‘All-In’ Celebration

The Schwab IMPACT conference featured a gigantic exhibit hall, great after-parties and an appearance from the founder himself.

My experience with the annual Schwab IMPACT conference is that it tends to be more of a party than an educational event; that is, the conference organizers are creating a way for successful advisors to celebrate themselves for the assets they’ve brought into the Schwab platform.  This is certainly not a trivial endeavor; the firm now has $5 trillion under custody, which makes it the continuing market share leader in the advisor custody space.  Congratulations all around!

What made the conference interesting this year—what I looked forward to—was the firm’s explanation for abruptly eliminating commissions on stocks, ETFs and options.  Even without trading commissions, the firm still has many millions of dollars rolling in on the spread between its money market account and cash returns elsewhere in the market, and millions more in various platform, 12(b)-1 and subTA fees paid by mutual funds for the privilege of having Schwab serve as the conduit for such inflows as are coming under their management these days.  But how often does a large firm suddenly decide to leave money on the table?

Meanwhile, keynote speakers Tim McGraw and celebrity photographer Platon offered insights about life and success, but they’re both fundamentally there for entertainment. For the closing party, attendees flooded Petco Park, the stadium home of the San Diego Padres, and enjoyed a catered private concert by the popular band One Republic.

The other notable feature is an exhibit hall that is so massive that you could have marked off gridlines and held a football game in a corner of it.  It was filled with actively-managed mutual funds—one of the few places where virtually every fund group had a booth.  Yet while I was there, most of the attendee traffic seemed to be centered around a technology alley, where kiosks were set up in two long lines for a few dozen tech vendors to display their solutions to your various practice challenges.

There were a variety of announcements, including an upcoming move to fractional share accounting that will benefit smaller investors who want, say, 1% of their portfolio to be invested in Berkshire-Hathaway.  Another important announcement was a $500,000 dollar-for-dollar matching contribution to the Foundation for Financial Planning’s “Future of Pro Bono” Anniversary Fund. 

Advisors perked up when Schwab COO Jon Beatty, in his opening address (later clarified in a private interview) said that Schwab Advisor Services is reorganizing its consulting and advisor support efforts.  The company will be providing more customized assistance to firms of different sizes and practice management sophistication, and also to putting more emphasis on digital support as software becomes more complex and important to practice efficiency.

View from the top

The explanation for zero commission trading came during a main stage keynote that started with Schwab Advisor Services CEO Bernie Clark, then proceeded (in the same session) to a sit-down with Clark and Schwab CEO Walt Bettinger, and finally (still in the same session) to a sit-down between Clark and Chuck himself—company founder Charles Schwab.  They reiterated the conference theme (“all-in”) repeatedly in various ways, talking about each other, the company, advisors—we were all “all-in.”  These sessions seldom telegraph what’s on the drawing boards or give what would traditionally be called “news,” but if you pay attention, you can see glimmers of what the management team thinks about the advice model.

Clark told the audience that the entire financial services world seems to be reaching an inflection point, where the independent advisor profession (the words “financial planning” were never used) is emerging as the dominant vector for financial advice, where the fiduciary standard is finally starting to matter in the marketplace, and where changes are coming at the profession and the industry at large faster than they ever have before. 

“All-in, to me, means fiduciary,” Clark said, “which means doing all the right things and making sure you are taking care of business in a way that makes all of us proud of what you’re doing.  It’s digging deep, not holding back, body, mind and soul coming together.”  Later, he told the audience of more than 4,000 advisors: “You being all-in built this industry…. In the last ten years, the size of this profession has tripled.”

I winced a bit as Clark publicly celebrated mostly giant firms (who undoubtedly do more business with Schwab than rank-and-file advisory firms): Dynasty Financial Partners, Hightower, United Capital, Buckingham, Financial Engines, The Mutual Fund Store and Edelman.  But later he said to the attendees: “You are not wealth managers any more.  You’re life managers.  You have changed the lives of countless people and helped them realize their dreams.”

  Finally, he said: “I promise you that we will continue to work on our efficiencies and scale, because we are growing with you, and we all have to be more efficient as we craft the future together.”

Bettinger finally talked about the decision to move to zero commissions, telling the audience that it was “one of the most important steps to fulfilling Chuck’s vision,” and (this is hard to imagine) that the October 1 decision to eliminate commissions on individual securities and ETFs was actually 20 years in the planning.  He added that the firm only made the move to zero commissions when it was confident that there would be no trade-offs—that is, it would not impact the service or customer experience.  “We are grateful to still have pre-tax margins measured in the 40s,” he told the audience.  “We give up a couple percent in revenue; planned for, prepared for, now implemented, and now we look forward to reaping the benefits.”

