Schwab CEO Walt Bettinger.

Charles Schwab Corp. announced Thursday that it is cutting its standard online equity and ETF trade commissions from $8.95 a trade to $6.95 for trades made by advisors who custody with Schwab, for retail clients and clients of its Personal Choice Retirement Account (PCRA) program.

In a presentation to analysts and the press, CEO Walt Bettinger also said that the firm has “broadened” its previous “satisfaction guarantee” to “refund the particular cost” of commissions, transaction fees, or advisory program fees, “for any reason” to clients. Schwab previously had offered that money-back guarantee to clients from its fee-based advisor solutions, in which Schwab would “eliminate” a quarterly fee, Bettinger said, for “an unhappy client.”

As for cutting expenses of its Schwab-labeled index funds, Bettinger positioned it as “consistent with our heritage to level the playing field for all investors,” and said it was making its fees “as low as and lower than any other” major provider of index funds, citing in particular Fidelity and Vanguard.

“We’re eliminating all minimums for our index mutual fund,” he said “so all investors will pay the same expenses,” referring to the fund’s operating expense ratio,” which he said meant the pricing of those two index fund competitors “begins to approach our pricing only if you have $5 million to invest.”

Schwab’s press release said its competitors’ trade commissions as of Jan. 31 were $7.95 at Fidelity, $9.99 at TD Ameritrade and E-Trade, and $7 to $20 per trade at Vanguard, depending on the number of trades made.

As for its mutual fund expenses, the Schwab release cited the following expense ratios (see table below) based, it said, on the funds’ prospectuses.

In a presentation that covered the strategies and financials for 2016 and 2017, both Bettinger and Bernie Clark, head of Schwab Advisor Services’ RIA custody business, spoke bluntly of both the firm’s competitors and its strategy of putting Schwab’s scale to work on behalf of its retail and advisor clients.

After a “a strong year in assets and returns for our shareholders,” Bettinger said “we’re beginning some initial steps to benefit our clients through disruptive actions.”

 

 

 

 

 

 

 

Investment Amount

 

 

 

  $5,000  

 

 

 $100,000 

 

 

$5,000,000

Schwab S&P 500 Index Fund

   

0.03%

 

 

0.03%

 

 

0.03%

Fidelity 500 Index Fund

   

0.09%

   

0.045%

   

0.035%

Vanguard 500 Index Fund

 

 

0.16%

 

 

0.05%

 

 

N/A

Schwab Small-Cap Index Fund

   

0.06%

   

0.06%

   

0.06%

Fidelity Small Cap Index Fund

   

0.19%

   

0.07%

   

0.06%

Vanguard Small Cap Index Fund

 

 

0.20%

 

 

0.08%

 

 

0.07%

Schwab U.S. Aggregate Bond Index Fund

   

0.04%

   

0.04%

   

0.04%

Fidelity U.S. Bond Index Fund

   

0.15%

   

0.05%

   

0.04%

Vanguard Total Bond Market Index Fund

 

 

0.16%

 

 

0.06%

 

 

0.05%

(See Schwab.com for more details on these expenses)

Highlights of 2016 included, he said, that financial “planning activity increased substantially, that it was the “fifth consecutive year that clients entrusted us with more than $100 billion in net new assets,” and that Charles Schwab Corp. estimated a “$300-$400 million benefit” would accrue to the firm with the Federal Reserve’s next rate increase; subsequent Fed hikes would provide a $200-$300 million benefit.

As for the benefits of corporate tax reform promised by the Trump administration and Congressional Republicans, Bettinger called prospects for reform an “ongoing story,” but the company estimated it would benefit Schwab to the tune of $450-$600 million annually. He called clients’ potential movement of money now in money market funds to Schwab Bank as a result of rising rates a “significant opportunity” for the company, which he said could produce a “very substantial incremental revenue and growth opportunity.”

Bettinger said the firm expects that RIA channel growth in general will “outpace other segments,” in large measure due to the movement of breakaway brokers to the independent channel. He also commented on the Deptartment of Labor’s fiduciary rule, saying that regardless of whether the rule is changed or delayed by the president or Congress, “that train has left the station.”

