For RIAs with financially profitable practices that meet their lifestyle needs, I think owning a franchise would take them back a few steps.

December 9, 2011 — 4:03 PM UTC by Stanley F. Ehrlich Guest Columnist


This article is modified from a version that was first published in “The NAPFA Advisor Magazine,” November 2011. It is being reprinted with permission of the author and NAPFA.

Anyone who reads financial industry news has certainly heard about Charles Schwab’s plan to franchise a retail branch network. According to the Schwab Institutional website:

“Schwab will ensure a turnkey retail Schwab branch with the same look and feel as current Schwab branches. These franchises will offer similar products, pricing, and services as Schwab company-managed retail locations, consistent with the current mass affluent strategy in retail. See: Schwab spells out the details of its franchise plan.

“Independent Branch Leaders (IBLs) will pay a franchise fee and will share in both the revenue and the expenses for their branch. Additionally, IBLs will operate only one branch office and will not be able to maintain or own a separate investment advisory practice.” See: And they’re off! Schwab opens the doors to its first independent franchise … in New Hampshire.

As a fee-only RIA who has custodied at Schwab for almost 16 years, I’m well aware of the variety of programs offered by Schwab to help RIAs grow their practices. This begs the question: Why does Schwab want to franchise its brand and potentially put itself in conflict with some of its own RIAs, such as me and many of my peers in National Association of Personal Finance Advisors? See: Why Schwab is embracing a franchise-like strategy to fast-forward branch growth.

Or, instead, we might ask if the conflict is more imagined than real.

Unlike all others

To help answer these questions, I had a lengthy conversation this fall with Andrew Salesky, senior vice-president for Schwab’s Independent Branch Services. I asked Salesky if there is an existing model that Schwab built to design its franchise program, and he mentioned some platforms used by Ameriprise. On the whole, however, he believes Schwab’s program is unlike others in the industry.

Why institute the program? Salesky said Schwab’s nationally recognized brand is not as physically accessible to clients as it could be, and the firm is looking for new clients. Branch proximity is a factor for many prospects.

Salesky also said that branch locations will be opened based upon reviews of proposals brought to it by prospective IBLs, not driven by Schwab’s market research. In other words, if a prospective IBL believes he’s in a market that has the potential for success, then it’s up to him to make his case. His or her commitment and connection to the community, as well as indicators of potential growth, will determine where franchises will be opened.

Of significant interest to RIAs is the type of service that the IBLs will be expected to provide. While IBLs will be sole proprietors, they also will be registered representatives under Charles Schwab, and they will be required to have Series 9 and 10 licensing.

The deal

Presumably, one question for a prospective franchisee is whether or not that individual would be more successful as an RIA. Of course, each person also has to make his or her own decision about lifestyle issues, such as working under a structure defined by Schwab through a franchise contract.

Schwab is looking for individuals who will contribute a lot of sweat equity, in addition to their own capital, to build a successful business. The initial franchise fee will be approximately $25,000 to $50,000, with the final cost dependent upon factors such as the number of clients to be provided by Schwab. Schwab anticipates seeding new franchises with 25 to 50 existing Schwab clients, with AUM of $10 million to $20 million.

Andrew Salesky: A franchise will be indistinguishable from a Schwab branch office.
Andrew Salesky: A franchise will be
indistinguishable from a Schwab branch office.

Salesky said a franchise will be indistinguishable from a Schwab branch office. After the market and site are agreed upon, Schwab will do the build-out and put its name on the lease, though the rent will be paid by the franchisee. Schwab will finance the build-out with a no-interest loan payable over the first five-year agreement with the franchisee.

There will be other expenses related to technology (hardware) and communications, and the franchisee will be responsible for all staffing expenses. Schwab envisions franchises will be housed in offices of approximately 1,000 square feet, with two private offices, a lobby, and space for a greeter.

Regarding the retail aspect of the business, franchises will be expected to be open a minimum of 40 hours per week, with at least 35 hours of those hours on Monday through Friday. In addition to gathering assets and bringing in new clients, franchises will perform activities similar to those conducted at existing Schwab branches, such as opening accounts, completing forms, and other client support functions.

