The American economy has never been in better shape; it’s “moving ahead on all cylinders” and will be even more robust two or three years from now. “You just have to participate in the growth and be a believer in it.” That rosy picture was painted by Charles Schwab, founder-chair and former CEO of the brokerage bearing his name, in an interview with ThinkAdvisor on Monday.
Last week, Schwab announced that effective Oct. 7, it was eliminating trading commissions on stocks, ETFs and options across mobile and web trading channels. TD Ameritrade, E-Trade and Ally Financial swiftly followed with their own versions of zero-fee trades.
An upstart from the get-go, Charles Schwab, 82, has been guiding his company to become the country’s biggest and best online brokerage ever since the early days of the public internet two decades ago. The firm has nearly $4 trillion in assets under management.
In the interview, he describes the company’s “formula” for opening branch offices — there are about 370 coast to coast — in relation to its customers’ proclivity for online investing.
Further, he pinpoints the Charles Schwab customer of today. Not surprisingly, he or she clearly isn’t the ultra-high net worth investor — though the firm has some of those too, he notes.
In his new book, “Invested: Changing Forever the Way Americans Invest” (Currency – Oct. 7, 2019), he details his journey, rooted in entrepreneurship, over some five decades, including the firm’s near-catastrophic acquisition by Bank of America in 1983. Four years later, Schwab bought the company back.
In the interview, he discusses the zero-commission move and how he expects it to impact advisors and his firm’s revenues. Further, he opines on its effect on FAs who “masquerade as both an advisor and a broker.”
On the cost-cutting front, the firm is laying off 3% of its employees, about which Schwab also comments.
On Oct. 7, ThinkAdvisor held a phone interview with Schwab, speaking from the firm’s Wall Street office. Based in San Francisco, he was in New York on a media blitz to promote his book. Apart from annoyance over Manhattan traffic jams and lamenting the five bogeys he shot in a golf game last Saturday, and voicing a clear distaste for life insurance investing, he kept it on the sunny side.
Here are highlights of our conversation:
THINKADVISOR: How does Schwab’s eliminating commissions on certain online trades impact brokers and financial advisors?
CHARLES SCHWAB: The advisors who try to masquerade both as an advisor and a broker who charges commissions — whether on brokerage or insurance or you-name-it — are going to have a tough time competing with advisors that use Schwab and get the tremendous advantage of zero-commission transactions. Our recent move will really enhance their business. They’ll be very competitive against the traditional firms who try to do investment banking, advisory [etc.] — it gets so conflicted. Advisors will now charge what they should charge — a small amount per annum for their services.
In your book, you refer to brokers’ work as “a sales game.” Do you still think it is?
The old traditional broker who’s just out there selling stories — yes I do. That has mitigated a lot over the years, for sure. Still, when you periodically read in the Wall Street Journal about the misfortunes of clients who believed some [broker] about an idea or a series of ideas and their account gets churned, or they get into a high-commission product that they didn’t understand, not only does the client lose money but they’ve also paid a big commission. It gives the wrong kind of incentive for people who are [supposed to be] in the business of providing fiduciary advice.
How will zero commissions impact investors?
If you’re a very independent investor — do your own research and make all your own decisions — what a fantastic process to use a zero-fee Schwab account [will be].
What effect will this change have on your firm’s revenues?
We [believe] our revenues will be impacted negatively about 4%. But we’ll make that up over the next year or so as more people hear about [zero fees] and want to participate. We’ll probably increase our accumulation of new accounts and [likely] will make up for it within a year.
How will zero commissions affect Schwab’s custody business?
We’ll continue to be prosperous. We have almost $4 trillion of clients’ assets, some of which are in banking, our own advisory things; we have mutual funds, ETFs, little contributions all over the place — small amounts here and there. But the totality comes to a significant amount. So we’ll be just fine.
In your book, you mention laying off employees at various intervals over the years, and now you’re cutting 600 workers. What are the implications?
We’re trimming about 3% — 600 employees was the target amount of reduction. [Cost-cutting] is one of the things about Schwab that’s been sort of amazing: It’s allowed us over the years to reduce our costs to the investor by being very diligent about reducing our cost of business and adopting technology wherever we could, which has made us more and more efficient. We’ve passed on a substantial portion of that savings to our clients in the form of lower prices.
How will you keep expenses down now?
We always try to adopt technology and make things as clear and efficient to our clients so they can do as much self-[service] as they want to do.
What are your plans for growing the firm?
Obviously, [we’ll continue to] offer great service and make sure our clients are really happy. Referrals from happy customers are unbelievable — they’re 40% to 50% of our business. We don’t have commissioned salesmen — brokers out there banging on your door, calling you after hours at nighttime and in the morning, badgering you. So we’re highly dependent upon referrals from existing clients as well as on people seeing our advertising, which is the other [way we acquire clients].
Your firm has gone through several big transformations over the years. Just who is the Charles Schwab customer of today?
