The Charles Schwab Corp., already having increased assets under custody for independent investment advisers this year, is preparing several products, services and technology offerings for advisers next year.
Included in the mix are ex-panded trust capabilities, online foreign-stock trading and Federal Deposit Insurance Corp.-insured sweep accounts for parking clients' cash at multiple banks. In discussing plans for 2010, however, Schwab executives seem most excited about attracting wealthy individuals directly to the firm's branches and investment products.
“We think that there are more and more individual investors out there looking for advice, [and] we're not overly convinced that they are going to pay 2% or 2.5% or 3% or even 1.5% — and maybe even 1% — for some of the advice that they expect to receive,” chief executive Walter W. Bettinger II told analysts at a Business Update conference last month.
“We intend to be able to deliver highly scalable but extraordinarily professional and diversified [advice], with the most sophisticated risk management techniques available, to our clients at a very, very sharp price point — an industry-impacting price point.”
That may raise more of a challenge for rival brokerages that target so-called mass-affluent investors than for registered investment advisers, who generally pursue the assets of even wealthier individuals and families.
But Schwab executives made it clear that they are flexing their considerable marketing muscle to pursue such high-net-worth investors as well, according to a transcript of their remarks at the conference.
Schwab's retail division next year will introduce a “bold new marketing campaign” aimed at selling “professional portfolio management” products, an expanded inventory of fixed-income products and “additional advised offers enhanced over what we have today” to a range of investors and active traders, said Benjamin L. Brigeman, executive vice president in charge of investor services, as Schwab designates its direct-retail unit.
Asked if referrals to RIAs keeping assets under custody with Schwab would be part of the advisory menu for high-net-worth clients, he didn't give a direct answer.
“We want to make sure that what we have is what the clients are looking for, but also salable in a mass way,” he said. “A big part of the conversation,” he added, will revolve around using exchange-traded funds to manage wealthy people's portfolios professionally.
Schwab recently introduced its first proprietary ETFs with no trading commissions for its clients, and company founder Charles R. Schwab told analysts at the Business Update conference to expect equally aggressive promotions in other areas, including in-branch advice. The company has a pilot program in place in three cities now to entice investors in for hand-holding, and based on early results, it will likely expand the program next year, he said.
“We are going to become even more bold than you might think we are today,” the former chief executive said.
Independent advisers, of course, have always had mixed feelings about relying so much for custody, trading services, products and support on firms that have the potential to compete with their clients. Large custodians with big discount networks such as Schwab, Fidelity Investments and TD Ameritrade Holding Corp. have tried to moderate such tensions with programs such as referrals of wealthy clients from branches to select RIAs, with mixed results.
The strains continue as custodians reach out to convince brokers from full-service firms to set up practices as independent RIAs, sometimes in the backyards of existing clients. They also, however, are encouraging some of the breakaway brokers to join the practices of existing RIAs.
Advisers following Schwab's multichannel efforts appear philosophical about its latest plans.
“In the modern world, everybody is in everyone else's businesses in some way,” said Gene Diederich, chief executive of Moneta Group LLC, which has about $7 billion in its RIA business. “We are not really concerned about Schwab being in our business, because we don't get a lot of push-back on fees from clients who look for very high-service relationships, but if they start pulling clients away from us, it will be a different story.”
Mr. Diederich, who joined the firm this year after a long career at A.G. Edwards & Sons Inc. and its successor firm, Wachovia Securities LLC, said that Schwab and Fidelity, with which Moneta keeps the bulk of its assets, do “an excellent job of supporting us.” The firm is trying to recruit brokers to its RIA practice, he said.
Schwab executives, for their part, said they haven't veered from their longtime strategy of uniting each of their businesses around the single purpose of serving individual investors, whether indirectly through RIAs, directly through retail branches and online trading, or through corporate savings plans that can funnel participants to Schwab when they retire.
James McCool, executive vice president for Schwab's institutional-services division serving RIAs and corporate retirement plans, told analysts at the Business Update meeting that advisers are pressing for help in winning their clients' personal-trust accounts from banks. “This will be the subject of continued investment,” he said, promising a progress report next spring.
A Schwab spokeswoman declined to comment on whether the initiative relates to the company's plan to stop holding alternative assets for advisers. Some advisers, requesting anonymity, said they've been told that Schwab has applied for no-action relief on the custody issue from the Securities and Exchange Commission.
Mr. McCool said that his unit is both expanding and keeping a rein on expenses by making “proper risk management decisions about what we can hold, how we manage our clients' assets knowing that they are expecting us to be that third-party independent custodian watching over the assets ... This is what's allowing us to continue to make investments ... whether it's trust or the ETF or other things across the firm.”
Mr. Bettinger told analysts that in spite of a tough year in which trading volume and asset inflows from clients have decreased, Schwab is improving its web platforms and desktop trading capabilities across all channels. For RIA clients, he singled out a plan for “a multibank sweep initiative which enables advisers to deliver to their end-clients likely a higher yield than they can get today in a traditional sweep money market fund.” Schwab officials wouldn't comment on when the offering will be ready, but said the firm has to make systems and other operational adjustments.
TD Ameritrade this month plans to double the FDIC-insured capacity it offers on sweep accounts by adding a second bank affiliated with TD Bank Financial Group, its largest stakeholder, a spokeswoman said. It began offering its first sweep vehicle in May as an alternative to rock-bottom money market rates with a government guarantee.
Other improvements that Schwab plans for advisers and active-trading clients this year include the ability to trade foreign stocks online in dollars or other currencies — something that Fidelity introduced this year — and additional fixed-income products.
The institutional-services business run by Mr. McCool represented about 35% of Schwab's revenue and 39% of its pretax profit margin in the first three quarters of 2009. Citing statistics from Cerulli Associates Inc., he said Schwab's market share of RIA assets is a little more than 25%, double that of Fidelity, its closest competitor, and added that the “spread” is increasing.
Schwab's net asset flow from one of its two leading competitors in this year's first three quarters was up 30% from the comparable period in 2008, Mr. McCool said, without naming the competitor. New assets from various competitors, breakaway brokers and current clients, however, are arriving in smaller client accounts than in recent years, he said.
While Schwab continues to expand its adviser services unit, Mr. McCool — who joined the firm in 1995 when it bought the 401(k)- servicing business started by Mr. Bettinger — said he's less interested in building market share at the expense of revenue in the retirement services field. Schwab won't bid for the business of plan sponsors and third-party administrators who want only plain-vanilla administrative services, he asserted. “It may mean in the long run that we're not going to keep showing a "hockey stick' with growth of new participants in the 401(k) business,” he told analysts.
E-mail Jed Horowitz at email@example.com.