Rick Wurster explains his first M&A deal in RIA terms and uses data points to bolster his case that Charles Schwab's 46 million client accounts can dominate private share markets
The Schwab CEO, interviewed by Wall Street from IMPACT, made RIA needs and reach central to his Forge Global purchase value proposition
7 min read
Brooke's Note: We are all accustomed to breathless launches of alternative investment platforms and products. They always seem to live down from their high hype. The Schwab purchase of Forge feels different. There are believable synergies and real data points to substantiate claims – especially emanating from Schwab's meeting with Wall Street, which was made public. It's also nice that RIAs are (again, credibly) cited as pivotal to the plan and that we're not talking about structured products. These are simply shares in private companies. The one product involved seems to be more of an index fund of 60 top private companies. CEO Rick Wurster also seems to be willing to put matters into time frames (and plain English). He also explains the strategy of stock plan administration, where other Schwab investments converge. Now comes the challenge of execution. That'll be harder but not because it involves reinventing a wheel. It's more like pieces of a puzzle with identifiable shapes.
Charles Schwab Corp.'s dominance in RIA custodial assets and retail trading could extend to private shares in pre-IPO companies in as little as a “couple of years” thanks to its first big acquisition
CEO Rick Wurster hosted a little-noticed Nov. 6 Wall Street analyst call laced with data points and RIA context – including integration timing – regarding the $660-million purchase of Forge Global, a secondary market for private shares.
RIAs earned 22 mentions during the call, which took place in Denver, during Schwab IMPACT, Schwab's signature RIA event. The Westlake, Texas, broker-dealer has 46 million client accounts and $11.59 trillion in assets – including $5 trillion in RIA assets.
“Our plan is to expand our private market capabilities to all qualified retail RIA and stock plan services clients … within the next couple of years," Wurster said.
"But we will hit the ground running as soon as the deal closes, and we'll continue to roll out offerings in the near and medium term.”
He added: “In the near term, we'll expand access to 1 million-plus retail clients, launch our RIA experience, expand fund offerings and continue to integrate Forge into our existing infrastructure.”
Significant alts growth
Wurster also explained Schwab's RIA opportunity for Forge by conceding his firm's current paucity of alternative investment market share.
“If you look at the RIA community, our RIAs, we have $5 trillion of assets. We've got roughly 1% ($50 billion) to 2% ($100 billion) exposure to alternatives among our RIAs on our platform.
“We think that number over time is likely to grow quite significantly,” he adds.
“Significantly” could mean several-fold, according to Shirl Penney, president and CEO of Dynasty Financial Partners, which administers the $110-billion-plus in assets of 55 RIAs.
Charles Schwab and Dynasty pull off record-shattering -- and previously unthinkable -- lift-out of $129-billion AUA Merrill Lynch team, but the thundering herd has furiously stampeded to court to block the move
Dynasty also owns a stake in OpeArc, which manages wealth in private stock plans. See: Charles Schwab and Dynasty pull off record-shattering -- and previously unthinkable -- lift-out of $129-billion AUA Merrill Lynch team, but the thundering herd has furiously stampeded to court to block the move
“On the Dynasty platform our average firm is 6% to 7% in alternatives or private market allocations,” he says by email.
“We see this number doubling over the next 4 to 5 years, and some of our firms given the size of clients they serve being larger could end up being 20% to 25% in private markets.”
Keeping assets
Wurster reinforced that point by saying some of that growth can come simply by getting existing clients to consolidate holdings.
“We do have a lot of high-net-worth and ultra-high-net worth investors who have kept some portion of their assets away from us because they wanted access to alternatives,” he said.
“In the future, there's no reason for a Schwab – ultra-high-net-worth Schwab -- client to hold some of those assets away. And, so I think by keeping those assets at Schwab and bringing some of them back, I think that will be an accelerant to net new assets.”
He adds: “We believe there is $9 trillion of potential supply in private securities today, about 20% of which is estimated to be tradeable.”
Forge, which lists 3 million clients, already has revenues at a run rate of about $100 million annually. That showed $25.3 million in the year's first quarter and $27.3 million in the second quarter, according to graphics presented during the Wall Street call.
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Golden goose
Analysts wondered whether Schwab will be able to service existing third-party institutional relationships to keep all of those revenues.
Wurster is optimistic but not definitive.
“It's something we'll evaluate, but at the moment, we certainly expect to continue those relationships. In general, we want as much liquidity flowing through the platform as possible," he explained.
Schwab just announced another stock plan-related deal after helping OpenArc launch $129-billion stock plan RIA, an 'impactful funnel,' Cerulli analyst says
"We want supply from the company side. We want as much demand from our clients, from institutions, wherever it comes from on both sides.
“I think we want to expand this marketplace, provide efficiency and grow it. So the immediate answer is ‘yes,’ we have plans to keep that. But we'll, of course, as we get into the business more deeply and learn about it, we'll find out more,” he said.
The golden goose of 400-employee Forge is that it has relationships with 625 companies that make their private shares tradeable on the platform, Wurster explains.
Ties and team
“[Forge has] the deepest set of relationships in the market with over 625 relationships with private companies, which is the largest number in the market,” he said.
"That was really attractive to us because we want to be in a position to sell -- or for clients to be able to buy actual ownership in the company. And, in order to do that, you need to have a relationship with the private companies.
"Forge has those ties and has the infrastructure and team to be able to expand on that, build on those relationships and grow them.
"And we expect that as we make this market more efficient and larger, that the private companies will find it even more attractive to work with us, and that number and that roster will grow,” he says.
Validation
The Wurster vision for private markets is clear-eyed, says Erik Bjerke, senior managing partner, OpenArc Corporate Advisory, which had $129 billion when it broke away from Merrill Lynch and landed at Schwab – with the expressed intent of collaborating nationally to dominate in corporate shares.
“We view this transaction as a validation of the OpenArc business model and another big step towards the future of the integrated corporate benefits and family wealth advisory landscape,” he says by email.
“Rick is listening to exactly what clients want and are asking for on a daily basis. Similar to families, corporates also desire to build deep, fiduciary relationships with vendors over time.
“Independent companies like OpenArc will be in a unique position to bring large-market institutional resources to bear for growing, private companies,” Bjerke says.
As the corporate lifecycle develops over time, we are in a position to advise, side by side, on the best product and platform mix for its employees.”
Powerful combination
Not only did Schwab help break OpenArc away from Merrill Lynch, and buy Forge but it also invested in Quapita, a Singapore equity management software provider. Schwab led the $26.5 million Series B funding round in October. See: Schwab just announced another stock plan-related deal, Qapita, after helping OpenArc launch $129-billion stock plan RIA, an 'impactful funnel,' Cerulli analyst says
“We took an ownership position in Qapita and we will use their technology capabilities to administer private stock plans," Wurster said.
"That, in combination with the ability for those private companies to create liquidity for their employees via Forge's capabilities is a very powerful combination. It's going to be really hard to match what we can do for private stock plan administration.”
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