Schwab sees client revenue falling ‘further and further’
To fend off upstart digital competition, Schwab is prepared to operate in a future of lower revenues on client assets, says Schwab CEO Walt Bettinger.
“Our goal is to lower the cost of what clients might pay and lower revenue [on client assets] further and further and further,” Bettinger said before the audience at The Economist’s Finance Disrupted event in New York City.
In the past, Schwab earned 80 basis points annually on client assets, he notes. “It’s now in the 20s, and we intend to push that further down,” he says.
Total revenues at Schwab overall through the first six months of 2017 are up 17% year-over-year. Total revenue for 2016 was 17% higher than 2015.
The firm’s strategy, he says, is to make it even more difficult for digital-first firms like Betterment and Wealthfront to be profitable.
“We will leverage our scale, which makes our moat wider and wider, and less attractive for some firms to try and disrupt us,” Bettinger says.
Robo advice firms have raised millions in venture capital and gained clients, but industry critics say they are struggling with profitability, in part because of low revenues per client.
In his talk, Bettinger alluded to challenges that these firms face. “It’s very hard to build a brand and sufficient scale to be successful,” he says. “Ultimately this business is about trust.”
Schwab as a firm brought in $18 billion in net new client assets during August, Bettinger says. “That’s more than the total AUM of [Wealthfront and Betterment] in all the time they’ve existed,” he says.
Schwab has three digital advice offerings: Schwab Intelligent Portfolios, a digital-only service, an institutional platform for RIAs, and the hybrid robo advisor Schwab Intelligent Advisory. Schwab Intelligent Portfolios now has $20 billion in AUM, according to the firm.
Bettinger asserts that those RIAs who adopt its digital advice offering will see their business escalate against those who do not.
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Bettinger also acknowledges the success of Vanguard’s digital advice arm, Personal Advisor Services, which is expected to top $100 billion in AUM by the end of the year.
“We’re happy to share the market with Vanguard,” he says.
There’s a potential for tech giants like Amazon to enter banking and wealth management, Bettinger says, but that would invite a major level of scrutiny from financial regulators. “That would be a massive decision to make.”
Offering advice to peer institutions, Bettinger addresses the challenge of digital disruption rhetorically.
“Can startups become major players?” he asks. “That depends on whether firms have the courage and will to make changes to avoid being disrupted.”