Photo: Charles Schwab Advisor Services

The last time Walt Bettinger sat down for an interview with Investment Advisor during a Schwab Impact conference, it was 2008 and the financial crisis was front and center. Four years later, that specific crisis has passed, but there are still serious challenges faced by advisors and their clients. In an exclusive interview on Nov. 14 with Charles Schwab CEO Bettinger and Bernie Clark, who runs the RIA platform at Schwab, we explored the challenges faced by advisors and Schwab’s role on behalf of its affiliated RIAs and the entire independent advisor movement.

When asked about the independent RIA model and Schwab’s commitment to RIAs, Bettinger was forthright and disarmingly honest. “We think the advisor model is simply a better mousetrap. We think that as we move into a world that is more and more transparent, with more and more informed consumers, the independent advisor model […] will continue to gather steam.” What of Schwab’s commitment to RIAs? “The best way to endorse [the RIA model] is the fact that it is our strategy in the affluent space,” Bettinger stressed. “Schwab has had a few missteps over the years into that space, the most famous of which I won’t name, but its initials are UST,” he said, referring to Schwab’s acquisition of U.S. Trust in 2000. Schwab sold U.S. Trust to Bank of America for $3.3 billion in early 2007. “I’m proud to be part of the management team that corrected that situation,” Bettinger said, “because we believe in the advisor model.”

That belief, Bettinger suggested, is reflected in his own time and energy commitment to Schwab RIAs. “The best part of my job is traveling to see clients,” Bettinger said. “I meet with advisors on a regular basis throughout the year.” Moreover, spending that time with advisors and advisor prospects reflects Schwab’s own fiduciary standard of seeing its business “through clients’ eyes.” He’s not immune to some modest chest-thumping on behalf of the RIA business, however: “by 2X we are the biggest, and by at least that same amount I’d say we’re the best at serving them.”

What specifically is Schwab doing to grow its business, and how will it support its RIAs and the entire independent advisor business? For Bettinger and Clark, the key concepts are advocacy, innovation, consistency, confidence, referrals and maintaining Schwab’s culture as a “challenger brand.”

Fiduciary and SRO

For Bernie Clark, the battle lines drawn around a bill introduced this year by Rep. Spencer Bachus suggests where Schwab’s advocacy efforts are needed in Washington. That bill, which would have designated FINRA as the self-regulatory organization for RIAs, is an instance, Clark said, of interested parties “trying to dance around the concept of bringing what has become an independent industry back into the main fold.” The largest proponents of that bill were SIFMA and “other organizations that would potentially benefit” from FINRA becoming the SRO for RIAs. “The Investment Adviser Association,” in the person of IAA executive director David Tittsworth, “was the lone representative testifying on behalf of the RIA industry for not having an SRO and for not having FINRA be the SRO. There were three representatives from the wirehouse side” who testified; there’s “something inherently wrong with that,” he said. In discussions with legislators on the issue, Schwab realized “they didn’t have the concept; so they need contextual education.”

As for whether all advice-givers should operate under a fiduciary standard, Bettinger said he tends “to think of fiduciary from a bigger-picture level.” He continued, “It doesn’t matter what business you’re in: If you’re paying a fee for my advice, my advice should be based on your best interest.” Bettinger said Schwab believes “so strongly” in this approach that it implemented a fiduciary model “even in our retail business” four years ago. Bettinger said the fiduciary approach is part of Schwab’s overall corporate strategy that encompasses “three simple words: ‘through clients’ eyes.’” That is, if “I’m not seeing it through clients’ eyes, I’m not putting their needs at the forefront.”

Confidence and Competition

When asked whether advisors are now expecting something different from Schwab, Bettinger lists two broad expectations. “The first is what you’d expect: the tactical, service quality and technology, including Schwab Intelligent Integration,” he said. The second is that Schwab is taking a more active role in the growth of the overall industry. “The independent RIA industry is not one where the pie is only so big and we’re all inside the pie, bludgeoning each other to win a little bit bigger slice. It’s a pie that we can grow to something dramatically larger.” Clark said that when it comes to serving advisors, “we’re rewarded for our innovation and consistency at the same time.”

So who does Bettinger consider his biggest competitor? “The greatest competitor for our company is actually confidence.” Bettinger worries about “what we can do to build and inspire confidence; the financial services industry has done a pretty effective job of undermining confidence in recent years. It seems like every six months we get another blunder by another company in the financial services industry, which splashes blood on all of us as they’re injured, self-inflicted in most instances.” Schwab, he said, “needs to be an organization that stands for confidence and delivers confidence; whether it’s the decisions we made four years ago about the conservative way we operate our company and balance sheet, and [how we] made it through that time as the largest publicly traded company that didn’t take any public assistance under TARP to where we are today.”

Clark mentioned that another goal for Schwab is “growing that pie.” In its retail operation, Clark said, “we have a referral program to advisors when a retail client in our company needs more sophistication” in planning and investment needs. “We refer up to $4 billion a year, new, to advisors,” said Clark, referring to Schwab’s Advisor Network referral platform. Bettinger said that half of Schwab’s new clients come from referrals over all.

How will Schwab evolve? “The future Schwab will look a lot like the Schwab of today,” said Clark, arguing that “the strategy of ‘through clients’ eyes’ is not one that evolves because of an economic cycle or because of a changing demographic.” While he expects to see “tactical shifts” in the future, including a “workforce evolution mirroring the demographics of our country,” he said “the core of our strategy is timeless.”

Finally, Bettinger said that Schwab will remain a “challenger brand—our clients do want us to challenge conventional wisdom to the extent that it is better for that end investor.” While he acknowledged that it “may sound unusual for a company with almost $2 trillion” in assets to be thought of as a “challenger brand,” he said “you can look at some of the moves we’ve made across the company” in 401(k)s, in Schwab Index Advantage, in ETF pricing, and in the initiatives announced at Schwab Impact as evidence. “That part of Schwab you’ll continue to see accelerate.”