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Schwab is accelerating its software upgrading pace on the back end

The San Francisco-based firm's front-end technology surpasses the system's foundation, which is OK for now, but the bill is coming due

Tuesday, March 24, 2015 – 8:18 PM by Lisa Shidler
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Sophie Schmidt: I think they're taking a very bold approach.

Correction: An earlier version of this article said that Schwab is budgeting $5 billion to rebuild its platform. That dollar amount is wrong insofar as it was accidentally taken from a quotation of Schwab CFO Joseph Martinetto that referenced bank assets. The amount Schwab will spend on upgrading its broker-dealer platform has not been disclosed. The company’s spokesman says it is considerably less than $5 billion. In addition, we referenced wrongly Martinetto’s status at the firm. Though he is leaving the CFO position, it is not to retire but to take on a broader position at Schwab with a new CFO reporting to him. We regret these errors.

The Charles Schwab Corp. is turning its focus to its core broker-dealer software.

The firm’s broker-dealer platform needs special attention that goes beyond the usual annual technology outlays, according to comments made by Joe Martinetto, the San Francisco-based firm’s executive vice president and chief financial officer, as he ran through areas of spending focus.

“As much as we have spent on rebuilding technology over the course of the past few years, there’s actually more to do. One of the places of focus for us is in our core broker-dealer platform, which is fairly old and highly customized,” said Martinetto during a day-long call from San Francisco to Wall Street analysts on Feb. 12.

Sophie Schmidt, an analyst and consultant with Aite Group of Boston, applauds Schwab increased attention to its back-end technology.

“I think their back office is a 1990s infrastructure but they’re not alone. I think they’re probably ahead of some wanting to connect the front end and back end. It’s still very ugly and I think they’re taking a very bold approach. Everyone is investing in technology but the back office has been left alone and the back office is so critical.” See: For sub-$500k accounts, Schwab is sweeping RIA client cash into its bank, pumping up corporate profits.

Wait for it

Joel Bruckenstein: If they haven't upgraded the platform, it's probably something they need to do.
Joel Bruckenstein: If they haven’t upgraded
the platform, it’s probably something they
need to do.

The improvements won’t be implemented for years, according to Martinetto. “It takes a couple of years of investment to be able to make that transition of a platform that is that material to the way we run business.” See: What Neesha Hathi has to say about Schwab’s oh-so-slow-but-steady technology initiative.

There is danger of moving in a ponderous manner given how quick technology is moving, cautions Joel Bruckenstein, co-producer of the annual Technology Tools for Today (T3) Conference.

“Technology in general has changed a lot over the last several years. If they haven’t upgraded the platform, it’s probably something they need to do. They’re saying it’s going to take years to correct. But while they’re putting the platform in place, people are making other arrangements.”

The industry is racing to modernize its technology as RIAs and investors clamor for different types of ETFs and mutual funds. See: Startup firm bets its ETF research technology can cut out the middle man for advisors.

In-house funding

Martinetto did not offer any projected costs for the technology upgrade. But the overhaul will draw on cash flow and not require a capital raise, says a Schwab spokesman.

“We believe if we can invest capital at returns that are superior to what our cost of capital is we should make those investments. And if we have capital in excess of our ability to invest it, we should return that,” Martinetto said in the webcast.

The new system will be “more efficient, less expensive to manage.” says Schwab spokesman Greg Gable and will make Schwab more technologically nimble. “[It] enables us to do more in the way of quickly adding new capabilities and services.”

The platform is used by all of Schwab’s businesses and in the end RIAs will gain benefits as well, Gable says. But he was tight-lipped about what specifically the company is doing to improve the platform. See: Schwab shifts its strategy on its massive Intelligent Integration.

“It wouldn’t be prudent competitively to signal what those capabilities are specifically, but an example of the kind of thing we want to be able to do quickly is innovate with new products or services, such as we did with the automated investing services we just launched, but it will also be behind the scene things that improve the overall client experience, convenience and ease of use,” he says. See: Schwab technology undergoes metamorphosis.


Gable says the platform is upgraded on an organic basis and therefore characterizing it as 1990s technology is wrong. There are robo assets currently in custody on the platform, he adds, but acknowledged that upgrading the platform would allow more robo assets to be “compatible in the future.” See: Schwab sings 'Blue’ as it rolls out its robo — and phono — functions ahead of deadline, with minimums.

The largest RIA-custodian is already way ahead of wirehouse competitors, says Tim Welsh, president of Nexus Strategy. “I think advisors at the wirehouses still have two terminals on their desks at some of the places,” he says. See: How Schwab is calling out wirehouses with its 'accountability’ blitz and what collateral effects could hit RIAs.

Schwab’s Martinetto didn’t offer specifics about the new platform, just that it will be a major improvement. “Not only would it be bringing in some new capabilities, but it would also be 1) reducing the cost structure but, 2) enabling us to develop onto a platform that would be more modern in terms of architecture and, therefore, speed our ability to bring new products and services to market.”

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