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Speaker of the Month: Dan Leemon of Schwab

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The indexes are down along with the value of many clients’ portfolios, investor confidence is shaky at best, and the wealthy want some answers. That is exactly what Daniel O. Leemon intends to offer during his opening remarks at Schwab’s IMPACT 2002 conference October 27-30 in Washington, D.C. As executive VP and chief strategy officer for The Charles Schwab Corporation, Leemon will offer his perspectives on the current state of the affluent market and advisor opportunities. The affluent need a different kind of advice than other investors, he says: “There are a number of opportunities arising within [the affluent market] that advisors need to address.”

We spoke with Leemon about the importance of addressing the affluent, his response to the reported slight decline of this market segment, and Schwab’s advisor strategy in today’s economy.

Your opening remarks at Schwab Impact will cover the current state of the affluent market and advisor opportunities. Why is it important to address this topic? We’re obviously in an unprecedented situation both as a country but certainly within the scope of our business when you think about individual investors. Individual investors are in a position they have never been in before. They are unhappy, they are angry, they are confused–and the phrase “crisis of trust” has been used so much over the last four or five months that it has almost become trite, but that is exactly what is going on. So we see in our market research that on the one hand, most investors are pretty fed up with the corporations they have invested in and the people they have gotten advice from, and on the other hand, most of them still believe that the financial markets are where they need to put their money for long-term security. So it is important to be talking about affluent investors and opportunities for advisors, because somebody is going to break this wall down. Somebody is actually going to go out with a message that says, “You can trust us, and here’s why,” or, “we understand what to do in a situation like this, and we can work with you.” It’s important to begin cutting through not only every investor’s anxiety, but also through the noise in the marketplace. I think this is an unprecedented time, and as miserable a time it is for everybody, there is an opportunity there.

What is your response to the decline in HNW households? Most affluent investors are still in their working years, so there is sort of this double whammy that they have been hit with. One, their investment portfolios have gone down. Two, any incentive compensation or bonus part of their income has probably evaporated over the last part of the year as well. So it doesn’t surprise me that a bunch of people have dropped below the million threshold. I think what’s important here is that all of those people will go back over that threshold again. So you need to continue to treat them as you did before. They need what they needed before; in fact, more now than ever, in terms of sound advice and a long-term strategy. All those people will be back.

The 11% decline sounds like a round number that was found very scientifically, but our math says that the long-term grown rate in investable assets in the U.S. is around 10%. We had a whole bunch of years where it was 13% and 14%, and then we had two years, from 1999 to 2000, when it went down about 4%, and now it probably went down another 10%. That still leaves you with a long-term average of about 9% or 10%. So, I don’t have a lot of expectation that the market will go a lot further down. I think the real question is how long will it stay in the current trading range, and that to me gets back to an investor confidence issue rather than anything else. My reaction to a bunch of people falling back over the million-dollar line is, that they will be back. And we need to think about our business while keeping in mind that they will be back. This is not a permanent shrinkage or permanent disappearance in the market; it is a setback for investors, and we need to be there for them.

In light of the slow retail trading volumes and the bear market, what is Schwab’s investment strategy going forward? I can speak on our advisor strategy: It’s what it’s been, only more so. We think that independent advisors are a vital and very powerful force in the marketplace. I think a year or two ago, research was saying the independent advisors were picking up more new advice relationships than any other set of financial advisors. This is a market that we are absolutely committed to, and it is unique. Someone you learn about in the community and by referral and someone who so clearly has your interest at heart because they don’t have some big mother ship to answer to, is just a critical part of the marketplace and truly unique for some investors. We’re trying with our strategies to make sure that we are making the investments so advisors have the easiest time they can running their business. They need to be out there helping people through this difficult time and not figuring out why their download didn’t happen or why they are having trouble reconciling their account. So we are working very hard to take our traditional trading and custody capability up to a new level.

Referral to advisors is a big part of our affluent strategy. So for the first time we are really incorporating advisors into our affluent strategy as opposed to just, “well, we have this retail business and we have this advisor business.”

Any suggestions for planners over the next few months? What should they keep their eye on? I think they ought to be in very close touch with their clients. One of the things that we’ve heard, especially from clients from the traditional brokerage firms, is, “I suddenly stopped hearing from my broker. I know my money is down, I know the advice was bad, but I would still like to hear from my broker and I’d like to know what we do next.” And a lot of those brokers are hiding in the bushes because they don’t know what to say. My advice would be talk to your clients, feel their pain, set the new strategy going forward, ask them for referrals, offer to help educate their friends on asset allocation and long-term diversification, and those sort of things. I think that is the most important thing to do. I wouldn’t point to any particular product and I certainly wouldn’t advise the people to try to time the market. And also I think you should make sure they understand what you really do.

One of the themes in my speech at IMPACT is that you don’t restore trust with really nice hair, a firm handshake, and looking them straight in the eye. You restore trust by actually having something they can trust. So help people understand what the conflicts are at the traditional firms, why the independent manager doesn’t have those conflicts, and how you pick investments. Help them understand how you get paid. I think it is that kind of transparency that will continue to drive the independent advisor model to be as powerful as it has been. I think unfortunately what has happened to investors during the up market was that everyone looked like a genius. So investors felt like they knew a lot and they really didn’t. Now they just need to know more and understand more. So I would say that it’s about spending time with your clients but also allowing them to understand what you do, how you set a strategy, how you get paid, and how you report the results to them, so they can absolutely trust the independent advisor model.

Anything you would like to add? We are trying at IMPACT to give people a broad perspective on the world and what the major uncertainties are. A lot of our clients are paralyzed right now, but we can’t be. So a lot of the conference will be focusing in at a fairly micro level to help advisors with the tactics to succeed. So there is this global perspective and micro perspective on helping advisors. And I think we are living in a world where you’ve got to be able to fit those two things together.