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Advisors Who Want Independence Are Urged To Talk To Chuck

SuperUser Account posted on June 25, 2011


Some financial industry observers were surprised last year when Merrill Lynch announced it was moving into the mass affluent market with its Merrill Edge program, offering discounted advice to clients with up to $250,000 in assets through call centers, online and in bank branches. Now Charles Schwab, into whose field Merrill was encroaching, appears to be responding in kind. Schwab will sell franchises to financial advisors who want to offer advice to the mass affluent investors that Schwab built its reputation upon.

Do Schwab-affiliated RIAs have anything to worry about? Most of them typically aim higher — for the high-net-worth client. But some high-net-worth clients could be drawn to Schwab's discounted franchise advice service. At the very least, Schwab-affiliated RIAs may find it disconcerting if a new Schwab branch manned by a competing advisor opens its doors in their neighborhood.

Rick Rummage, managing partner of The Rummage Group, an advisor consultancy in Herndon, Va., says Schwab will find the market is ripe for recruiting advisors. “I think they're going to get a huge response because there are a lot of advisors out there who are unemployed or underemployed right now. They're not great rainmakers, but the industry is filled with people who aren't good rainmakers. To have some call-in business and some walk-in business would be highly attractive to those advisors,” Rummage says.

Schwab expects the first handful of offices to open in the second half of the year. Senior Vice President Andrew Salesky, who formerly led platform services for Schwab and now is in charge of the rollout, says the company is preparing the necessary filings to launch the franchise businesses. The target markets are smaller, more suburban regions, he says, primarily in places where Schwab doesn't have a presence. The franchisees would pursue the same mass affluent market that Schwab's 300 retail branches now look for, Salesky adds — people with investable assets of $250,000 to $2 million.

Schwab says it will accept applicants from all channels: wirehouses, IBDs, advisors at banks and insurers — anyone “well-connected to the local community” with a track record of growing a business and who's thinking about independence, “but who's not ready to go fully on their own,” Salesky says. Schwab will offer about six weeks of training on its products and services.

“With the Schwab model, they're getting the benefits of the brand,” he says. “They're getting a turnkey Schwab branch that's fully outfitted so they can hit the ground running on day one and focus on what they do best, which is interacting and engaging with clients.” With perhaps an eye on aging advisors who are considering retirement, Salesky also says the program will help them sell the business when they're ready to do so. The goal is to roughly double the pace of new office openings each year, he says.

Here's what Schwab says advisors can expect. You'll get a single office, one that can accommodate yourself and maybe an assistant and a junior advisor. There will be a “Charles Schwab” sign out front, just like the one at Schwab's employee-operated retail offices, but your name won't share billing with your franchisor. You'll get 25 to 50 clients up front on which you can charge fees and commissions and schmooze for referrals. You'll be able to sell the full range of Schwab investment products but only those third-party products currently offered by the company. Schwab will match your marketing costs up to $1,000, and share other expenses and revenues. (No word yet on what payout looks like.)

Since this is a franchise, Chuck has expectations for you as well. Plan on pulling in $10 million to $20 million in net new assets each year. Plan on paying up to $50,000 in an upfront franchise fee. By all means expand your office staff as asset growth warrants, but don't plan on opening multiple offices. Chuck doesn't want that kind of thing. This program, at the end of the day, is about expanding Schwab's brand, not yours. Indeed, the new branches will be “indistinguishable” from the current retail offices, Salesky says.

There's logic to Schwab's strategy, says Bing Waldert, an analyst with Cerulli Associates in Boston. The deal allows the company to split the capital costs of new branches with an advisor and have a foothold in a regional market for less than the cost of a retail operation, he says. The advisor most likely to find the arrangement appealing is the one who enjoys working with a client on strategies for reaching investment goals, but who isn't keen on pressing the flesh at local business group get-togethers, he says. “I think the person who's going to open a Schwab franchise is going to be relying on the Schwab brand much more to drive feet into their branch,” Waldert says. The $10 million to $20 million annual asset goal is not out of line for a modest RIA practice, he adds.

Of course, RIAs who custody with Schwab are likely to take notice if a franchisee hangs a Schwab sign in their neighborhood. Derek Hobbs, a partner with Evart, Young & Hobbs, an investment management company in Redwood City, Calif., said he would have to look closely at the model. “At first blush, it would definitely be a challenge,” Hobbs says. “In the past, they've been pretty good at not stepping on our toes.” Hobbs is pleased with the custodial service Schwab offers, but says he has other options in case a franchise comes to town and he feels it is a real threat. “If it is something that does affect our business, there is always Fidelity and TD Ameritrade,” Hobbs says