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Schwab: RIAs Ascending, but $23 Trillion Is There for the Taking

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In its most recent quarterly earnings release, Charles Schwab reported it held $1.1 trillion in RIA assets at Schwab Advisor Services (SAS). But at its 25th annual Impact conference in Boston in mid-November, the head of SAS, Bernie Clark, encouraged RIAs to think even bigger, saying Schwab was committed to helping advisors gather more of the estimated $23 trillion in affluent client assets that live outside the RIA channel (affluent defined here as client accounts with $500,000 or more in investable assets).

However, Clark warned the 4,500 attendees at Impact that the RIA channel’s growth was not going unnoticed. “People are chasing you,” he said in the opening general session. “They want to have what you have,” not least the strong relationships with clients that “are at the heart of your business models.” Moreover, he said that for RIAs, “complacency is your biggest enemy.”

Clark estimated that assets in the overall RIA channel totaled $4 trillion, held by 14,000 RIA firms with 32,000 employees. Clark argued that attracting, training and “retaining talent will be critical to your future success.” He then outlined the ways that Schwab is helping RIAs meet the human capital challenge, including its existing Executive Leadership and intern programs; RIA Talent Advantage, a program designed to help advisors build a more diverse workforce; and a new initiative it is working on with Deena Katz at Texas Tech University for high school students.

He suggested that to succeed, advisors must meet the needs of multiple generations of clients: boomers and Gen X and Gen Y clients, but also those young people who constitute the generation following the millennials. “Generation Z will be different as well,” Clark said, envisioning a near future where advisors will be “running multiple businesses within your firm” to meet those differing generations’ different needs.

“The digital era will bring opportunities and many threats” to advisors, Clark continued, arguing that social media now constitutes “your largest center of influence.” He also said that “we must stay together on advocacy — inside and outside Washington” and trumpeted a change to Schwab’s digital, print and television ads to highlight potential clients’ option of connecting with an independent advisor.

Clark invited onto the stage Schwab CEO Walt Bettinger, who spoke of Schwab corporate’s continued gains in market share and asset growth. This is “the fourth straight year,” Bettinger said, that “we’ve brought in more than $100 billion in net new assets.” Referring to its RIA referral offering, Schwab Advisor Network, he said “we’re at nearly $6 billion in closed business in the first nine months” alone of 2015.

Bettinger addressed the robo-advisor issue, calling it “overhyped” but noting that “aspects of those platforms make incredible sense for many clients.” In its own advisor survey, “last year, 50% of you saw a role for digital advice in your business,” while this year “it’s now 70%.”

In its Q3 results, the company said its retail and advisor Intelligent Portfolios platform has attracted $4.1 billion in client assets already this year. Schwab launched the retail version of its all-ETF digital advice platform in March 2015. The RIA version, Schwab Institutional Intelligent Portfolios, was launched in June 2015.

Bettinger said of Intelligent Portfolios that the firm “can take that engine so you can trade mutual funds in that portfolio, even individual securities,” as part of what he called “Custodian 2.0,” acknowledging that “the custodian services we’ve provided for three decades haven’t changed dramatically” over that time, but that Intelligent Portfolios “lets you serve a broader swath of clients.”

Referring to the dustup that occurred when Schwab announced its digital advice offering, Clark recalled “there was some emotional chatter” about robo-advisors “when we entered the space.” Bettinger said the negative chatter from the mostly venture-capital funded robo-advisors came from the realization that “we recognized the real strategy for those firms is a takeout — an acquisition. So when we came into the space, we crossed our name off the list of firms who could write those checks” to acquire a robo-advisor.

In a private interview following their joint appearance before advisors, Clark and Bettinger expanded on their comments. On the $23 trillion “opportunity” for RIAs, Bettinger reiterated that “when you’re successful, people want to copy you,” so while it’s “great” that 30% to 35% of the assets at wirehouse firms are in some type of fee arrangement, those clients “think they’re getting [those services] for free.” That’s why Schwab’s ads encourage wire clients to “ask questions.”

As for some of the commentary when Intelligent Portfolios was first launched that focused on its requirement that a minimum amount of IP assets be held in cash — which some saw as a roundabout way for Schwab to be compensated for its IP portfolios — Bettinger said of those portfolios, “It’s not free; we never said it was.” The design behind the institutional version of IP was meant to give RIAs a way to “broaden their reach,” he said, adding that 500 Schwab RIAs have signed up for the platform since its June launch. In the same interview, Clark said that rather than force RIAs to choose model portfolios in the institutional IP platform, “we turned it over to 5,000 entrepreneurs,” meaning the RIAs who custody with Schwab.

When asked why RIAs couldn’t upload their own portfolio models to the platform, Betinger said “they can use their own” asset allocation models, noting that the 450 ETFs on the institutional IP platform “cover 95%” of the ETFs already used by Schwab RIAs.

Bettinger urged RIAs to “be a challenger; it’s important to remain that challenger. You’re the best-kept secret in financial services.” He called on RIAs to ask Schwab to provide products and services “that we couldn’t five or 10 years ago” but that it might be able to now due to its scale and financial stability.

He said, “The most important thing is to never put you in a position to have to apologize for custodying with Charles Schwab.”

As proof of the RIA model’s growing strength and superiority over traditional models, Bettinger said, “Tell me about a big RIA who went back to the wirehouses.” The wires, he said, are “moving our way.”