What benefits?  “We disrupt on behalf of you as well as end investors,” Bettinger said.  “If you and end investors respond by giving us more business, that leads to better financial results and better metrics, which we then turn around and try to share back in an appropriate proportion to all constituencies, to start that cycle all over again.”

And later: “If we can have investors who are not your clients question the organization they are working with [because they still charge commissions], that puts them into the consideration population.  Once they start to consider alternatives, that’s when we think you can attract them.” 

Apparently, the Schwab team thinks that most of the asset management activities are becoming commoditized; Bettinger noted “the commodity areas, like trading, buying and selling a security, or even relatively straightforward asset allocation, rebalancing and tax-loss harvesting.  Those things are either commoditized already or heading in that direction relatively rapidly.” 

What is NOT customized?  “Life planning and playing psychiatrist during periods of high volatility in the market are not commoditizable types of services and experiences,” said Bettinger.  “We all know where you need to go in adding value and providing special customized services for your clients.” 

He added that independent advice is “a better model, that aligns the interest of the investor [with advisors] and removes the vast majority of the conflicts that can exist in the traditional models.  And of course,” Bettinger added, “what we want to do is do everything we can—as the advisor business is so core to our corporate strategy—to encourage people to work with an independent advisor.”

That led to a discussion of Schwab’s move into providing lending services for advisory clients.  Clark and Bettinger were careful to position this, not as cross-selling other services (to make up for the lost commission revenue?), but as a competitive advantage for advisors. 

“The other side of the balance sheet is becoming increasingly more important,” said Clark.  “I think the traditionals are still thinking that that is their spot,” he added; “that they can come in and disrupt your relationship with your clients by getting in on the lending side.”  Bettinger added: “You [meaning the audience] have helped us identify just how critical this capability is as you compete with some of the traditional firms.  We do not want you to be at a single slice of disadvantage relative to traditional firms when it comes to lending.  You will see us introducing more and more lending capabilities, so that you can compete effectively as you bundle together banking and lending with life planning and wealth management.”

They offered few details, other than to say it would involve more sophisticated mortgage lending and unsecured loans, and would be appropriate not just for the wealthiest clients, but middle market clients as well.

“I hate commissions”

The “all-in” theme continued when Schwab came out—only the second time he has addressed Schwab’s advisor audience.  In a video before he walked out, he talked about his early years as an analyst with a Wall Street firm, and frankly admitted his instinctive hatred for the whole Wall Street business model, and his hatred for commissions in general. 

He talked about his early struggles getting his firm off the ground, the problems with getting funding and the attention of consumers, and it was interesting to hear a David vs. Goliath story from a David who started out mortgaging his house to buy tech tools and hire staff, who now happened to be a billionaire.

One of the first things he talked about when he came out was that as a Stanford student, he had worked part-time for an investment advisory firm in Menlo Park, CA, and got a taste of real financial advice before he entered the Wall Street world—and without that experience, he might not have realized how conflicted the brokerage model really was. 

“It was my time at that company that made me realize what you guys do every day,” Schwab told the group.   “And I have to thank you for it.”  Later he added: “I hated commissions.  I hated them then, I hate them today, and we took them away.”

At that point, you realized why he had chosen this year to come out of the corner office to talk publicly: the no-commission announcement was, of course, designed to increase competitive pressure on other custodians, but in Schwab’s mind, it is more importantly a dagger aimed directly at the heart of the large investment banks.  This was a moment of triumph in the long campaign to supplant Wall Street with a more client-focused model.

In the exhibit hall, the mutual fund vendors were noting pointedly that the commissions on funds had not been eliminated.  Leaving in the fund commissions may be a way of justifying the 40 basis point fee on assets coming from the platform (the actual amount is negotiated on a firm-by-firm basis), which Schwab executives insist is not a shelf fee, but that it instead offsets the expenses of doing those fund trades on behalf of the companies.

But the buzz overall was positive and actually festive among advisor attendees, who attended expensive after-hours gatherings, dinners and the aforementioned concert at Petco Park.  Many of them carried copies of Schwab’s new book, entitled “Invested,” as they celebrated another year of taking market share away from the brokerage firms. 

I got the sense that the firm was aware, more than it ever has been in the past, that the advisor population may be a more effective weapon than the discount brokerage operations against the Wall Street business model—and therefore closer to the core mission at its founder’s heart.