Somebody with a median account with us of something like $200,000. They’re [about] 47 years of age; so they’ve had a number of years to accumulate assets for their IRA or 401(k) and have personal savings. They usually start out with not a lot of money as a young person in their 20s, but by the time they’re 47 or 48, they’ve accumulated that kind of money.
Is it correct to think of Schwab as a discounter?
I don’t think so, not anymore. We’re so diversified in the services we offer and the different kinds of ways we help people now. For example, robo accounts are fantastically efficient for diversification and low cost — all the things that people need to look for in terms of getting the best kind of ethical advice.
So is it correct to say that you’re a full-service brokerage?
Yes, that’s definitely a term we would qualify under. [We have] a full slate of services that people would need to handle their financial affairs.
Do you have any ultra-high net worth clients?
Oh, yes. We have a service for people with more than $20 million, the Schwab Chairman’s Circle. We have quite a few people who have been with us many years and have accumulated that amount of money. They’ve had great financial success and have stayed with us because they trust us.
You now offer a subscription model of payment, right?
We introduced that [this past March]. People pay us $300 for an analysis of their financial position, and then we charge them $30 a month for continued advice. That includes a person who would be their financial advisor, as such. So no matter what size your account, it would cost you a total of $360 a year to have that advice. It’s not intended to be in competition necessarily with the larger accounts where people have much more complicated situations.
What do you see as the future of the financial services industry?
[Customers] have to have some sense of who they’re doing business with. So they want to see eye-to-eye and know you’re there when push comes to shove. That’s what our formula is: to have some physical presence in each of the communities where we do business. We have about 370 branches throughout the country. Most people want to come in and look you in the eye and see if you’re upstanding because they’re giving you their money. They want to make sure you’re responsible and then after that, they do most of their business online. That’s what they’ve been doing for the last 20 years, since the advent of the internet.
What’s your outlook for the stock market for the rest of this year?
As always, the market goes up and down. People’s feelings get better or they’re influenced by trade discussions, by politics, by you-name-it. We all get emotionally engaged in things, and sometimes we’re more optimistic than pessimistic. So you have to expect that markets will go up some and down some. You’ve just got to live with it.
Do you see a crash coming?
No, no. But those things do happen. That’s the time when you have to really be emotionally strong. It’s the best time to buy stocks. There are always bargains, and those are, sort of, nifty. You feel emotionally awful when [a crash] happens, but it’s the best opportunity for investors. You just have to hang in there because you don’t want to pay taxes — you don’t want to do all that stuff that you do if you sell [your portfolio]. You want to hang on and add to the great companies you have.
You wrote about not having been a fan of life insurance. Still true?
Life insurance is, for sure, a terrible place to be an investor. [But] I always said to buy term life insurance if you have the risk of dying early and have young children. But keep most of your money in savings and put it into stocks that will grow and grow and grow.
What’s your outlook for the economy for the rest of this year?
We’ve never been in a better economy than we’re in now. The country is moving ahead on all cylinders. There’s a lot of talk about some slowdown, but it hasn’t occurred quite yet. Maybe a few numbers are down, but employment is at a fantastically high level. We’ve never had such high employment and such low unemployment among all sectors. So the economy is in great shape. I’m totally optimistic that the economy will be substantially higher two or three years from now. You just have to hang on and participate in the growth and be a believer in it.
You write about your having dyslexia. You say, “I’m probably more confident than many at taking that step into the abyss when it’s time to do something new and shake things up”; and you note that risk-taking is a “trait common” to those with dyslexia. Please elaborate.
I think there’s something to that. I think [dyslexics] are probably people that think more conceptually than other really smart [people] who are sequential in their thinking.
You always wanted to be an independent businessman —
That’s for sure.
Do you think having dyslexia had anything to do with your strong drive to have independence vs. working for someone else?
It may have. Maybe I was too fearful of working for someone who’d probably find out I was dumber at reading than I’d want them to know — so the only way I could do things was to do them in my own time.
When you were in school, did you get extra help from your teachers?
The first six years of grammar school I went to a nuns’ school. They worked with me at the blackboard after school all the time so I could learn my alphabet, which was very difficult for me. Multiplication, math was pretty easy for me. But spelling and alphabet was not that easy.
Flash forward several decades: What’s your management style?
I’m a great delegator. I like to find people really smarter than I and give them the reins to do whatever it might be — the project they’re working on or managing a certain sector of the company — and let them do the best they can. Obviously, I’m there to guide them on different directions and such; but I give them latitude to make decisions.
You’ve been playing golf since high school. How’s your game nowadays?
It’s actually quite good, thank you. I shot a nice round on Saturday. I’m a 12 handicap now. With the elements of aging a little, my ball doesn’t go quite as far. But I think I shot an 85 that day, which I was very pleased with. I had about five bogeys, which I hated. That’s what messed up my score. I’m not great at [golf]. But I love it.
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