7 key takeaways for RIAs from Schwab’s annual business meeting

Charles Schwab Corp. signage is displayed on the door of an office building in New York, U.S., on Thursday, April 12, 2018. Charles Schwab Corp. reported earnings per share for the first quarter that beat the average analyst estimate, with 443,000 new accounts, the highest quarterly level in 18 years, chief executive officer Walt Bettinger said in a statement. Photographer: Christopher Lee/Bloomberg
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At the heart of Charles Schwab’s annual business update meeting was one word: competition.

As the Department of Justice requests additional information from both Schwab and TD Ameritrade ahead of a pending acquisition over antitrust concerns, executives at San Francisco-based Schwab repeatedly played up competitive threats in the retail and RIA marketplaces during their presentation to shareholders. (The Justice Department, meanwhile, has been reaching out to Schwab’s rivals as part of its review.)

CEO Walt Bettinger began by discussing the “intense competitive environment.” Subsequent presenters followed suit.

“I don't spend a lot of time thinking of any one competitor, because we operate in such a fragmented market that I'm looking at wirehouses, I'm looking at fintechs, I'm looking at Fidelity, TD, E-Trade, Vanguard, banks, and who am I missing?” said Jonathan Craig, senior executive vice president of investor services and marketing.

Bernie Clark, head of Schwab’s custodial platform, said more competitors could emerge. “The price of entry into the custodial space has never been cheaper and easier,” he said.

How will Schwab meet these competitive threats? What will a combined Schwab-TD look like? Read on to learn how executives intend to grapple with those and other issues.

Schwab’s RIA platform likely to win after TD Ameritrade merger
“Unless it's proven that we can't execute on it, we expect the Schwab systems to be the platforms of choice,” said Joe Martinetto, who was appointed to oversee the integration with TD Ameritrade.

Martinetto said that Schwab will try to bring over — or build out — parts of TD Ameritrade’s platform that are deemed superior, pointing to the firm’s thinkorswim options trading platform and open API model for RIAs as things they are “going to have to take a hard look at.”

Clark said that Schwab will bring over iRebal and that they wouldn’t “take away anything that would limit small advisors from continuing to do business. It would make no sense for us to do that.”
Direct indexing
As one advisor predicted, Schwab is taking strides to offer direct indexing to clients.

Bettinger noted that the company’s investments toward fractional shares, technology and its recent elimination of commissions “play together toward direct indexing.” This will help Schwab attract investors of all sizes in the future and offer more customized investments.

“We think direct indexing is a critical part of the long term future of investing,” Bettinger said. “And you'll see us making strides in this area to better serve clients.”

When asked by an analyst when to expect direct investing, Bettinger declined to give dates “for competitive reasons.”
Schwab doesn’t compete with RIAs
“Very, very rarely do we ever see a situation where there is actual competition,” Bettinger said. “And if we do see that, where there is competition for the same client, we will generally stand down in the retail space in favor of the RIA, while understanding that ultimately the end client has to be the one making the decision.”

Bettinger then went on to say that news reports with regard to competition between the retail and RIA division was “news that may not be totally accurate.”

“I think this notion of competition between retail and RIA, it's in many ways sort of news that — I want to use a phrase, but I'm not going to use that phrase — it's news that may not be totally accurate,” Bettinger said.

Financial Planning has reported that Schwab has removed RIAs from its custodial platform after they hired former Schwab registered representatives.
Wirehouses and IBDs are competition, too
In response to an analyst’s question about Schwab’s share of the RIA market, Bettinger said that advisors have plenty of options to keep their assets — and not just with custodians.

“They have the choice to be with independent broker-dealers. They have the choice to be with wirehouse brokerage firms. They have the choice to be with hybrids,” he said.

Bettinger said that Schwab may be in “the 40% range market share” in the custodial marketplace. “But that's after throwing away all of the other options that are available to someone who's in the business of managing money for other people,” he said.

For those advisors who choose to use a custodian, he said that the combined Schwab-TD firm would offer them service, value, pricing and capabilities comparable — or better — than what they have today.
Schwab is committed to small RIAs
The sub-$100 million RIA is a “sweet spot” at Schwab, according to Clark. “It's how we built our business in effect from the beginning.”

“We have historically been a leader in the sub-$100 million AUM RIA space,” Bettinger said, later adding that speculation that the firm has little or no interest in serving sub-billion-dollar RIAs is “inaccurate, naive and inconsistent with everything that we have done for the last 25 or 30 years in the RIA space.”

At the time the deal was announced, some small advisors expressed concern with regard to future service levels after the merger.
Schwab won’t start charging fees to advisors
“We have no intention of raising fees on small advisors, on advisors at large,” Clark said. “And more importantly, we don't want to change the economic relationship we have with them by instituting some other kind of different fee.”

Clark said they would consider this if advisors expressed interest in being charged differently.
Schwab will expand lending capabilities
“I think we have great comfort in expanding the ratio of loans to securities as long as they’re loans that get paid back,” Bettinger said, echoing statements he made to advisors at the company’s annual conference.

“We intend to be quite competitive there in support of the RIAs that we work with as well as our principally high-net-worth retail investors,” he said.

Clark added that advisors have been asking about more banking capabilities.

“They certainly don't want their clients going out to the larger banks,” he said, noting that many advisors use small or regional banks.

In addition, Schwab is looking at the loans it offers advisors. Right now, it does a “very small bit of lending” through the broker-dealer to advisors who are going independent.
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