Schwab pushing fee-based programs

The Charles Schwab Corp. is running full steam ahead with its long-term plan to build fee-based revenue. In a meeting with analysts today, chief executive Walt Bettinger said that his goal is to move Schwab away from transactional business to the point where “the vast majority of revenue” is from fee-based managed assets and interest revenue. “Long-term, we think [transactional business is] a commodity service” that will suffer from falling margins, he said. Fee-based accounts, at $138 billion, now total 17% of assets at the firm, and inflows are running $500 million per month ahead of plans, firm officials said. But that growth has caused Schwab's compensation expenses to run over budget — to the tune of $70 million this year — because of incentives given to branch brokers for selling managed offerings. Among other programs, Schwab has been heavily promoting managed account strategies run by its ThomasPartners and Windhaven Investment Management units. Mr. Bettinger said most new fee-based assets will come from existing clients, but the firm is targeting wirehouses for growth, as well. “That's where the assets are and that's where we're targeting,” Mr. Bettinger quipped, in a reference to famed bank robber Willie Sutton. Mr. Bettinger downplayed expectations that Schwab might buy more proprietary money managers. He said the firm is always looking for opportunities, but that it earns 40 to 45 basis points off of assets referred to its RIAs, and any acquisition would have to be competitive with that return. “That math alone would limit … your opportunity set,” he said. The branch referral program, called the Schwab Advisor Network, refers about $4 billion a year to Schwab-affiliated RIAs, according to Andy Gill, executive vice president of investor services. Regarding the recruiting of new RIA firms, Mr. Bettinger said the “overall trend continues very strong,” adding that concerns over an industrywide slowdown in recruiting is overblown, since assets from breakaway advisers are a relatively small piece of overall net-new-asset growth. Commenting on Schwab's new “Own your tomorrow” advertising campaign, Mr. Bettinger said the messaging fits better with the RIA business compared to the old “Talk to Chuck” tagline, which was oriented toward retail investors. Schwab's 7,000 independent advisers manage $900 billion. The company has $2.05 trillion in total client and retirement-plan assets.