Charles Schwab & Co. is accelerating its move into wealth management, in part by steering its sub-$5-million investors away from RIAs so that it’s the only in-house choice on the menu.

The Westlake, Texas, broker-dealer just bookended last week’s full-page paid ad in The Wall Street Journal – signed by its founder and chairman Charles ‘Chuck’ Schwab – with a direct memo to RIAs outlining the changes. 

[Chuck] Schwab broke the news that the company is hiring “thousands” of financial consultants to add to its existing 3,000. If “thousands means 2,000 or more, it is growing the front-line advice sales pool by at least 66%.

The hiring announcement in the Dow Jones flagship on Aug. 13, was followed yesterday (Aug. 18) by a memo sent to RIA principals in Schwab Advisor Network (SAN), a referral program for 100 to 150 firms that still remain from the TD Ameritrade merger and Schwab’s once-burgeoning programs. 

Citywire first obtained the memo and published its contents yesterday in an article with three bylines.

RIA alarm

RIAs can’t be pleased to see their previous best referral source drying up, says Tim Welsh, president of Nexus Strategy, in a white paper he published on the topic titled: “The Toll Bridge Collapses.”

“For two decades, the deal looked simple: Custody your assets with a discount broker, and it will send you clients,” he writes. 

“Charles Schwab built the Schwab Advisor Network (SAN) on exactly that premise in 2002, and RIAs built entire growth strategies on top of it. 

“That deal is now being unwound, and unwound at a speed that should alarm every RIA still counting on it.”

Bigs not blinking

Terri Kallsen: Headed Schwab‘s last recruitment drive. 

Some large RIAs, however, have not blinked at Schwab‘s tightening of the referral spigot upstream. 

Though Bicknell could not be reached for comment, Mallouk reiterated his praise for Schwab and expressed no concern about how rapidly minimums are rising.

“Our relationship with Schwab has never been better. Regardless of where they set minimums, I am confident there will be many instances where we can add considerable value to their clients, especially with higher net worth households.”

Diversifying revenue streams

Schwab‘s accelerating sense of urgency to convert its book of business from self-directed to managed reflects its quest to improve revenue streams – especially since it has largely sworn off commission revenues in the past six years, says Welsh.

Currently, it makes the most revenue from managing cash, which is vulnerable to whims of regulators, AI cash sorters and a slowing economy that could force the Fed to reduce interest rates, he adds in the phone interview.

The race is on to reduce that dependency on bank revenues before it becomes an issue.

“It goes to the [cash-spread] business model of Schwab,” Welsh says. “It’s the only way to be less dependent on those assets.”

Still, it may be easier said than done for Schwab to hire “thousands” of financial consultants. 

Sweet offer

Schwab embarked on a similar retail hiring push in 2015 under then-retail chief Terri Kallsen, setting a goal to add 1,800 branch advisors to its then-1,200 staff. Industry consultants, at the time, questioned whether the firm had the recruiting machinery to support that scale. It took about five years to reach 3,000 advisors.

That said, one recruiter says that Schwab offers one of the sweetest W-2 advisor packages in the industry, because it pays them salary and bonus for winning client assets that it largely hands them on a platter.

And, perhaps, that package just got sweeter for prospective recruits knowing that they won’t need to split revenues with RIAs for thousands of accounts up to $5 million.

And they also know that Schwab spends big on advertising – such as the full-page ad in The Journal.

The median household income of Journal reader families is about $265,000.

Unmatched funnel

The WSJ ad is not happening in a vacuum; in a July 21 analysts’ call, CEO Rick Wurster told Wall Street analysts that only 5% of Schwab retail households are in fee-based advice.

Adding thousands of branch consultants expands the top end of that funnel. The branch personnel tend to be Series 7 brokers who in turn feed clients to Schwab Wealth Advisory (SWA), which is Schwab’s managed account program. 

“Nobody buys a managed account,” says Welsh. “It has to be sold.”

Rising net inflows

SWA itself is undergoing a massive expansion with wealth centers being built out as call centers, nationally. Not having to share tens of billions of dollars in AUM with RIAs will will make it easier – all things equal – to keep the pipeline of referrals full.

Schwab reassured RIAs in its memo that though the number of referrals will drop, the absolute assets under management being referred may still climb.

‘Today, more than half of SAN’s net flows come from clients with $10 million or more in investable assets,” Schwab told Citywire.

The Schwab added: “In the first half of the year, SAN has seen total net flows of $18.2bn, up 15% year-over-year. The $10m+ and $25m+ segments now represent half of the SAN program’s net flows and are its fastest-growing client segments, with net flows increasing 54% and 45%, respectively.”