Charles Schwab Corp. files with SEC to follow up on Rick Wurster pushing investor revolution in mass personalization – with 40 basis points of monetization
The Westlake, Texas-based broker-dealer and AUA’s $8.5 trillion custodian will cannibalize its own products and third-party partners, but with its eyes set on a new value proposition.
Brooke’s note: what’s wrong with direct indexing? Virtually nothing, although it still suffers from high minimums and semi-high fees. To me, this seems to follow the RIA script of out-of-chain control to where most of the leverage and fee value is – at the wealth manager. Or the investor himself. Still, it seems to have parallels with organic foods. If you opt for organic, you go all the way. No secondary order of grapes mixed with DDT. Or am I wrong? Am I going to drip-mix DI? The good news for supporters of pro-direct indexing, RIA or investor, is that Schwab is both a believer and a forerunner and a competent national brand is likely to instill that necessary belief, if anyone can. . Still, it’s not a slam dunk. RIAs love sleek solutions, but historically they’ve been reluctant to lump them together in one place. This equation of keeping the channels lean, it seems, leaves the door open for various direct indexing providers to thrive.
Charles Schwab & Co. will begin a giant process of disintermediation for itself and its vendors’ asset management products by the end of April when it launches its first smart products that combine the best of SMAs, ETFs, mutual funds and self-directed investments.
But investors who want all that smarts should be prepared to commit at least $100,000 to the offering and pay fees that far exceed most ETFs. See: Charles Schwab & Co. Sets Monetization Game for the Ages in Motion to Push No-Fee Trading Assets to Paid Accounts, ‘Blurring’ the Lines Between Self-Directed and Advised Assets
The Westlake, Texas-based broker with over $8 trillion in AAU filed with the Securities & Exchange Commission (SEC) today to sell three index strategies – a small step towards a bigger goal .
Directly held holdings will be added or subtracted, including: A US large cap based on the Schwab 1000 Index; a US small cap based on the S&P SmallCap 600 index and an environmental, social and governance (ESG) filtered strategy based on the MSCI KLD 400 social index.
Fidelity filed a similar filing on Jan. 22 for Fidelity-managed FidFolios. They combine direct indexing with fractional shares for any investor who can reach the $5,000 account minimum. Fidelity already has $33 billion in direct indexing but in a program with a minimum of $100,000.
Today, he actually posted the offer. See: Fidelity Investments Returns to Schwab with Retail Direct Indexing That Offers Two Apparent Benefits – It Reduces the Minimum by $95,000 and Already Accepts Assets
The idea at Schwab is that the initiative kills many birds with one program.
Not only does this give Schwab potentially more wallet share in investment management, but it also improves its value proposition for do-it-yourself investors sitting in assets that don’t incur fees. It offers a new way to self-manage, according to Schwab CEO Walt Bettinger.
[It] Significantly attracts people who are historically self-reliant and index-oriented, he candidly explained to IMPACT 2021 and Schwab’s Wall Street Business Update
“The idea that I’m going to take my money and just put it into a fund or an ETF and trust that manager or that index is going to invest the way I want to… I wouldn’t go so far as to say that those days are over.”
Barriers are falling
Of course, some of these “certain funds or ETFs” selections belong to Schwab, but that may not be a problem.
“Schwab has long been willing to cannibalize his own business,” Chip Roame, managing partner of Tiburon (Calif.) Strategic Advisors, which counts Schwab as a client, said in a previous email interview with RIABiz.
“Will a larger share of future net flows perhaps go to direct indexing? Yes,” he adds.
Rick Wurster, Schwab’s #2 rising star, recently named president, will lead and promote the core initiative “this is our future”.
Wurster has been involved from the start as a director of Charles Schwab Investment Management, where he oversaw the acquisition of Motif’s assets, namely its direct indexing capabilities in June 2020.
His rise has been nothing short of meteoric by Schwab standards. Wurster joined the firm in 2016 after a 10-year stint at Wellington Management and five years as a partner at McKinsey.
“Direct indexing has long been available to very high net worth investors and institutions able to meet very high investment minimums,” he said.
“But now, thanks to technological innovations and industry developments like Schwab’s introduction of commission-free online trading, we are able to lower the barriers to direct indexing for more investors and advisors who serve them.”
The barriers are still high for many investors; Schwab imposes a minimum of $100,000 and the fee, at 40 basis points, will be considerably higher than most ETFs.
Still, the cost and minimums may not deter many investors aware of the benefits — including tax management, according to Divya Krishnan, director of Schwab product management, in a statement.
“Personalized indexing will increasingly define what investors want,” she says.
“Our research shows that one-third of our customers are interested in direct indexing, and we look forward to expanding the features and benefits of Schwab’s custom indexing over time.”
Schwab plans to roll out additional strategies, features and capabilities that will bring even more benefits of direct indexing — including greater customization — to retail investors and advisors over the next 12 to 18 months, says the communicated.
Direct indexing is part of Schwab Asset Management, which managed approximately $635.8 billion on a discretionary basis and $41.5 billion on a non-discretionary basis as of December 31.
Fidelity-managed FidFolios are still in a pilot phase, but the company will soon roll out the product to all investors in the coming months, the company says in its statement.