Talking about a higher standard for no-frills brokers is like lighting a bomb when the robots are coming.
Chuck Schwab is 81. He got his start in the wealth management business back in the newsletter days, in an environment when a lot of advisors at the top of their game now were barely learning how to read.
His talking points were always value and the elimination of conflicts of interest. That’s how the firm that bears his name evolved into an empire.
Last week he bemoaned the fact that his message hasn’t taken over the industry, warning that the public still considers the typical advisor as trustworthy as a stereotypical used car salesman.
That’s a surprisingly divisive statement in the face of the no-holds-barred war the industry just fought for the right to ignore clients’ best interests.
I know, resistance to the fiduciary rule revolved around implementation and unintended consequences. I get it. Nobody wants to catch a nuisance lawsuit from a disgruntled client who never would’ve been happy anyway, and the DOL didn’t think that through.
But the rhetoric retail investors heard didn’t go into detail. What they heard is that the wealth management industry wouldn’t commit to putting clients first.
There was a lot of talk about affordability and preserving a wide range of investment options, structural stuff.
Smart advisors already know that talking about their own business model in front of the clients is poison. At best it bores them because it’s all about you and your margins when the conversation should revolve around them.
At worst knowing too much about how the market sausage is made drives them away from the industry forever. They like the illusion that the relationship is a little genteel. You make a little money for helping them make a lot.
Generations of investors have accepted that you have the right to earn a good living because your assistance is valuable. They recognize that value. They’re willing to pay for it.
In that world, the critical factor has always been value and not price or compensation framework. Commissions or fees, product or service, transaction or relationship, if they feel enriched, they’ll enrich you back.
Talking about our needs and our struggles breaks the spell. The value conversation turns back into a commodity conversation where the client has a specific price in mind.
Used cars are commodities. The buyer has a budget. There’s a ceiling price, a target and a floor. Depending on the inventory available on the lot, the seller tries to make a deal.
There aren’t any illusions that they’ll work together for years or that the seller is interested in finding the buyer the best vehicle available. It’s just a transaction.
Which brings us back to Schwab. The Schwab approach is always to deliver investment services at industry-beating prices — the best deals in town — and then layer on a sense of value.
Right or wrong, Chuck Schwab’s clients feel at least a little special and protected. At the very least, the rhetoric is all about them and their needs.
That’s a competitive edge. Schwab talks a lot about responsibility and ethics, the kind of words normally associated with fee-only planners and other friends of the fiduciary standard.
He wants his people to be as trustworthy as family doctors. But his firm remains as discount-driven as it gets.
Their average relationship generates 16 basis points of fee drag. That’s robot country, commodity country.
Very few advisors can compete with that pricing. Schwab truly has some of the best deals in town on his lot.
His enemies are client churn — bad for business when you make your real money on the float — and especially watching your best clients migrate up market.
He likes to play in fiduciary country and has the scale to make it work, at least on paper. That doesn’t mean providing the most lavish service or taking a bullet for a beloved client.
It just means communicating visible value for those 16 basis points, a sense that the client has gotten more out of the relationship than the advisor at a price everyone can afford.
“Mass affluent” clients can see that value. Ultra-high-net-worth clients can too. If they like the Schwab experience, this is where they’ll spend their 16 basis points.
If I were Chuck Schwab, I’d be a little nervous about the robots because now there’s competition for those 16 basis point relationships. That’s the strategic threat.
His people deal with that threat by differentiating themselves. Human beings pick up the phone. All the technology is behind the scenes making it happen, not on display as the main event.
Selling the most lavish 16 basis point relationship on the planet covers that front and gives the company room to stretch.
After all, Schwab doesn’t have to offer 1% service for a 16 basis point fee. The company just needs to find the sweet spot where fees and value make clients happy and support healthy profit margins on the back end.
Maybe it won’t even be the last firm left standing. That’s okay. Like the old joke goes, they only need to be a little faster than weaker competitors to stay ahead of industry predators.
And the moral is clear. Compete on price and face the robots. Compete on value and give your clients the best sense of safety and expertise you can muster.
Just selling cars hasn’t been the route to long-term prosperity in some time. Schwab and other discount brokers burned that model a long time ago and no amount of regulatory relief will turn the clock back.
One more interesting thing: the way Chuck was talking, he’s happy to take on a self-imposed form of fiduciary standard where the firm effectively polices itself to make sure clients come first.
It’s toothless and relatively painless. The only consequences are internal. But prospects see that the firm promises they’ll be treated better there than anywhere else.
Which do they choose, assuming performance and fees are comparable?