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.