head of the franchising effort from Andrew Salesky after the latter was put in charge of Schwab's company-owned branch network, said that interest in the franchises has been strong, with more than 3,500 inquiries in hundreds of markets.

“We've wanted to make sure we have the right candidates, in the right markets,” Mr. Taucher said.

Observers have wondered whether terms of the franchise agreement, which gives Schwab an increasing split of revenue that reaches 50% after five years of operation, would make the franchise deal a tough sell to recruits. Out of their share, franchisees have to cover rent, salaries and some additional expenses.

By contrast, independent registered representatives and advisers can pocket about half their revenue after expenses, recruiters estimate.

Schwab hasn't had to change the terms of its franchise arrangement to attract franchisees, Mr. Taucher said.

“The folks we've attracted are attracted to the Schwab brand,” he said.

Schwab franchisees are limited to the same menu of products and services as traditional Schwab branches, a situation that may not appeal to advisers who want their own independent practice.

“I can't imagine that a better producer would be interested in that model,” said Jon Henschen, founder of Henschen Associates LLC, who recruits for independent broker-dealers.

“The attraction is for advisers who don't want to be wealth managers, and don't mind leaving the management of assets to someone else,” Mr. Taucher said.

An adviser with $25 million in client assets is a typical target for Schwab, he said.

“Some have brought over assets, others haven't been able to, due to noncompete agreements,” Mr. Taucher said. “And for others, [a franchise] has been a chance to get back into the industry.”

A Schwab franchisee is “almost like a tuck-in” adviser who forgoes full independence for the convenience of joining an existing practice, Mr. Shanks said.

Still, Schwab is a “great name — money runs to Schwab,” said Bill Willis, a recruiter and founder of Willis Consulting Inc., who noted that the revenue split franchisees get is similar to that which some RIA firms pay business development people.

Mr. Carpenter certainly is optimistic about bringing in business.

“I've had more people driving by [the new branch] — just stopping in to say hi — than you can imagine,” he said.

Not all have been Schwab clients.

“As a wirehouse rep, we never had a lot of walk-in business,” Mr. Carpenter said.

Indeed, finding high-traffic, visible office locations has been one of the challenges of the franchising effort, Mr. Taucher said.

“In certain markets, it takes a while to search out the right spot,” he said. “It has to be the right location that clients can see and have access to.”

Another issue with franchised branches: Some RIAs who hold assets in custody at Schwab have been concerned about franchisees joining a growing number of company-owned locations to compete for clients.

Schwab officials said that franchisees, like branch employees, are trained to hand off certain customers to RIAs who are part of the branch-referral program, and don't compete for clients of existing Schwab RIAs.

“In my geography, there are three primary advisers, and I've met with those folks,” Mr. Carpenter said.

“I haven't made any referrals yet but I think [the referral program] is a great solution” for customers who need more attention from an adviser, he said.

Mr. Carpenter said his plan is to build his branch over the next two decades while grooming a younger adviser to buy him out eventually.

Schwab allows franchisees to sell their branches but must approve the sale and be given the right of first refusal.

“Just due to the volume of business Schwab does, there's a lot of [potential] value there,” Mr. Carpenter said.


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