Schwab ready to butter its bread with advice

Charles Schwab & Co. – long known for discount brokerage services – is finally preparing to blitz its customers with a full complement of self-generated advice.

Unlike Schwab’s purchase of U.S. Trust Corp. or the opening of private-client offices, however, news of its latest move did not provoke anger from the independent advisers whose clients’ assets are under custody with the San Francisco discount brokerage giant.

Even a severe past critic such as Thomas C. Grzymala, president and CEO of Alexandria (Va.) Financial Associates, says that he feels secure in the face of the developments.

“Go ahead and try me,” says Mr. Grzymala. “People need hand-holding – especially since last week. The box [approach] doesn’t answer the question, `What about …?”‘

Schwab says it intends to continue to make judicious use of salaried investment specialists to help fill in the blanks for investors.

Some Schwab adviser clients think Schwab ought to leverage its proven adviser network before putting its efforts into an advisory program.

“Making clients self-empowered is a big mistake,” says Scott Van Den Berg, director of Century Management in Austin, Texas, which manages $410 million in assets.

“Getting the research is one thing, but interpreting it is another. I think Schwab would be better to steer people to advisers rather than try to do it themselves,” says Mr. Van Den Berg, a former president of the National Association of Personal Financial Advisors.

Making a move

Schwab’s move is the latest aimed not only at competing with other online brokers but at taking a bite out of Merrill Lynch & Co. Inc. of New York and other full-service brokers.

The details of the plan are still secret for competitive reasons, according to Schwab spokesman Glen Mathison.

Still, the firm tipped its hand in a magazine article because it needs to show it is not standing still as its revenues, profits and stock price continue to erode under bear market conditions.

Schwab’s shares were in free fall again last week, dropping to near $8 as exchange stoppages and market pessimism continued to take its toll on trading volumes. They closed Friday at $9.50.

Schwab will proactively apply its own Morningstar-like investment grades to securities holdings in customer’s accounts. The plan features will be launched on a rolling basis over the next year or two.

The technology behind the scheme comes from Chicago Analytics, a research company that Schwab purchased last year.

Roughly speaking, it uses sophisticated software to grade stocks the way that Morningstar rates mutual funds, relying exclusively on quantitative measures. It plans to use letter grades rather than stars.

Those ratings will be passed along to Schwab clientele so they are in a better position to make “sell” or “hold” decisions. Schwab is still keeping mum on how it plans to advise clients on “buy” decisions.

Financial services consultants say Schwab’s making a good move.

“At a microlevel, some advisers will be disturbed,” says Charles “Chip” Roame, principal with Tiburon (Calif.) Strategic Advisors. “At a macrolevel, it forces [them] to give better and better advice as Schwab, Quick & Reilly, TD Waterhouse and others climb up the advice chain.”

Stephen C. Winks, publisher of the Senior Consultant in Richmond, Va., thinks this may be a classic case of Schwab showing sensitivity to its markets and to changes in technology, which may pose a serious threat to advisers in years to come.

“[Co-CEO David] Pottruck is saying: process and technology is important and it’s not beyond the ability of the investor themselves to take advantage of it,” he says. “He’s coming to the conclusion that the advisers aren’t offering the advice. If the adviser’s not doing it and it can be delivered then why not? It’s easier to deliver than even six months ago.”

“If firms don’t watch out they are going to be marginalized by technology and process,” he says. “If advisers don’t take corresponding action, they won’t be in the business five years from now. This is an early warning sign.”