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Setting the Pace

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To assess the current state of the independent advice business, there’s no better place to start than with Schwab Advisor Services, whose innovations helped make that business possible and remains the industry leader by providing custody, operational and trading services to nearly 6,000 RIAs. There’s no better person to explain Schwab’s strategies and assess the state of the business than Bernard “Bernie” Clark, whose long tenure at the company in different high-profile roles—he joined Schwab in 1998—culminated in being named to run SAS as executive vice president in February 2010.

In a wide-ranging conversation at Schwab’s San Francisco headquarters in early October with Group Editor in Chief Jamie Green, Clark discussed Schwab’s role in providing services to its advisor clients, touching on technology, financial services reform, portfolio building and human capital.

The Portfolio and Schwab’s Role
Advisors are rethinking how they invest for clients; they’re expecting more from, and conducting more due diligence of, their money managers. What’s Schwab’s role in this process?
Using a broad brush, advisors are differentiating themselves again.
All of the legislation that’s been coming out, when you think of concepts like fiduciary, for instance, it’s all about making sure the investing public sees a real difference—not just a perceivable difference, but a real difference.

When it comes to the portfolio, the value that advisors provide to their clients is a bigger role than just the portfolio mix, but that mix is more important than perhaps it was five years ago when the markets were heading in a more steadily upward direction.

So the focus, the education that advisors are going through around investing—and sometimes it’s just validation of their due diligence process around product—is quite similar to the same education and validation that their clients have been asking of them.

The good news, I believe, is that when this is all said and done, everyone will see much more transparency, and will be far more educated about their investing future. And that’s good.

Part of what’s challenged this industry is that people have been too reliant on the simple “Trust Me” relationship, which is important, but I like the idea that they understand their investments better.

Our role? We don’t involve ourselves in the investment selection, other than to create good choice for advisors.

We created an AdvisorSelect List, launched in April, where we do some due diligence on behalf of advisors if they don’t have that resource themselves. We do interrogate strongly the custodial attributes of investing, making sure documentation is what it should be if they’re using an unregistered security, for example.

You’ve also seen us expanding our capabilities on our investment platform: The JPMorgan Chase new issue is a perfect example of trying to bring more products from the best in the industry. Look at our PIMCO bond ladder—again going to the best and having them create something that advisors can use. While we can’t talk much about it now because it’s not a closed deal, the Windward deal [the acquisition by Schwab of Windward Advisors of Boston, which specializes in both active and passive ETFs], is making new ETF strategies available. Where the needs exist, you’ll see us do more, and we have indeed done some building around the edges where we’re good, like with the 11 ETFs we’ve launched this year.

You have a JP Morgan relationship and a PIMCO relationship, and a build, with the ETFs, and a buy, with Windward, to make more products available to advisors.

All those areas are of great interest to advisors at the moment.
Build-it-and-they-will come was a great movie, but those days are long over. If you look at what we’ve done, we know that with the unraveling of the Bush tax legislation and the demographic of our client base, non-taxable fixed income products are incredibly important. You will see us get more engaged in the taxable side as well; we were engaged in the Microsoft new issue a couple of weeks ago; there’s been lots of advisor interest.

The 11 ETFs we launched? That’s where the majority of advisor interest has been; that’s why we launched them—indexed, because we’re staying close to the marketplace … transparency, liquidity, ease of use. Both the launches, and through Windward, are a little bit more of an aggressive strategy. We’re not trying to build things that just look neat; we’re listening, and responding to the demand.

On the ETFs with no-commission trading, your competitors have noticed and responded. Will that continue, like with the big NTF-mutual fund platform, answering advisors’ needs to access investment vehicles at a low price point?
That’s a big strength of our company. The Select List I mentioned, those are actively managed no-transaction-fee mutual funds. Where did we think we could add some value in the ETF marketplace? We could lower costs. So yes, you’ll see us continue down that track. If you’re alluding to a NTF-ETF platform, that’s not the message I’m sending here. But it is adding value by lowering costs.
Our Windward products will launch with no transaction fees for advisors, so there will be some immediate advantage [to advisors with that acquisition].

When does the acquisition close?
Early November, probably. But getting to the core of your original question, portfolios are really important now.

Differentiation is critically important to advisors—they differentiate themselves so much through their relationships, but they, too, in crafting their strategies, are thinking about the needs of their clients. Our Advisor Outlook studies say advisors feel it will be hard to meet client’s objectives; they’re not looking at yield, they’re talking about life planning.

Differentiators for Advisors and Schwab
So if what differentiates advisors is personal attention, it’s also a challenge to do it efficiently, to find the right clients, to use the right technology to keep providing that personalized service, since that’s what gets and keeps clients. What’s Schwab’s differentiator? Is it your people?
Personalized services are scalable and replicable—you can do bill paying on a large-scale basis, for instance—but the essence of what advisors do is customization and “know me” solutions—they know who they’re dealing with. We in turn have differentiated ourselves for a very long time with our own “know me” solutions side, and that intimacy with our clients.

It’s not about creating a solution that addresses the personal needs of an individual in an impersonal way. That’s the big differentiator. One of the first things I encountered when I joined Schwab in 1998—I was the guy responsible for service and trading and operations—at that point we were still a maturing organization, and quite often the conversations we had were about people.

It was clear to me that many of these early advisors wanted deep relationships with the people who were serving them, with the service team and its managers. They wanted to know those people, and for them to know their firms. We were ahead of everybody else at that time, but nowhere where we are today. So we set up a system where there could be careers within those organizations where they could mature in place.

