In his opening remarks at Charles Schwab’s virtual Impact conference for RIAs on Tuesday, President and CEO Walt Bettinger acknowledged that the firm’s layoffs of 1,000 individuals on Monday likely will not be the last.
Describing the recently completed $22 billion purchase of TD Ameritrade, Bettinger said, “this combination is not completely easy, because the truth is we’ve had to part ways with some incredibly talented people, [and make] some tough choices — some that we’ve already made, and of course, some still to come.”
Adding that layoffs and related steps are “the nature of combinations like this,” the CEO said Schwab is “going to look to make every decision we can based on whether it’s ultimately better for our clients or not.”
After sharing these opening remarks with some 2,100 advisors and several hundred other guests, Bettinger and Bernie Clark — head of Schwab Advisor Services — reviewed seven other short- and long-term issues on the minds of RIAs and industry watchers.
1. Size Matters
Clark insisted that the firm doesn’t “have a minimum” for assets under management, and “we’re not going to.”
“We think serving the entire market is incredibly important,” Clark explained. “It’s certainly not my job to tell you when you’ve been successful, because you’ve hit a certain dollar amount.”
As for costs borne by RIAs, “As we go forward, we’re not going to have fees. No custody fees are planned in the future, for sure,” he said.
2. Transition Period
Clark reiterated that the two entities are “in an 18- to 36-month transition” before they become one broker-dealer.
“We want to have that experience be as paperless as we possibly can,” he added.
“We know how difficult sometimes it is to navigate paper. And so it’s important that we get a very seamless process for all of you, as far as technology goes,” Clark said.
3. Tech Tools
In terms of TD Ameritrade technology moving over to the Schwab platform, thinkpipes for options trading, as well as iRebal for rebalancing and thinkorswim for trading “will thrive as part of our overall platform,” according to Clark.
“As we bring our platforms together, we’ll use Schwab Advisor Center as the foundation of all of that,” he explained.
Schwab also “will grow the capabilities from both Veo and Veo One on top of that platform,” Clark said. “We recognize Veo has some fantastic capabilities, and over time, we’ll continue to incorporate those as we go through this transition.”
4. Digital Advice, Direct Indexing
“We can count on the fact that relationships will continue to be key,” Bettinger said.
While they’re “evolving,” he explained, “there’s more of a combination of digital [advice] along with in-person relationships, [and] the idea that in-person relationships will go away is just wrong.”
“If I was running an RIA firm,” Bettinger said, “I would be looking at the digital side of my front door to make sure that I can reinforce my brand while driving growth and encouraging clients in a way that builds trust and, and of course, attracts talent to be competitive.”
The CEO said he’s “really excited about the future in areas like direct indexing. It’s going to have an impact” on clients.
Direct indexing “makes a lot of sense for many investors, [but we’ve] got to get the cost down lower than it is today,” Bettinger said.
With Schwab’s acquisition of some talent and tools from Motif Investing earlier this year, it can take “customization to a new level,” according to the CEO.
Also, “with … fractional shares, [the firm has] the ability to create customized indexes, serving people with smaller balances,” he explained.
“There’s just no doubt that customization and personalization [are] a part of investing that is going to continue to play a major role going forward,” Bettinger added.
5. Scale Matters
Looking at the competitive landscape, Bettinger said: “Offering transparency and low fees has really become the cost of entry, and that’s going to present a challenge for organizations that have traditionally operated with higher costs.”
As for scale, that’s “going to continue to be a very, very big deal in determining who the winners are,” he explained. “There’s no denying that there are certain costs like cybersecurity, compliance and regulatory that if you are sub-scale, it is just difficult to do those things well.”
These costs are hard to spread “over a very small asset base,” the CEO added. “So scale is going to really matter.”
But even big brands, like Schwab, are being challenged by newer players, he admits.
Brand loyalty “alone is not going to assure success,” he explained. “It’s not going to assure a retention of consumers, because they’re more willing than ever to change the provider that they work with in search of a better experience, lower costs, more transparency [and] more objectivity.”
6. Future of Indie Advice
Asked by Clark to describe what he sees 10 years from now for the RIA business, Bettinger said bigger would not necessarily mean better.
“Size does make a difference, but it doesn’t substitute for building deep, close relationships with our clients. That’s [the] part of this industry that has made it successful,” Schwab’s CEO said.
For his part, Clark looked at the current landscape and said that in addition to Goldman Sachs’ purchase of United Capital and Morgan Stanley’s acquisition of E-Trade, other broker-dealers are moving fast to capture more market share in the independent advisor space.
Schwab’s “been watching Wells Fargo, LPL [Financial and] Raymond James investing in ramping up offers for independent advisors,” Clark explained.
“We know the competition is coming, and we’ll see firms continue to come together to create more capabilities and broaden their offerings,” he added.
As a result of this, along with industry consolidation, “We have to stay on that cutting edge. We have to be out there always recreating.”
7. Financial Results
“Our Advisor Services business represents about a third of our firm’s revenue and earnings and [about] half of our firm’s assets,” Bettinger explained. “This business serving advisors is incredibly important to us together.”
The combined entity has over $6 trillion in assets, with about $2.5 trillion in RIA accounts.
A key part of Schwab’s revenue is net interest income, and “the decline in long-term rates [is] going to have an impact … [on our] annual financial results,” he said.
In the third quarter (before the acquisition closed), Schwab’s net interest income fell 18% from a year ago to $1.34 billion; it accounted for about 55% of total revenue. Also, Schwab’s pretax profit margin stood at 36.3% in Q3’20 vs. 45.6% in Q3’19.
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