Schwab’s “In” with RIAs Is Not Big Edge on Fiduciary Rule: CEO
Despite its large business of servicing independent advisors who adhere to a fiduciary standard of care, Charles Schwab Corp. does not see itself as being much better off than other broker-dealers grappling with the Department of Labor’s impending fiduciary rule.
“I have great doubts about major market (share) shifts coming out of this,” Chief Executive Walt Bettinger said In a presentation to analysts on Friday, adding that brokerage firms will tweak fees and products to retain customers rather than risk driving them to competitors.
“It could be an economic hit to firms and individual brokers and advisors, but not a market shift,” he said of the fiduciary rule’s effect on competition.
The new rule, which will be phased in starting next April, restricts the way brokers and advisors can sell retirement products and makes it difficult to do so through commision accounts. It also prohibits discussion of rollovers into IRAs from employee retirement accounts unless the rollover would be in a client’s rather than a brokerage firm’s best interest.
Schwab would appear to have a huge advantage in attracting fee-based advisory accounts.
About 46% of the $2.6 billion of client assets held at the San Francisco-based discount brokerage pioneer as of March 31 were from customers of registered investment advisers. RIAs use Schwab products, trading and custodial services, but company executives do not expect many brokers to abandon wirehouses and enter its RIA portals because of its familiarity with the fiduciary standard.
“The primary reasons brokers shift sectors are for freedom, flexibility and the chance to own their businesses,” Bettinger told analysts.
“I don’t think the DOL regulation has much impact on that.”
The big change that the fiduciary rule brings is exposure to expensive class-action litigation and Schwab is not immune to that, Bettinger said. The rule permits such lawsuits if clients allege that brokers are not ministering to their best interests in advising on retirement savings.
“It’s a pretty big gift to the plaintiffs’ bar,” Bettinger said, noting that firms will be pretty conservative with their marketing to minimize the risk of litigation. “They’ve driven all these things out of arbitration and into litigation where the courts are going to decide over the coming years whether someone acted in the best interest of someone else,” he said.
The Financial Industry Regulatory Authority two years ago foiled an attempt by Schwab to require its 9,000 brokerage account clients to sign away their rights to bring such lawsuits.
The Schwab executives said they also are not immune to the higher barriers the rule creates for brokers trying to attract rollovers from 401(k) and other employee plans to individual retirement accounts. The firm may have to modify some of its advertising to meet the new rule, Chief Financial Officer Joe Martinetto said.
But, like other brokerage firm executives who have fought the DOL rule, they said it is unlikely to have a big effect on profits. Schwab has already budgeted the expected implementation costs into its 2015 and 2016 plans, according to Martinetto.
A bigger impact for Schwab, which ended the first quarter with about $20.3 billion in interest-earning cash and investments, is the Federal Reserve’s interest-rate hikes. Schwab’s net interest revenue jumped 31% in the first quarter in large part due to the Fed’s December rate hike, and the company did not feel any competitive pressure to raise rates it pays to depositors. It is likely to do so when the Fed makes its next move, expected in the third quarter, but at a more moderate pace than the firm had anticipated earlier this year.
In another rate decision that will affect clients, Schwab as of June 1 will no longer permit clients to transfer cash in their brokerage accounts into money-market accounts. Instead all cash will be swept into the San Francisco-based company’s bank subsidiary, where it earns more on clients’ cash than it does in money-market funds that it manages.
Separately, Schwab indicated that it is had not received many bites from other brokers and banks to license its robo-advisor platform called Intelligent Portfolios. “Larger banks or other distributors are going to have hesitance around the Schwab brand and to those people a solution that does not involve a branded competitor is going to be more appealing,” Bettinger said.
Independent brokerage giant LPL Financial and RBC Wealth Management recently said they were licensing the FutureAdvisor digital investment product owned by BlackRock. “Everybody of size will have this solution, some from Schwab, some from nonbranded platformers,” Bettinger said, adding that outsourcing will not be a “meaningful” part of its robo’s success.
Schwab ended the first quarter with $6.6 billion of assets from its and its RIAs retail clients in in its year-old automated investing product.