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Stepping Up

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At a time when much of the financial services world is in crisis mode, with hyperbolic statements on the seriousness of the situation flowing like red ink, it’s refreshing to hear a voice of moderation amid the tumult that acknowledges the whirlwind while placing it into a context that shines a hopeful light on the future path of the registered investment advisor. Walt Bettinger might be given a pass for giving into the hype, but instead, the new CEO of Charles Schwab & Co. Inc. is handling the crisis in the same way that he seems to have shrugged on the mantle of perhaps the most iconic figure in the independent advice world: Chuck Schwab. The equanimity might come from the fact that as someone who built his own business (then sold it to Schwab), Bettinger is comfortable with the entrepreneurial mode, though he’s quick to say “I don’t try to infer from that that I have some special expertise.” Named president and COO in January 2007 and assuming the title of CEO on October 1, 2008, Bettinger said the new role was made easier because the “transition has been in the works for a couple of years” and as a result “Chuck . . . has included me at the table on all the major issues that the company has addressed and dealt with.” Maybe, too, it’s because Schwab the company has apparently dodged the bullet of toxic mortgage exposure while at the same time reaping the benefits–in terms of attracting breakaway brokers with significant assets, or ATI (advisors turning independent) in Schwab-speak–of the tarnishing of the wirehouses’ reputations and independence.

In an hour-long exclusive interview during the annual Schwab Impact show in Atlanta on September 24 (before Congress had approved the big bailout bill), Bettinger spoke of the trials of managing during a difficult time, the opportunities that are arising for Schwab and RIAs during the crisis, his priorities in the near and medium term, directly addressed some of the issues that have led to the love/hate relationship RIAs have had with Schwab the company over the years, and spoke of the unique challenges he faces in succeeding Chuck Schwab. Here’s one pledge: There won’t be any “Talk to Walt” marketing campaigns.

What does the current crisis mean to Charles Schwab & Co.?

One thing that stands out to us at Schwab: “Profits” has multiple definitions, and to the extent that those who analyze companies and invest in companies don’t discern between different types of profits, it encourages risk-taking that is potentially disproportionate to the up side.

What we’ve tried to do at Schwab is to make profits the old-fashioned way: we serve our clients, we do the best possible job serving our clients, and they make a daily decision whether the service they’re getting is proportionate to whatever compensation that we’re getting in return. If it is, they stay and hopefully do more business with us. If it isn’t, they leave. That’s the only way we make money.

We don’t go out and borrow money and invest it on our own account, or ramp up the leverage of the company in an effort to try and create profits. When this is all said and done and we’re down the road looking back, we’ll realize that what people want to invest in, and owners want to own, are companies that they can understand and how their business model makes money. That will result in some reduction in risk-taking by companies because, frankly, they won’t get paid to take it.

Can we fix these problems, or is it just part of the cycle?

I think it’s very difficult for anyone sitting in the middle of the storm to say “This is the ideal solution.” What many of us have recognized from the events of the past week–I was in Washington last week and had conversations with many of the folks who are deeply involved in this rescue attempt–is that we must have liquidity, because if we don’t have liquidity in the system, if people aren’t willing to buy and sell the most conservative of securities, the whole system grinds to a halt.

We view the programs being proposed by Secretary Paulson and Chairman Bernanke as more about liquidity in the system than helping banks necessarily restructure balance sheets.

We need liquidity within the system for our entire financial framework to function–that doesn’t make a difference whether it’s someone on Wall Street or someone on Main Street–whether you’re highly affluent or a teacher like my father.

At a time like this, do your responsibilities to shareholders and advisors change?

I wouldn’t say that it changes significantly. Our responsibility as a fiduciary to our shareholders and our responsibility in serving our clients and our employees–the three constituencies that I talk a lot about–is consistent throughout all cycles. I do think that in times like these it is more important than ever to understand the philosophy and framework behind the way a company operates. I think the way Schwab has historically operated and does so today is in that more conservative approach–the way we make profits, the way we serve clients, the way we manage our balance sheet, the decisions we make around investing–are all based on being a port in a storm for the marketplace. That’s history, that’s today, and I fully expect that to be the case indefinitely into the future.

Part of it is getting that message out on a consistent basis?

Certainly. And that needs to be the message in good times and bad. I sat at a table with analysts three years ago who said, “Boy, you’re just not aggressive enough with the bank [Schwab Bank]. You should be lending this way. . .you’re leaving money on the table.” Our philosophy then, and it wasn’t because we had some secret knowledge, was that “No, we’re going to let the bank grow at a rational rate serving primarily existing clients. We’re going to invest dollars that clients have entrusted us with in a manner that’s consistent throughout a cycle.”

So our message of conservatism in the way we try to operate the company was that way during boom times and is that way today. That’s the winning strategy. To adjust the message to the times, that’s where companies get in trouble. And I think people see through that.

Do you have any plans on how Schwab might change?

I would expect you to see the same company down the road that you’ve seen in the past and see now, for a variety of reasons. Our purpose as a company is very clear and timeless, and that is helping everyone to be financially fit. We believe strongly that with that as a purpose and fulfilling it we will continue to create revenue growth and profit growth and success for all our constituencies–shareholders, clients, and employees.

