Schwab says slow growth of franchise channel is by design

It’s been almost six years since the official launch of Charles Schwab Corp.’s franchise program, and the 34 operating offices amount to only about half the number originally projected to open over the first 18 months.

From Schwab’s perspective, the slower pace of growth does not reflect a failure to execute or even a threat to the future of the franchise program.

“I don’t know where those original growth projections came from; we opened 12 franchises during the first couple of years, then we slowed down by design in order to make sure we have the right talent in place,” said Craig Taucher, who has headed up Schwab’s franchise business since about a year after it debuted in June 2011.

“We’re not just looking for bodies; we need the right candidate, the right real estate and the brand of Schwab in those communities,” he added. “We’re looking at accelerating our growth over next several years.”

The 35th franchise is scheduled to open later this month in Normal, Ill. Schwab had projected it would open between 60 and 70 during the first year-and-a-half of the franchise program’s launch.

Ryan Shanks, founder and CEO of Finetooth Consulting, suspects Schwab overestimated the market of qualified and interested potential franchise owners, as well as the precision required to strategically establish new retail-oriented franchise locations.

“When it comes to recruiting and attracting talent, nine out of 10 folks think it’s going to be easier than it is,” he said. “That’s probably one of the things that most likely caused some pivoting internally and slowed the growth. Early on it might have been a pursuit of numbers, and that has evolved into something along the lines of ‘come in and we’ll screen you.’”

Considering Schwab’s expansive reach into areas that are often seen as directly competing with financial advisers working with Schwab’s custody business, the franchise business could be seen as more competition for advisers. But Mr. Taucher said the franchise business targets a different market through a different access point to Schwab’s products and services.

“We’re not getting any flak from RIAs because this is a different model,” he said. “The reality is, this is a retail program and we’re looking for folks who don’t want to manage portfolios.”

As originally designed and promoted, the franchise program is a complement to the Schwab branch network, which has 300 individual offices across the country.

The franchise offering, as explained by Mr. Taucher, is primarily aimed at independent brokerage reps who are ready to run an office without all the overhead and responsibility of completely going it alone.

“We’re looking for folks who don’t want to manage the portfolios; it’s a very different model,” he said. “Our franchise owners represent Schwab, and this is a retail platform for self-directed investors and active traders.”

Mr. Taucher declined to disclose the number of assets the franchises have brought onto the various Schwab platforms, beyond alluding to multiples well above the annual required minimum of at least $10 million in net new assets.

“The reality is we’ve seen three and four times that number from the franchises, with 85% of that representing new clients to Schwab,” he said.

Mark Gerard, who opened a Schwab franchise in Rockford, Ill., in October 2013, was a little more forthcoming with the numbers at his office.

“We’re at $260 million so far,” he said.

If there is a prototypical candidate for a Schwab franchise, it might be somebody like Mr. Gerard, who is 43 and had worked for 15 years in the financial services industry prior to buying his own franchise.

“I saw a great opportunity to step into a branch where I would be a business owner and not an employee,” he said. “My goal had been to open an advisory practice, but the challenge was the ramp-up costs and getting to some kind of scale.”

Mr. Gerard, whose brother Kevin owns a franchise in Mequon, Wis., said he was recruited by Schwab to open the Rockford franchise.

According to Schwab’s franchise disclosure document, franchisees are responsible for an initial upfront investment of between $57,170 and $133,500.

And if attracting new money isn’t as easy as falling off a log, it’s close.

“Every Schwab client is assigned a zip code and every zip code is assigned to a branch,” said Mr. Gerard, meaning franchises are sometimes getting credit for new client assets that never directly interact with the franchise.

That is essentially the franchise model, and helps explain the more deliberate pace of growth.

Franchises and branches are almost always located in small and midsize markets. They’re rarely located within 50 miles of each other, and high-profile retail storefronts are a top priority, according to Mr. Taucher, who says it took three years to find an acceptable office location in the resort town of Traverse City, Mich.

“We want high visibility and easy access,” he said. “In some of the small markets those locations can already be 100% leased.”

Bill Willis, president of the consulting firm Willis Consulting, said the Schwab franchise model leans heavily on the power of the brand to attract new clients, which can take a lot of pressure off the franchise owners.

“I see the franchise ownership as somewhere between an independent broker-dealer rep and somebody working [as an employee] in a Schwab branch office,” he said. “In a small market, or a market where Schwab isn’t represented, having that Schwab sign out there is gold.”

Mary Murphy, who opened the first Schwab franchise in late 2011 in Nashua, N.H. and is now considering buying a second franchise, praises Schwab for having demonstrated an “unmatched ability to scale.”

A former IBD rep, and school teacher before that, Ms. Murphy said she is grooming a successor to take over her current franchise and plans to buy another franchise from which she will eventually retire.

“It’s going to be so much easier to gracefully retire,” she said.

Related Topics: Charles Schwab & Co.