More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.
In a telephone interview on June 19 from Schwab’s Explore conference for advisors in Naples, Fla., Charles Schwab Corp. CEO Walt Bettinger and the head of Schwab’s custody unit, Bernie Clark, addressed the current state of the company and the importance of advisors to Schwab Corp. They also addressed the impact of robo-advisors and the changing desires of advice clients.
In its most recent quarterly results released April 15, Schwab (SCHW) reported a 58% jump in net income over the previous year, on a 15% rise in net revenues. Schwab added $34.2 billion in net new assets, resulting in $2.3 trillion in total assets. Of those assets, $974 billion is managed by RIAs in Schwab’s custody channel, up 16%, while assets in Schwab’s retail advice program rose 17% year-over-year to $159 billion. At the time, Bettinger said in a statement that “our work to build awareness of our professional advice capabilities continued during the quarter, and we ended March with approximately half of all client assets receiving some form of ongoing advisory service.”
In the interview, Bettinger said Schwab’s performance “is strong,” but that its “momentum is even stronger.” The growth in advice at the company reflects the fact that “very few people today believe they can be successful informally managing money on their own; what’s why you see so much growth.” He also argued that “the Charles Schwab of today is so different than it was,” as evidenced by the half of its assets receiving advice, and that its “positioning is most important; we’ve shown that Schwab can perform well” even in a low-interest rate environment.
That ‘positioning’ reflects that clients in “both the retail and high-net-worth markets want more transparency” and also want to “eliminate or minimize conflicts of interest.” Warming to the themes he expressed in an interview last week when Schwab released two studies on “Generation Now” — investors age 30 to 45 — Clark said that “the next generation has been brought up a different way,” and that Schwab and advisors have to be where those younger clients and prospects are: “This is part of our culture.”
When asked whether the older age of clients in the advisor and retail channels poses a threat to the industry, Bettinger said he maintains and refers to “a stack of old PowerPoint presentations from 10, 20, 40 years ago. There’s a lot to learn from history: 15 years ago we were concerned about the age of our client base,” but 15 years later the average client’s age “is only a year older.”
What about the threat to Schwab and advisors from the so-called robo-advisors? “Online advisors have unbundled” traditional advisor offerings, Bettinger said. “They’ve picked the easiest way” to provide advice, “extracting asset allocation and tax loss harvesting.” However, he expects there will be “a lot of competition in that space,” concluding that for robo-advisor competition, “it’s the top of the first, with nobody out.”
Bettinger said he believes that both online and in-person advice “will continue to evolve” in pursuit of the younger generation. However, for advisors it’s “not about doing something differently”; rather younger clients are “telling us what they want is transparency, conflict-free” advice. “The big picture of Generation Now is right at the core of what we do,” though he said “you’ll see some strategic actions from us” to help advisors with this threat, through technology, social media and evolving centers of influence.
What then about Schwab’s “Own Your Tomorrow” advertising campaign that features Chuck Schwab himself, who suggests that while investors lack trust in the financial services industry, they’ll do better at Schwab? The retail ads are aimed at “driven” individuals, Bettinger said, “who are active, engaged in their communities, who want to understand” their investing strategies and not have everything done for them.
“We’ve been really pleased with the results,” he said. “We’ve seen an increases in the acquisition of these types of individuals.” He cautioned, however, that “we’re only been in this for a year; you need to do it for years” before judging the efficacy of the campaign.
Unlike the "Talk to Chuck" campaign that preceded it, "Own Your Tomorrow" is aimed at not just retail but the "corporate" side, including advisors. “That was the weakness behind 'Talk to Chuck,'” Bettinger said. "you want a broader umbrella.”
In the statement accompanying Schwab’s first quarter results, Bettinger said “Our contemporary full-service investing model continued to resonate with investors,” so what does that mean?
“It’s identifying the difference between Schwab and the wirehouses," Bettinger responded. "[Clients] want transparency, they want open architecture; they don’t want the latest, greatest alternative investment that we design and manage.” Those clients are “not relying on their broker for everything,” but they do want accessibility and “greater control and competence.” The difference between the wirehouse model and Schwab is “a philosophical approach; it’s an evolution. Frankly, it’s one of the reasons advisors have grown so much: they’ve been out in front in building different kinds of relationships” with their clients.
What about the fiduciary standard? Clark said “there’s an awful lot of politics” around the issue, and that Schwab’s goal “is to protect clients and invite everybody to create transparency as we have been doing. Low cost is critical, though we’re not a discount broker. Specifically, we’ve been there with the Investment Adviser Association” in advocacy efforts in Washington.
“The leadership of those companies are talking about hedge funds, private equity — it’s all about products — but the story they tell clients is much different. It’s frustrating.”
Clark had the final word: “we have to continue to educate [clients] on the differences.”
Related on ThinkAdvisor:
- RIAs, Get With It: Here Comes ‘Generation Now’
- Advisory Industry Wants More Exams (and Will Pay for Them, Too)