The other thing is that this transition has been in the works for a number of years, and even prior to the dates that it was more publicly recognized. So as a result, Chuck for a number of years has included me at the table on all the major issues that the company has addressed, and especially over the past couple of years has asked me to either make the decision or play a primary role in making the decision, so that at the point in time that a formal transition occurred, much of what we were doing were things that were already consistent with what I would have put in place.

There have been such big changes on Wall Street. Has your competition changed? Will that affect how you move forward?

I suppose one could say that after we move past the current environment into what could be called a more normal environment, we will have fewer competitors, but stronger ones. Schwab has always grown inside an environment that was very competitive, with well-funded, aggressive, successful, high-quality competitors. We compete across a broad spectrum with everybody from full-service brokers to banks to discount brokers and mutual fund companies. That will continue.

One of the things that this environment has shown all of us is that while it’s of course healthy to have an intense focus on your external competitors, you can also create a lot of challenges for an organization with internal decisions. Many of the companies that have disappeared or been acquired, their undoing was less external competitors than internal decision-making. In fact, one could call it internal competition, if not in the traditional sense, for results, for investment, for risk-taking.

What you’ll see in the future from Schwab is continuing to recognize the strength and capabilities of our external competitors, but also clear recognition that internal strategies and decisions play a big part in future success.

Let’s talk about Schwab Institutional and the advisor channel. The notion of there being competition between advisors and Schwab has arisen over time because Schwab has a retail presence. Can you discuss that, and the importance of the advisor channel to Schwab over all?

First, I spent the first nine years of my time at Schwab with Schwab Institutional. I think it’s fair to say that I was as close to what many would call the father of Schwab Institutional–John Coghlan–than anyone. He was my direct manager for seven or eight of those nine years. Then I spent several years in the retail business, and the last few years in an overall corporate position.

This issue of competition between what we do in trying to serve advisors and our retail business has never been a smaller issue than it is today; I hear less about it now than I have at any time in the past. The reason for that is that we now have clarity of our corporate strategy. That strategy makes sense to advisors, it makes sense to our retail business, and it makes sense to analysts who cover our stock and the owners who own our stock.

Our retail business is focused on the mass affluent, clients who are largely self-directed or are looking for scalable, straightforward portfolio advice. Our advisor business is largely focused on serving advisors who work with more affluent investors and are looking for more customized, specialized portfolio advice. That doesn’t mean there aren’t advisors who build their business with mass affluent people or provide simplified, straightforward advice–that’s fine, and we want to serve them, too. But the core strategy of the business is aligned and makes perfect sense. Having the clarity of that corporate strategy has taken the air out of the tension balloon that in years past created some of those dynamics that you referred to.

Do you often meet with advisors?

I spend every moment I possibly can with clients in all our business lines. The advisor business is not simply a place for Schwab to make money; it is core to our corporate strategy. That’s a statement that in the past may not have been as clearly stated or as clearly communicated as it could have been. It is core to everything we do at Schwab.

We also fundamentally believe at Schwab that many affluent investors are simply better served by working with an independent advisor than they would be by working with someone at a wirehouse. The focus on objectivity, the flexibility around product selection and portfolio construction, the community involvement, these are things that lead to deeper trust and better relationships with affluent people. We just think it’s a better business model.

What do advisors want most from Schwab?

It’s clearly a mix of things, but the one thing that comes up time and time again in every conversation I have with advisors is quality of service. We have the products, we have the capabilities, the markets will evolve, and we’ll keep innovating. But it comes down to service: advisors need great service from Schwab so they can provide great service to their clients.

You were an entrepreneur yourself. Do you feel an affinity toward the advisors who park themselves at Schwab?

My entrepreneurial background, starting a small business at a young age and building it from scratch and having lived through the challenges of having to make payroll–and knowing the people who work in the organization as people, and knowing their spouses, families, partners, and the importance of that paycheck–those things create an impression on you that never goes away. That background has facilitated interactions with advisors that might have been more difficult if I didn’t have that background. I don’t try to infer from that that I have some special expertise, but I have been in that spot that [they] have been in, and that opens doors to honest dialogue.

Is Schwab well situated, is the system well situated, to handle the coming surge in retirement?

Our view is that we’re at the very early stages of the development of the business models that will help people in retirement. There’s a lot of talk about the amount of money one needs to accumulate to retire. There’s a lot of talk about when someone retires they will have this grandiose new life with new hobbies and behaviors.

At Schwab, we look at it very differently. For most people, retirement isn’t an event, it’s an evolution. More often than not, it’s an imposed evolution, not a decided one. More often than not, when people move into what we have historically called retirement years, it’s not about taking up new hobbies, or changing their life, it’s doing more of the things they already enjoy. There may be more of a component on giving back during this time, on helping others, but it’s often that what I’ve done before retirement is what I want to do after.

Rather than this incessant focus on how much money I need to save, what most people more realistically do, is when they’re no longer adding money into their accumulation, they get much more conservative with their investing, and the risk they take into [account in] their lifestyle. It’s no different than when we were in college, we adjusted our lifestyle to our economic resources at the time. That’s a much more real-world environment around retirement. We try to be really practical about it.

Safe and Sound

A Tale of Two Cities


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