The independent advisor profession and Charles Schwab & Co. grew up together, and not coincidentally, Schwab the company began operations as a discount brokerage firm in 1975 after brokerage commissions became deregulated, marking the firm's first assault against Wall Street orthodoxy. It was the launch in 1984 of the Schwab Mutual Fund Marketplace with 140 no-load funds and in 1987 of its Financial Advisors Service that jumpstarted the independent advisory community. These days, some 5,000 independent advisors custody $388 billion at Schwab Institutional, and the company serves as an icon of the perfect planner partner to many advisors, though there are some Schwab iconoclasts as well. In looking back at the past 25 years and looking ahead to the next, it seemed appropriate to plumb the memory and prognostications of Charles Schwab the man.
In a telephone interview with Editor-in-Chief Jamie Green in mid-November, Schwab noted that when he began his first job at an independent advisory firm in June 1961 doing research, conditions were "primitive" and "the sense of independent capital and wealth" was so much smaller than it is today. Moreover, it was expensive to invest, Schwab points out, considering the sky-high commissions on stock trades, 8% loads on mutual funds, and the "incredibly high" taxes on capital gains. Schwab the company began as a "transaction service," then moved into mutual funds, but Schwab the man believes his greatest legacy was his ability to "democratize investing," and to support the notion that people could get their advice from someone who did not have a conflict of interest. All along, Schwab has supported the local, conflict-free business model of the independent advisory profession--"one that continues to be one of the fastest growing sectors" in financial services--by adding a "scale capability" to advisors' offerings to clients and helping to keep their costs as low as possible. He admits that the wirehouses "will continue to be robust competitors," but points out that they have "Achilles' heels." Most notable are the continued conflicts of interest despite the reforms of the past few years stemming from their continued involvement in the transactions and in investment banking.
As for the future, he believes that independent advisors are "well paced to take care of the aging boomers," though he warns that the specter of inflation will make financial plans in retirement a tricky thing to accomplish, one that requires more than "a simple insurance annuity." Schwab says the company, having streamlined itself over the past 15 months, will continue to partner with advisors into the future. Chuck himself plans to stay on for "at least another three or four years."--James J. Green