Schwab to Pay for New Accounts, Customize Asset Management Products
(Corrects headline and top three paragraphs to indicate that Schwab CEO was referring to cash offers to open brokerage accounts, not higher rates on cash.)
Citing recent moves by Goldman Sachs, JPMorgan Chase, Bank of America and other competitors to woo mass affluent investors and by traditional discount brokers offering cash for new brokerage accounts, Charles Schwab & Co. on Tuesday said it will fight back to protect its bedrock market and also market more aggressively to very wealthy investors.
“Determined competitors,” including large integrated banks, private companies operating at modest margins and venture capital-backed startups, are accelerating downward pressure across revenue streams, Schwab said in a slide accompanying Bettinger’s presentation.
Schwab will swallow hard and raise cash offers to induce customers from other firms to open brokerage accounts, he said.
Bettinger did not provide specifics but said the discount brokerage pioneer needs to protect itself from competitors’ “extraordinary cash offers for client asset transfers,” which he referred to as the ultimate form of direct marketing. One client in Schwab’s home town of San Francisco was recently offered $36,000 to move a very low-return stock account, he said. An unnamed competitor has raised its maximum offer to $25,000 on a new $10 million account from $2,500 on a $1 million account, according to an accompanying slide.
The strategy is “incredibly short-sighted,” “uneconomical” and “distasteful,” but “we are not going to lose clients to another organization because of a cash offer,” Bettinger asserted. Schwab’s response, he added, should stop the escalation.
Schwab used its pricing clout late last year when it cut commissions to zero on many equity and ETF transactions.
On the new product front, the company is prioritizing low-cost asset management products to attract assets from traditional active-management giants.
“Our greatest opportunity is in the asset management space,” Bettinger said.
Direct index products, in which artificial intelligence is used to create stock portfolios less expensive than traditional “wrap” products such as mutual and exchange-traded funds, is a key area. “Everywhere technology has gone, it has attacked bundling and the lack of transparency,” he said. “You will see us striving” in direct products.
Analysts pressed Bettinger and other Schwab executives for progress reports on the firm’s planned $26-billion purchase of competitor TD Ameritrade Holdings, including whether the Department of Justice’s antitrust request for more information last Friday will disrupt integration timelines.
Bettinger downplayed as “fairly modest” the market share the firms will command in the wealth management space, but declined to speculate on what the additional government requests will mean to the firms’ hope to close the deal by the end of this year.
The firms continue to operate as competitors, but their first large “digital integration” meeting will occur in Texas at the end of the week, chief operating officer Joe Martinetto told analysts. “We don’t know at this point how long the Department of Justice review is going to take, but rest assured we are using every day as best as possible to pursue that integration so we can hit the ground running,” he said.
The discount brokerage pioneers have not announced which of their systems will prevail, but Schwab executives signaled theirs will dominate. If they see great demand for popular Ameritrade options trading platforms such as ThinkorSwim, or the iRebal portfolio rebalancing software popular with registered investment advisers who custody with TD Ameritrade, Schwab will do its best to integrate them, Martinetto and Schwab Advisor Services head Bernie Clark said.
Clark devoted much of his presentation to assuring investors that Schwab will embrace the sub-$100-million asset advisors that work with TD Ameritrade. Many smaller advisors have expressed fears of being abandoned by the larger firm.
Schwab also plans to increase lending and concierge services to woo upper-high-net-worth investors who are the core franchises of the big banks and wirehouses that have been moving downscale into Schwab’s market.
“Our RIAs compete directly with advisors at large integrated banks who lead with lending,” Bettinger said, pointing to one area of ramped-up competition. “We need products on a par with those.”
Schwab also will more aggressively market programs such as its retail investor division’s “Chairman’s Circle” for customers who keep more than $5 million at the firm, said Jonathan Craig, Schwab’s marketing chief and head of the investor services division.