The notion of trust is occupying people’s minds these days. Open newspapers, turn on a cable news show, or attend an industry event and you’ll be reminded that investor confidence in our nation’s financial system is critically low. In this year alone, a bear market, corporate accounting fraud, questionable stock research methods, and the threat of war with Iraq have systematically eroded investor confidence. And Harvey Pitt’s resignation in early November as chairman of the Securities and Exchange Commission doesn’t help matters. For Wall Street, restoring confidence is now priority No. 1.
Charles Schwab Institutional’s annual conference for advisors, Impact 2002, kicked off in Washington in late October with Daniel Leemon, Schwab’s chief strategy officer, saying that the meaning of trust is changing. And with that change comes opportunity. “Trust,” he told the 2,500 attendees, of which 1,000 were advisors, is now “a competitive differentiator.”
Investors, he said, want more “direct evidence” that they can trust the companies and people handling their money. Investors also want more information on such things as performance, how an advisor is compensated, and the advisor’s objective, he said. So now is the perfect time for independent advisors to capitalize on investors’ preference for their open architecture platforms, as well as investors’ displeasure with brokerage firms hawking high-margin products to make up for losses, he said.
In fact, a new survey by the Securities Industry Association reveals that investors’ overall ratings of the brokerage industry are down; one survey response found that only 45% of investors are “very satisfied” with their brokers, a 14% drop from last year’s 59% satisfaction rate.
For advisors, maintaining clients’ trust will depend on how well they manage their own practices, Leemon said. To gain a competitive edge, he counseled advisors to outsource services so they can spend more time with clients, to increase their revenue sources, and to serve a niche clientele.
No Conflicts Here, Folks
Schwab has been devising its own plan to win back individual investors. When news broke about conflict-ridden research by Wall Street analysts, Schwab was the first brokerage firm to unleash advertisements trumpeting the fact that no such conflicts with investment bankers exist at the San Francisco-based firm. During an onstage chat with Co-CEO David Pottruck at Impact, Chuck Schwab voiced his disapproval of the current negotiations among the SEC, New York Attorney General Eliot Spitzer, and seven of Wall Street’s investment banks to remedy the research dilemma, saying it’s hard to fathom that an acceptable solution is “being crafted by the top seven perpetrators.” Pottruck concurred, saying the negotiations are “ludicrous” and that “the right solution is disclosure.”
Schwab predicted independent advisors’ –and Schwab’s fee-based model–of doing business will be “more successful” throughout the tough market environment (which he predicts will “go back to normal” in several years) than “the old brokerage model.” Pottruck opined that the “fee-based, no conflicts” model is the right way to go, and predicted the competition for the wealth market “is going to become very intense.”
Leemon said Schwab would continue to vie for individual investors’ business–and their trust–by “delivering services based on their needs.” He specifically noted services offered directly to retail investors and advisors, including Schwab’s own equity ratings, which offer grades of A through F on thousands of stocks; the Advisor Network referral program; Schwab’s Private Client Service; the Advisor Web Center, which now offers account aggregation; as well as portfolio software through Centerpiece, which Schwab renamed Portfolio Center.
During a separate conversation with Leemon, he told me that Schwab’s “four-legged” approach to serving investors distinguishes it from competitors. The first leg is marketing scale, he said. “We were the first [brokerage firm] to use advertising to draw in clients instead of outbound selling and cold calling,” he said. Second is technology. “Our ability to not just run an efficient back office, but to have really good tools for our reps and our clients spread across a lot of volume gives us an advantage; we can take the scale advantage and invest it in growth for the future.” The third approach, he said, is combining people and technology, which “is the oldest piece of Schwab’s heritage.” And fourth is “building a model that has the individual investor smack in the center of the universe,” he said. “We want to be, over time, the firm for the individual investor–second to none.” And ironically, he said, before the “crisis of trust” among investors took hold this year, Schwab had “set a goal of becoming the most trusted firm in the investments industry.”
The revamped Advisor Network referral program is also becoming a crucial component of Schwab’s corporate strategy. Robert Klapper, senior VP in charge of Advisor Network, noted that his unit “is one of the critical parts to Schwab’s strategy going forward; we couldn’t have said that about Advisor Source,” the previous referral program.