At the Schwab Impact conference on Tuesday, Charles Schwab CEO Walt Bettinger spoke bluntly on the future of robo-advisors, on TD Ameritrade’s planned acquisition of Scottrade and why the DOL fiduciary rule will result in “outsized growth” of the RIA channel. Bettinger made the comments on stage with colleague Bernie Clark, then in a private conversation and then in an interview on CNBC.
Kicking off the Impact conference in San Diego, Bettinger sat down with Schwab Advisor Services’ head Clark, delivering on his pledge that “as a transparent company” Schwab believes in “sharing publicly our beliefs about the future of this business” and “why we engage” on its strategies regarding company growth, how it competes, how it serves its advisor clients and its pricing.
Bettinger said Schwab’s growth “will be driven by market share gains,” while brokers breaking away from the wirehouses will continue “outsized growth” among RIAs. “Modest growth” from retail investor trading volumes “will be coupled with strategic pricing pressure.” He said Schwab needs to “draw more business” from its custodian and brokerage competitors while “attracting new wealth” from services like its Intelligent Portfolios digital advice platform.
As for the deal announced on day one of the Schwab conference, in which TD Ameritrade said it pay $4 billion to acquire online brokerage firm Scottrade, Bettinger said on stage that Scottrade founder Rodger Riney “built an amazing business over the past 35 years; he’s one of the true gentlemen in the industry, so it’s personally sad for me” that Riney is exiting the business while he contends with serious health issues.
In the interview after the general session, Bettinger agreed when asked whether the TD-Scottrade acquisition was primarily a deal to help TD acquire more scale. “It’s a logical transaction for TD,” Bettinger said, though he warned that it would result in the acquirer “deriving more from a commoditized revenue stream.” Speaking on CNBC’s Power Lunch program, Bettinger expanded on his theme.
He said that while he understood why the acquisition made sense for TD Ameritrade, “it did not make sense for us; their business is so much more transaction-oriented than ours. There’s commoditization going on with transactions; the way you combat commoditization is often with scale.” He continued by saying “transactions are less than 10% of our revenue [but] we don’t think that’s where the puck is going. It’s something that we looked at, but we ultimately decided to take a pass.” Both TD Ameritrade and Scottrade have advisor custody businesses, as does Schwab, with Brian Stimpfl, formerly of TD Ameritrade Institutional, heading Scottrade’s smaller RIA business.
Moreover, Bettinger said “we expect pricing in the transactional area to continue to compress, and if we get an improving economy and maybe slightly higher interest rates, we’ll see that [trend] accelerate. We’ve diversified our business model such that we have a fairly modest amount of revenue tied to transactions; so to acquire a firm that is still 40% transactional revenue is completely off strategy for Schwab.”
On the Wirehouses, Passive Trading and Robos
On stage, Bettinger spoke of how independent advice-givers are in the ascendant. “The effort to copy you” will result, in “10 or 20 years” with “the entire industry looking like you.” When Clark said that the DOL fiduciary rule has led to Schwab “we’re hearing and seeing” strategy changes among broker-dealers, with “LPL apparently up for sale and trying to bring in more capital; Merrill Lynch making changes” in its retirement planning business, and asked if after its recent scandals Wells Fargo will “move more toward a traditional bank and broker-dealer model,” Bettinger responded “I assume so.”
He then brought up Charles Schwab’s legacy. “Think of how Chuck Schwab founded the company,” in which he brought technology into trading and helped commoditize it.” Speaking to the 1,800 advisors in the audience, he said the movement toward more passive investing models “will make asset allocation less valuable.” So advisors’ real value will come from advisors acting “almost as a psychologist” to help end-clients determine and then take action to meet their goals.
Clark joked to attendees that “the new active management is determining what passive funds to include” in a client’s portfolio, with Bettinger agreeing that advisor value must be “so much more than ‘We’ll outperform the market’” for clients. In the interview, Bettinger argued that commissions, portfolio management and asset allocation have all been commoditized, “but you can’t commoditize trust,” especially in volatile market conditions.
As for robo-advisors, Bettinger said on stage that “the idea that startup robos will take over the asset management industry can finally be laid to rest.” The pure robos, he said, will either evolve into business-to-business platforms “or dissolve,” and said the standalone robos are “all available for the right check.”
Returning to the effects of the Dept. of Labor’s fiduciary rule, Bettinger said to attendees that the rule is providing a “nudge to get us to more transparency, but fee awareness and fiduciary expectations are here to stay,” predicting further that “price pressure and demands for personalized advice will grow in the 401(k) space,” especially for those firms selling more complex products like variable annuities.” Firms now putting into place systems and processes to deal with the DOL fiduciary rule, said Clark, will have to do so “with the assumption that the taxable space will follow” in dealing with a fiduciary rule.
To Bettinger, that couldn’t happen soon enough, since even under the fiduciary rule he marveled at “how [as a non-fiduciary advisor] do you explain to a client that you don’t always have to put their best interest first?” Such a conversation, he charged, “can only occur with a degree of obfuscation” on the advisor’s part. The DOL rule, he said in the interview, “will drive more brokers to leave” broker-dealers.
Clark pledged that BC: on interest rates, you’re building an all-weather company Returning to Schwab’s business and revenue model, Bettinger said that with a “little bit of help from the Fed last December and some help from LIBOR,” Schwab has built, in Clark’s words, an “all weather company.” In the interview, Bettinger argued that “we’ve delivered outstanding” financial results “even in a near-zero” interest rate environment, and how in its most recent reporting period pretax income “crested over the 40% mark” compared to 30% in the prior year.
On stage, Bettinger positioned Schwab’s financial strength as a benefit to advisors, saying that “in dealing with us you don’t have to deal with wide fluctuations,” and that “having $15 billion of capital is important in volatile times. You have my commitment that you won’t ever have to apologize to your clients for custodying with Charles Schwab.”