The San Francisco-based company is upping its rhetoric relating to its bid to bring higher-level investment counsel to high net worth investors

July 18, 2014 — 7:49 PM UTC by Brooke Southall


Brooke’s Note: The advice business is like the wine business in this way: People can either be attracted or repelled by high prices. So you might as well charge full prices. Some of that irony is captured here. Schwab continues to hammer away at the point that it is not a discount broker. Whereas “discount” used to sound like an attribute, it has now become about as welcome as the term “cut-rate”. A tipping point has been reached where Schwab would like to be known as a full-service advisor — all its baggage aside. It is clearly viewed as the lesser of two labeling evils.

With low interest rates all but eliminating revenues from spreads and money market funds, The Charles Schwab Corp. has spent a decade and a half working to replace that production.

As chief executive of Schwab, Walter Bettinger has had to explain that headwind on multiple occasions but now he is also having to explain something else — momentum gained by selling high-level advice on a fee basis. Schwab Private Client edges its fee closer to the classic RIA standard.

“With the right full-service model for serving today’s investors, we are driving sustained momentum in our business,” he wrote in a press release issued Wednesday. “Over 70% of retail client assets at Schwab are being served by a dedicated branch professional, we have held more than 110,000 planning conversations with clients over the past year, and approximately 50% of total client assets at Schwab are receiving some form of ongoing advisory service — $1.01 trillion under the guidance of independent advisors and approximately $175 billion in retail and other advisory solutions, up 20% and 28%, respectively, over year-earlier levels.”

In different company

In other words, Schwab can be thought of in the company of Merrill Lynch and Morgan Stanley — and not E*Trade or Scottrade.

“Wealth management capabilities are an important element of our contemporary full-service investing model,” Bettinger continued in the release. “Many of our clients are at a stage where they have accumulated significant asset levels, they are increasingly looking for professional help, and they expect Schwab to be just as proficient in serving their current needs as we are in serving clients at other points in their investing lives.” See: How Schwab’s new 'owning it’ advertisements position the firm to offer more advice — and how RIAs factored into the brand rethink.

'Distinct Schwab spirit’

Alois Pirker, analyst with Aite Group in Boston, says Schwab is hammering home the full-service point because clients have the option of choosing less-than-full service.

“For clients having an advisor does remain optional at these firms [like TD Ameritrade, Schwab and Fidelity]. Though, while this is pretty much mandatory at a traditional 'full-service firm.’ The 'full-service’ label sends a signal to their clients, saying: “We can give you the advice you need, you don’t have to move to a 'full-service’ firm for it. We are a 'full-service’ firm.”

But in the past, Schwab worked to be clear that it was all about the self-directed investor and charging the appropriate “discount” price. Full service has always been code in the business for gratuitously high and unknowable costs and expenses. Now Schwab is working to establish a more nuanced meaning for “full service.”

Schwab Spokesman Greg Gable explains how Schwab is both full service but not a wirehouse in an e-mail.

“The evolution of the firm over the past 10-15 years, and particularly in the last five, is such that an investor can have access to the same kinds of products and services as at any other major brokerage, including a relationship with a financial consultant — all while experiencing what we believe is still a distinct Schwab spirit and approach that reflects the kind of investors who we serve.”

Bettinger listed attributes of that “spirit” as “transparency, open architecture, technology and accessibility — including personal relationships.”

Meaning of 'discount’

The full-service theme was part of the commentary as The Charles Schwab Corp. announced Wednesday that its net income for the second quarter of 2014 was $324 million, comparable to $326 million for the first quarter of 2014, and up 27% from $256 million for the second quarter of 2013. Net income for the six months ended June 30, 2014 was $650 million, up 41% from the year-earlier period.

Gable adds that the use of “full service” is not new for his company.

“I have heard them mention the 'full-service’ descriptor as well before and it seems to me they use it to cover up the discount brokerage label,” Pirker says.

Gable allows that Schwab is working remove “discount” as a descriptor out of the lexicon related to Schwab (though ironically its trades have never been more deeply discounted at $8.95.)

“It’s also the case that our success in 'discount brokerage’ in the ’70s and ’80s and our early leadership in 'electronic brokerage’ in the ’90s and early 2000s created an identity among some, including many in the media, that doesn’t reflect the reality of the firm we are today. Which is all the more reason for us to be clear about our capabilities when we talk about the firm today.”

Other second-quarter highlights

Here are some additional business highlights included in Schwab’s second-quarter commentary:

1. Holding the annual EXPLORE conference for the company’s top independent advisor clients.
Schwab leadership discussed top client initiatives and growth opportunities for RIAs, including serving younger high net worth investors. See: Framing it as opportunity, Bernie Clark delivers a chilling market warning at EXPLORE about the coming post-baby boom market.

2. Adding six funds to Schwab alternative investment OneSource
OneSource is a platform that provides advisors and their clients with access to alternative investment funds registered under the Securities Act of 1933. A total of 30 funds are now available on the platform. See: After a wait, Schwab has a program for alternative assets.

This is an area of product growth that Fidelity Investments is also looking to ramp up, according to its spokeswoman, Erica Birke in an e-mail.

“Our platform has nearly 40 ’33 & ’40 Act funds, and through our strategic relationships and integration with CAIS and Goldman Sachs Asset Management, we offer 30 private placement hedge funds, fund of funds, and private equity fund of funds. The CAIS products are supported by Mercer Consulting’s due diligence and the Goldman Sachs funds are supported by their due diligence of third party funds. Fidelity has an additional 3000+ alts products that we custody that can be purchased and held in a client’s brokerage account.” See: Fidelity teams with Goldman Sachs as part of big push into alternative investments on behalf of RIAs.

3. Client assets invested in Schwab proprietary funds surpassed the quarter-trillion mark
Assets ended up at a record $251 billion, up 10% year-over-year. See: Schwab turns the YieldPlus page the old-fashioned way — with a whole new CSIM team.

4. Schwab ETFs finished the first half of 2014 ranked fifth in industry flows
That’s up from eighth for all of 2013, as reported by See: 10 reasons why Schwab’s move into ETFs may be an even bigger deal than it appears.

5. Client assets managed by ThomasPartners totaled $5.7 billion
That’s up 107% from the second quarter of 2013. See: A look inside Schwab’s second big deal with a small asset manager.

6. Client assets managed by Windhaven totaled $19.0 billion
Up 10% year-over-year. Some believe its relatively lackluster growth compared to ThomasPartners led to the recent shake-up. See: With Stephen Cucchiaro out, Liz Ann Sonders takes the Windhaven reins.

7. Schwab got deeper into the annuity business
The company launched Schwab OneSource Choice Variable Annuity with optional living benefit, with over 75 funds, and allows for qualified investments.

Mentioned in this article:

Aite Group
Consulting Firm
Top Executive: Frank Rizza

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