When asked whether cutting the cost of trades and reducing the OER of its index fund would affect Schwab’s financials, Bettinger said that Schwab’s continued growth would make that a nonissue. “We didn’t make our move in response to any competitors’ moves,” rather that  Schwab’s intent is “to not have pricing be a barrier to anybody looking to invest.”

What he called “the standard industry practice of negotiating prices” for clients with different asset levels “undermines trust; this enhances trust.” That’s important, he said, because “trust in our industry is exceptionally low.”

On the robo-advisor front, Bettinger said that the company’s Schwab Intelligent Advisory, now being tested, with a rollout later this quarter, is meant for clients with less than $1 million in assets who want hybrid robo-human advice, “delivered by CFPs with at least 10 years in the industry.” Bettinger said he had put himself through the process himself, called the service “thorough” and with an attractive price point of 28 basis points with a minimum investment of only $25,000. “We’re introducing a fee cap” to the service, he said, meaning “no client would pay more than $900 per quarter regardless of assets” on the platform.

“We’re playing the long game here,” Bettinger said during the Q&A session following his presentation. “We’re playing chess, not checkers; we won’t measure the success of these measures over one or two quarters.”

He also dismissed the idea that Schwab Intelligent Advisory poses competition to Schwab RIAs. “The RIA client is highly unlikely [to use the SIA platform], he said, and “the notion that a broad-based national retail operation” from Schwab “will have a significant impact on RIAs is folly,” citing retail advice and RIAs’ “different segments, different types of clients, different needs.”

Bernie Clark on Schwab’s Success and Plans

In his presentation to the analysts and press, Bernie Clark began by reporting that based on Schwab’s benchmarking studies, “independent advisors are growing faster than the industry” overall, “and if you custody with Schwab, even faster.” The reason has to do with RIAs’ fiduciary and transparency traits, said the head of Schwab Advisor Services, traits that resonate with boomer clients but that will also be rewarded by next-generation clients. Advisors “keep winning” not so much because of their investing skills, saying the “investment portfolio is only 20% to 30% of the value they bring” to clients. Rather its RIAs’ relationship management skills, “some becoming life coaches” and helping clients solve complex estate planning issues that results in Schwab’s RIAs retaining 96% of clients and assets.

As for how Schwab retains the more than 7,000 RIAs who custody $1.3 trillion in assets for the firm, Clark argues that it’s value-added services like its consulting program and its executive leadership program. Unlike other custodians, Clark said its consulting doesn’t consist of “a three-hour seminar at a local hotel,” but rather is at least a six-weeks-long engagement where advisor participants agree in writing to implement the consulting prescriptions.

“We’re the leading custodian in market share in every segment,” in terms of the asset size of RIAs, whose average client account size is $1.6 million. He also lauded Schwab’s high Client Promoter Scores from RIA clients, and said “1,400 firms have joined us” since the global financial crisis. In 2017, one of Schwab Advisor Services’ biggest initiatives concerns cybersecurity, with a 20-city tour, regional events, a dedicated website on cyber and web seminars on the topic. Schwab also plans on providing more services to family offices this year, he said, while continuing its advocacy efforts in Washington and its support for the next generation of advisors including multiple grants to universities, encouraging students to tell the independence story in a fragmented industry.”

“We’re at 26% of the market” for custodians, he said, with Fidelity at 13% and with “TD Ameritrade half that and Pershing half that.” But it’s a tough business, too, he said, noting that “we’ve seen leadership changes at one” of our competitors (meaning Bob Oros leaving Fidelity), and saying “Ijust learned of another departure” from a “boutique” custodian among what he called the “purpose-built providers” (no doubt meaning Lori Hardwick at Pershing).

Bettinger said “I’m not worried about the competition there,” but said “we are watching very closely” the wirehouse firms as potential competitors.

— Check out Schwab, TD Ameritrade Post Strong Q4 Earnings as New Accounts, Assets Soar on ThinkAdvisor.