Amazon employees, we're hiring: Q&A with Schwab Advisor Services head Bernie Clark

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Q: Do you see the entrance of Amazon and Google into the wealth management space?

BERNIE CLARK: It doesn't appear that people are overly anxious to mix product buying with their financial well-being, so I'm not sure that there would be an immediate embrace even of that offer. I think it's more on the watch, to see who the other entrants are.

I do think there are going to be more entrants in the space. The independent advisor space obviously has become so attractive. It is fast growing, the fastest by many standards. We'll see more private equity coming into the space. There will be more interest in roll ups of existing advisors. We're seeing a sharp increase in teams breaking away from the more traditional models. That trend will continue as well.

How is Schwab implementing artificial intelligence tools for its advisors?

There's a great opportunity here. We created a digital offer called Institutional Intelligent Portfolios which is built off the model of Schwab intelligent portfolios for advisors. And that's a model that we'll re-balance and tax loss harvest. It allows the advisors to create the portfolios. It's paperless. We think that was a really great venture into the digital space. There's a whole world of artificial intelligence and the next order of artificial intelligence that is highly dependent on data. And we've been working extremely hard at making sure we're getting our data structures in place to sort of answer that.

When talking about Amazon or Google, it's all about their data. Few firms have really learned how to fully exploit that. Certainly, we are not and we never want to be in the business of selling client data to monetize that. That's not the answer. We want to find more intelligent ways to use it and to help advisors use it, to be more predictive in what they're doing with clients. But step number one is creating integration between our technologies and advisors, which is well underway. And then trying to make sure that we’re helping them be more predictive in things that are going on with their client base.

How is Schwab starting to look at that unstructured data and build a model around it?

You start by trying to match data with the opportunities in the market. You’re trying to bring advisors together that are like-minded, using data and intelligence to find who might be helped to augment and grow. We have a benchmarking study that's 1,200 clients and a trillion dollars in assets. And a real opportunity for us to take that data in an anonymous way and create new opportunities for clients in regions of size, looking at like-minded advisors in how they grow their businesses.

How is Schwab hiring given these needs? Is the firm looking for different kinds of people?

We have actually restructured several areas. We've created more centralized groups, because we have come to recognize that our technologies really shouldn't be built in verticals any longer. Speed to market was an interesting strategy for a different time, and very successful. But now is the time to build better foundations and building digital platforms across retirement, the institutional business, and then the individual investor business which is really how we roll everything up at Schwab.

Neesha Hathi [Schwab’s head of its Digital Services organization] actually runs that business where she had worked within the advisor business and the retail business. Schwab Intelligent Portfolios is an example of where we built a core platform for a retail client and then we put a layer on top of it that accommodated advisors. We did the same thing with our mobile apps and we've got several other projects that are well underway where the retail experience will get built and then we'll build the one-to-one with an intermediary when it's for the advisor. We hope to accelerate through that process.

We are going to spend I think well in excess of a billion dollars on the digitization and modernization of our applications. We think that's a major leap forward. We're believers that technology augments the relationship in the advisor offices as well as our offices. So we're going to continue down that path. But we also understand that the lifecycle of technology is no longer going to be a 20-year-cycle. It's going to be constant refresh every five to seven years, maybe even more quickly than that. So our technology and our platforms need to be nimble enough to accommodate those changes. Then we'll be a little ahead. We'll be a little behind. We'll be at base with everybody else. And we'll continue to work ourselves through that.

We've chosen some key cities in which to do more for innovation. Austin is one of those. San Francisco obviously is one of those. We're extending ourselves, building a rather large center in Westlake, Texas. We’re hiring people who are interested in this industry but come from other industries.

For example?

Amazon. People who have lived through some of the development that has gone on there and are coming into this industry with ideas of how to implement more of this technology. The hardest person to hire in today's world is the compliance and cybersecurity employee. There’s high demand because it's one of the biggest risks that businesses have right now. Technologists in general. Two of those three roles won't fall out of demand in a downturn. Maybe we'll get a little slower on technology development. But the other two are critically important. Maybe even more important in down markets.

If I ask an advisor what their two biggest challenges are, they will tell me that it is technology and talent. And of course, the diversity of talent. We're always remiss if we don't bring that concept into it. We're trying really hard. But we're not getting anywhere. And so ethnicity, gender, age, we have to keep pushing on that.

You expect more private equity coming into the space, more roll ups and more teams breaking away. So what do you think the advisor space will look like in five years, given those trends?

I'm not an advocate that there will be just a few large firms. But there will be a few large firms. One of the surprises we've seen over the past decade is that the smaller firms were not the ones to consolidate fastest. It's actually the billion-dollar firms, the large firms coming together. And it's not always about takeover or acquisition. Often it's about joining equity of the firms, which is a neat way to do it, since that keeps the partners engaged. You can look at examples of The Colony Group, that’s a great example. You can look at Aspiriant on the West Coast doing that. So we've seen significant mergers of large firms and the acceleration of growth because of those mergers. And, the efficiencies that could come along with this trend.

Are there any concerns with a massive amount of private equity entering the RIA market?

I'm not sure I would yet call it massive given the amount of private equity that's available. But there is a lot of interest. And you can see the good that it's done. The initial public offering of Focus Financial was very successful. That's an organization that for a decade was backed by private equity. And I think that's one that ended well for the partner group. It ended well for Focus, the holding company. It ended well for the private equity that had invested in it. It's a great example of how private equity can help to grow the industry. We think that's additive to the industry. We don't think it is competitive. Because it gives firms the ability to bring teams out. It gives the firms the ability to make sure the founding partners are monetized when they need to be monetized.

We do think there needs to be an affirmation of the lower end of this market. There are still far more advisors under $200 million than there are above $200 million. As adhering to regulation and building scale become increasingly important, those firms will likely need to come together. And in cases where they don't have succession plans and they're not simply looking to sell, they need to join forces with other firms. I think you'll see sort of a growing up on the lower end of the market with more firms coming together to strengthen. They may not necessarily aspire to be $10 billion firms. But they may aspire to be $500 million firms that becomes more sustainable for their model.

What about the future of fees?

We think there will be more pressure within advisory firms for fees. Because over time, what they've done is they have kept their fees constant with a slight increase. On average, they're about 76 basis points for the average across all advisors. But even if you thought about them as 100 basis points, they've added many services over that period of time, most around planning and life coaching. In some cases, they have hired people to coach children of clients to gain acceptance into universities, those types of services, while never increasing their fees. So they have actually lowered their fees.

On the custodial side, the challenge is a little bit different. What we've seen there is pressure on transaction pricing. Now advisors aren't advocates for bringing ticket charges down. At $4.95, they're really minimal anyways. But if the retail advertised rates change, then we have to change the rates for advisors.

The economic relationship between the custodian, the advisor, and the product mix is changing pretty dramatically. Does that lead to a custodial fee? It does not necessarily have to. Could it be part of the mix? Possibly. But we also believe that advisors, if they should want to pay a custodial fee in lieu of other economic relationships, we could accommodate that.

Will Schwab match Vanguard's push towards zero fees?

There really aren't zero fees. If you're not getting paid for something here, you're getting paid for something there. And obviously the Vanguard strategies and others who have gone into this zero space are hoping to monetize that relationship in some other form of their business. It's as simple as that. So we'll consider everything as we always do. But certainly, I'm not thinking that that's something that has to happen immediately.

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Clearinghouses/custodians Recruiting RIAs Fee disclosures Automated investing Bernie Clark Schwab Advisor Services Amazon