Executive Summary
The big news this week is that Schwab has announced plans to allow independent advisors to franchise a local Schwab branch, receiving support from Schwab in the form of a (small) starting book of clients, financial support, a turnkey system with the latest Schwab technology, and perhaps most important: the Schwab brand name. Although the early response form some is that this will potentially disrupt existing Schwab Institutional relationships, I have to admit: to me, it sounds like a great opportunity for some entrepreneurial advisors - especially breakaway brokers.
The announcement itself came from Schwab earlier this week, as reported by AdvisorOne, that the new Independent Branch Services offering is now available for advisors. The new franchise branches will offer the exact same products, pricing, and services as the company-managed Schwab branches, with the same mass-affluent target market; the difference is simply that the branch will be advisor-operated and run as a franchisee.
Initially, the offering looks pretty impressive. You get to operate a turnkey retail Schwab branch with the company's latest technology. You get an initial set of 'seed' Schwab clients to start your revenue and generating referrals. There is a revenue and expense sharing arrangement that provides Schwab's financial support for office expenses in the startup years. You get a localized supporting marketing program from Schwab. Customized training and support. And you get to use the Schwab brand name. When people in the local community want to "Talk To Chuck" - they get you. Or as Schwab simply puts it: "Build Your Client Base. Leave The Infrastructure To Us."
As a follow-up article from Registered Rep pointed out, Schwab will keep the program on a 'tight leash' early on. Advisors will actually be forbidden from opening up multiple Schwab franchises. The point is not to allow someone to build a multi-Schwab branch mini-empire; the point is for an advisor who wants to build his/her own client base and book of business to do it, using the Schwab brand and resources.
As a Barron's blog points out, a huge portion of Schwab's revenues come from various independent advisor sources (which I assume includes the Schwab Institutional relationships). So to say the least, it's probably not in Schwab's best interests to alienate their existing RIA relationships. But I don't think the point of this launch has anything to do with the existing RIA advisors who work with Schwab. The reports say the new independent Schwab branches will be compensated in the same way as the existing company-managed offices, which would ostensibly include the incentives for the existing Schwab referral network to third-party independent RIAs as well. In fact, the network may expand, as the new independent branch advisor franchise creates the opportunity for Schwab branches in locations that have never had a local Schwab presence. But the bottom line, again, is that this isn't about the existing Schwab advisors; this is about new advisors to the Schwab system; this is about breakaway brokers.
After all, imagine if you're an existing advisor at Merrill Lynch or Morgan Stanley, or even a large independent broker/dealer like Raymond James or Ameriprise. You've decided that you want to leave the company for whatever reason - maybe you want to leave the B/D world entirely - and you want to set up shop somewhere new. But starting a new firm from scratch in today's environment is difficult, especially with the growing burden of RIA compliance, not to mention the overall challenges of building a client base from scratch with no visibility, brand, or company name.
If you were an experienced advisor who was about to go out on your own, and you could choose between starting "Joe Smith Financial Planning", rent an office, file your regulatory documents, choose a chief compliance officer, buy your CRM software, your portfolio management software, your financial planning software, your document management software, research and choose a custodian, etc., etc., OR... sign up for the Schwab program, have all of that in place immediately, and start building your client base right away, using referrals from clients that Schwab handed you and the visibility of being the local Schwab office with national "Talk to Chuck" marketing... which would you want to choose to launch your new business?
Schwab is betting a number of advisors will choose option #2. I have to admit, I think they're right. What do you think?
Depends on how much they want up front.