To the public Charles Schwab is better known for its discount brokerage than for its private banking activities. Yet, it has been quite interesting to follow the company’s strategic odyssey in the private banking sector. With their latest strategic focus it seems to me that they are on to something quite interesting that represents a strategic fit with their core activities. In a nutshell, they are offering loans of up to 500′000 USD to lure advisors away from the large firms to start their own businesses (see wealthbriefing.com subscription required).

Strategic Act 1

The odyssey started out in January 2000 when Schwab acquired private banker US Trust. At the time, commentators such John Labate saw this marriage as a great match. In the FT of Jan 15, 2000, he wrote:

An old-style firm founded a century and a half ago, US Trust’s average client account has $7m in assets, compared with the $110,000 average at Schwab’s 6.3m online and offline accounts. US Trust had no online strategy to speak of. Schwab has led the online sector in terms of total assets under management ($725bn by the end of last year) as well as number of online accounts. The two firms make a near-perfect fit [..]

Marshall Schwarz, then chairman and chief executive of US Trust described the synergies as follows:

“Our ‘high-touch’ with Charles Schwab’s ‘high-tech’ is a combination our customers will want going forward,” said

The strategy was clear: Charles Schwab was aiming at transferring its wealthier retail clients towards its newly acquired private banking arm to offer them a more prestigious and service oriented approach (the two Swiss banking giants, UBS and Credit Suisse do the same between their retail and private banking arms). However, over time benefits from linking the two entitites proved elusive at Schwab. In November 2006 Schwab sold US Trust to Bank of America for 3.3 billion USD and closed this strategic chapter.

Strategic Act 2

In January this year, Charles Schwab opened up a new chapter in its private banking strategy by tackling the market from a completely different angle. Instead of serving wealthy clients by an own private banking arm, as they had unsuccessfully tried with US Trust, Schwab now aims at indirectly serving them trough independant advisors. Through its institutional arm, the discount brokerage giant is attempting to lure advisors away from the large firms to start their own businesses on Schwab’s platform.

To facilitate this transition they are offering advisors loans of up to $500,000. In an interview with wealthbriefing.com, Barnaby Grist, managing director of strategic business development for Schwab Institutional, expected to see 300 to 400 advisors representing $80 billion in assets make the decision. For the moment this runs as a pilote programme for advisors with at least $75 million in assets under management.

Strategic Analysis

To me this new strategic direction seems to represent a much better fit with their current core business than their previous approach. It also follows what business guru John Hagel calls the unbundling of the corporation (subscription required) into three very different kinds of businesses – infrastructure management businesses, product innovation and commercialization businesses and customer relationship businesses.

Schwab is essentially an infrastructure business that operates a platform. Yet, they still want to benefit from the substantial market of wealthy individuals. By attracting independant advisors to its platform the dicsount broker found a smart way of developing the service intensive customer relationship part for wealthy people. The product innovation part, finally, is assumed by other dedicated firms, such as hedge funds, private equity funds etc. This is as a substantially different approach from its previous strategic attempt of addressing the high-end market through an internal private banking arm.

Summarising, it looks to me as if this new private banking strategy offers the following main benefits:

• Schwab can continue to develop its core brokerage platform business;
• By attracting advisors the company “adds” important amounts of new assets (or volume) to its platform while “outsourcing” the risk. This is substantially different from traditional private banking. The lower margins are outdone by scale and lower risk;
• In addition the discount broker benefits from the entrepreneurial drive of independant advisors;
• Finally, advisors act as true independants an can select investment products in an open architecture style.

By the way, the rise of independant advisors is something we see in Switzerland, too. In Geneva, an important Swiss private banking cluster, there are an estimated 300 of them. Several Private Banks are offering them a platform. However, the match is not nearly as good as between Schwab and independants because weaker complementarity…

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