Do people move around? Absolutely! But we’ve got nearly 2,000 people serving advisors; our average tenure among our service organization is around eight years. These are resources that know their clients.

We also wanted to make sure we didn’t become overly reliant on one person knowing one firm, so we set up teams of people who knew those relationships. Our senior executives and our marketing people and partners got to know clients—thus the 400 events we do a year now in spending time with our clients. So our model has evolved based on people; everything else is complementary: our products, our technology.

I’m not diminishing their importance, but without that core of people, without that tenure in the business, without having that “know-me” solution mindset around clients, you can’t be a leader in this business. You can compete, absolutely, and many do, but you can’t be the leader.

To your pointed question about whether we’re seeing people leave? Sure, we’ve always seen people leave, but more important to me, there’s no one in the industry—and you know me, I’m not being cavalier—whom I can’t talk to, whom I can’t convince this would be a great place to come to work.

[Read more about a possible brain drain at Schwab.]

Do advisors want something different now from Schwab in terms of service?
You can only build that, create that tenure, over a long period of time. But now I believe it to be the price of entry. It may not have the same perception of value, but if it goes away, then you’ll see it. You talked earlier about other custodians being engaged in this, but I’ll tell you, nine out of 10 times, that’s where the differentiation is noticed.

That’s why we are the primary custodian, and many people have secondary custodians, which by the way is fine. Diversification, especially for larger firms, makes complete sense. We’ve always said we want to be the primary custodian.

Schwab’s Technology Strategy
Some of your competitors claim the major RIA custodians are in an “arms race” when it comes to advisor technology. Forgetting the hyperbole, what is the strategy behind Schwab Advisor Services’ technology development?

Advisors need more efficiency. We have a strategy now of trying to create more efficiency for advisors, and technology is a large part of that … a lot of it in the past had to do with our platforms and people, and now with the launch of our Intelligent Integration approach, [the strategy is] mostly about efficiency, it’s mostly about workflow.

The past several years we’ve been using practice management as a strategy, to get advisors thinking about what’s going on within their offices, the workflow within their offices. Advisors have learned they have to be more organized in delegating responsibilities within their offices, having designated business development officers, chief compliance officers—these are full-time jobs.

Intelligent Integration is our opportunity in what we literally think is a decade-long approach to technology. Advisors have 10–15 years experience using technology on their desktop, and rather than a build-it-and-they-will come strategy, we’re going to build a platform that uses your technology, to think about using a CRM as a navigator, and make sure that all our information flows through that single point of entry, a single point of view.

[Read more about Schwab's new approach to technology.]

So when you’re dealing with clients, you’re eliminating all those duplicate data entries … not throwing out your existing technology, but creating efficiency that allows you to scale as you move forward. That’s the strategy: The technology is a solution to a strategy that talks about efficiency.

Don’t lose sight of the fact that Intelligent Integration will take all our information throughout the day, but at the end of the day it will pull in data from your other custodians and bring it all together in that single point of entry.

At Impact, we’ll be naming the first partners for Intelligent Integration, using input from 1,000 advisors who told us online who they wanted. (See sidebar, page 40, for more on Schwab’s new technology philosophy.)

One of the things I’m almost tired of answering is how important the advisor business is to Schwab. Just look at the balance sheet: This is a very important business within Schwab. I’d be hard pressed to think of any competitor where [the advisor] business is as important to their companies. That’s the bottom-line perspective.

Financial Services Reform and Fiduciary
Let’s talk about financial services reform, Dodd-Frank and the fiduciary issue. Let’s say the SEC imposes a fiduciary duty on all advice givers. It will be good for consumers, but will RIAs lose their big competitive advantage? Will adoption of a fiduciary standard for brokers be a net positive or negative for RIAs, and thus Schwab?

The broader view is still pretty cloudy with that 2,300-page bill [Dodd Frank]. We’re working aggressively on that front, we have our deputy legal counsel and our Washington office working on Dodd-Frank, and I think we’re getting before the right audiences, and we’re having influence.

[Read more about how Dodd-Frank will affect oversight of advisors.]

Many of the proposals we’ve seen have had a polarizing impact, though, partly because of a lack of understanding of our industry and specifically of independent advisors. We want to protect consumers, too, but some of those initial proposals wouldn’t have protected them. I highlight the idea of creating custody around fee debits, which are miniscule opportunities as compared to having legislation around third-party money movements, where there’s much more risk.

So we’ve been educating regulators and the SEC to some of these differences—working with the industry groups is important, too. It’s a wonderful thing to see the altruism of advisors, who want to protect consumers. To them a fiduciary standard begins to address that.

The simple nuance is that we need to create rules and regulations that will support different types of investing.

So if you’re entering into an advised relationship, we all want that to be a fiduciary relationship, no matter where you are. If you’re entering into a transactional relationship, we want that transaction handled with the greatest of care and with fiduciary responsibility, but that’s where it would end, in the transaction. To extend a fiduciary responsibility beyond that to a self-directed transaction environment would in effect change a very important part of our business, and take choice away from consumers; our clients don’t want that, we don’t want that, nobody wants that.

Fiduciary standing has been a competitive advantage for RIAs, but I see a group of people who have encouraged the industry to a higher ethical plane, and good for them. I don’t think they’re worried about extending the fiduciary standard to brokers.

Someone recently asked me if the trend to independence is over. This movement started a long time ago; I see no stopping of the trend.    

Group Editor in Chief Jamie Green can be reached at [email protected].


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