Certain overhead expenses will be paid by Schwab, such as advertising and maintenance of the Schwab platform, but the franchisee will pay for all direct expenses. The cost for sending statements to clients, for example, will be shared, with 75 percent of the cost borne by the franchisee.

Enhanced revenue support

Schwab’s interest in making franchises successful is evidenced by the fact that Schwab will provide enhanced revenue support in the early years of the relationship so the IBL can get the business up and running. (As noted above, the initial agreement is for five years.)

Since there are numerous permutations to calculating revenue, it’s difficult to provide a sense as to how much a new IBL would earn, but suffice it to say that my back-of-the-envelope calculation is that someone with an existing RIA probably wouldn’t match his or her current income until the franchise grew to a point whereby AUM was substantially larger than current AUM of an independent business.

While an RIA can bring existing clients to the new franchise, those clients will be transitioned to other Schwab solutions for investment purposes, such as the Schwab private client program. IBLs could still work with their clients on financial planning issues, according to Salesky.

Referral program

Another way for an IBL to receive compensation would be to refer clients to RIAs who participate in Schwab’s referral program. Those assets would be managed by the RIA, but the franchise would receive credit for assets within its account. Thus, there are multiple revenue sources for IBLs, with a higher rate of compensation for franchise clients who engage Schwab for advisory services than for those who don’t.

If an IBL is successful in building the franchise, the IBL will have the opportunity to sell it, though Schwab retains the right of first refusal, as well as approval of the new buyer. At this point, buyers will be limited to one branch, and existing RIAs will not be allowed to open a branch as an adjunct to their existing practice. Schwab’s goal is to open 15 branches in 2012, 30 in 2013, and 60 to 80 per year in 2014 and beyond. This fits with Schwab’s mission to attract the mass affluent—which is also the “sweet spot” for many RIAs.

According to Salesky, the opportunity to own a Schwab franchise has been met with some enthusiasm. He said more than 1,000 individuals had contacted Schwab about the program, and about 60 percent of those individuals are currently working in some sort of independent business model such as an existing RIA, and the remaining 40 percent are working in employee-based models.

The bottom line

At first glance, it doesn’t appear that these franchises will compete with existing RIA practices; in fact, the referral program might even enhance the practices of larger RIAs who receive referrals from Schwab. I don’t see a threat that might be felt by some RIAs.
Regarding compensation, all I can say is caveat emptor. Salesky said prospective franchisees will receive templates to model the numbers, and, certainly, prospects should do their calculations with very conservative projections. (Have we not learned anything from the past few years?)

For RIAs with financially profitable practices that meet their lifestyle needs, I think owning a franchise would take them back a few steps. Then again, if you have time and want to build off a nationally known brand, there’s no cost for you to explore the potential in this opportunity.

The Schwab brand is powerful, attractive, and known nationally, so marketing within a local community that doesn’t have an existing Schwab branch would probably be a win-win for the franchisee and Schwab. But if you’re considering opening your own franchise, don’t let the bright lights and potential big bucks get in the way of smart decision-making. Life is very different when you open a retail business, and sometimes the pot of gold is a lot further down the rainbow than you realize. See: TD Ameritrade and Schwab at odds on franchise model.

Stanley F. Ehrlich is a NAPFA-Registered Financial Advisor in Westfield, NJ. He can be reached at

Mentioned in this article:

National Association of Personal Finance Advisors
Top Executive: Ellen Turf

Share your thoughts and opinions with the author or other readers.


Frederick Van Den Abbeel said:

December 9, 2011 — 5:39 AM UTC

I believe there is a very simple question to determine if your custody provider competes against you. It is simply: “Do you operate a retail side?” It seems with all of this side-stepping around the issue and walking on egg shells I’d have more respect if they simply said “Yes” — we do compete than try to denounce the obvious.


Elmer Rich III said:

December 9, 2011 — 9:00 PM UTC

Is the glass half full or half empty? Both. The direct to consumer brand power of Schwab blows away any local of individual RIA branding. The scales and, perhaps, market segments, may be completely separate and not cross much. If a client wants the “security” of a big brand they can go direct.

The question of cannibalization is one that deserves some study. If we were on the Schwab BOD we would have wanted to see research on this before decisions were made. It sounds like it was Ready, Fire, Aim.

It seems realistic to assume there will be warring inside of Schwab between the two divisions.

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