Interesting Article on Schwab

[OldShooter]

https://www.institutionalinvestor.c...the-Biggest-Banks-in-America-That-s-a-Problem

Although I don't think I agree with the click-bait headline, I did find this article to be very interesting, both because I didn't realize how big Schwab was and because it explains in some detail what their strategies are.

I continue to believe that all the mutual throat-cutting in the brokerage business has not yet sorted itself out and produced stable revenue strategies for the players. So, as customers, we have to keep our eyes open.

 

[kaneohe]

interesting article.........thanks for sharing.

 

[Lakedog]

Thanks for sharing -- will be with Schwab by way of my TD Ameritrade accounts (although no obvious changes yet).

 

[kevink]

Thanks OldShooter for sharing this article. I've been a Schwab client for many years but had no idea how big they'd gotten or how ambitious they were and are.

Nothing but good things to say about their customer service and the Schwab Bank debit card, which reimburses ATM fees worldwide, saved us a small fortune during 5+ years of living as expats in Mexico which has a cash economy.

With about half of our nest egg with them and the rest with Vanguard I get to compare the two on a regular basis. Love Vanguard's structural advantages (no outside corporation to make money for) and of course revere Jack Bogle but I must say Vanguard's website is laughably primitive compared to Schwab's and their customer service also leaves much to be desired. OTOH can't get Admiral shares of most funds at Schwab so a food in both camps feels good.

 

[OldShooter]

Thanks for sharing -- will be with Schwab by way of my TD Ameritrade accounts (although no obvious changes yet).

It sounds like they are going to take their time with that.

I have been with them for maybe 20 years and am very satisfied, but like any vendor you have to keep an eye out. For example, one recent revenue-raiser for them was to change the automatic sweep to go to Schwab Bank paying a pittance. To get MM rates you have to make a trade and buy SWVXX or something like it. That bank sweep is a lucrative and easy change so I'd expect that will happen at TDAmeritrade fairly quickly -- you will want to watch for that.

I don't begrudge them that change. They have to make money somewhere. Basically it is a tax on people who aren't paying attention.

 

[OldShooter]

... OTOH can't get Admiral shares of most funds at Schwab ...

For the VG funds we use (at Schwab), VG eliminated the Investor share category and switched everyone to Admiral. I think that happened in July '19. So no difference any more. I was glad to see that because I am far too lazy to maintain accounts at two houses.

You might want to check with your rep or on the Schwab web site to see if your funds' Admiral shares are now available.

 

[kaneohe]

..................... For example, one recent revenue-raiser for them was to change the automatic sweep to go to Schwab Bank paying a pittance. To get MM rates you have to make a trade and buy SWVXX or something like it. ...................................

That worked earlier this yr. Now the yield on SWVXX is 0.03%.

 

[Mulligan]

Thanks for sharing -- will be with Schwab by way of my TD Ameritrade accounts (although no obvious changes yet).

My TD rep recently said Schwab will leave them alone for at least 18 months. Thankfully, as they screw up all sorts of things up TD does correctly in what I invest in.

 

[chassis]

Interesting, thanks. Agree it seems reasonable to expect more change in this space.

 

[aja8888]

Great article, thanks. I have been a Schwab client for the past 37 years. I didn't realize they have gotten so big.

 

[kevink]

For the VG funds we use (at Schwab), VG eliminated the Investor share category and switched everyone to Admiral. I think that happened in July '19. So no difference any more. I was glad to see that because I am far too lazy to maintain accounts at two houses.

You might want to check with your rep or on the Schwab web site to see if your funds' Admiral shares are now available.

This change applies to some of Vanguard's most popular index funds but not to Wellesley or Wellington and (I'm guessing) any other actively-managed funds.

I decided to keep a small amount at Vanguard years ago as a hedge against possible cybercrime/account access issues back when we used an FA who had us in DFA funds that Schwab was happy to be custodian for and of course Vanguard won't touch. Years later I'm happy to have a chunk of Wellesley Admiral at Vanguard and most other things at Schwab. Two great companies.

 

[ImThinkin2019]

Thank you Old Shooter for posting this particlarly well written and informative article. It is an interesting story. Reinforces the point that things change over time and we or our designee must stay abreast of developments. This is a challenge we are thinking about now.

I liked the writing so much I will look for other articles by this author.

 

[Markola]

I enjoyed the article and Schwab is a fine company that disrupted a stodgy industry. I found this passage confusing:

“Lately there has been another reason for Schwab to be bashful about its banking arm: The company has grown far too dependent on bank revenue, just when net interest margins are being compressed by falling interest rates. Last year’s sterling 3 percent NIM shrank by half in the first half of 2020. And Schwab doesn’t expect margins to improve the rest of the year.

So new revenue streams are needed. Says Michael Cyprys, director of financial equities research at Morgan Stanley: “That’s increasingly a top priority for this management team.”


Seems odd to quote a competitor as if it’s an unbiased source. Anyway, if I were at Schwab, I’d start keeping an eye out for whether my assets are part of the “new revenue streams.”

I also noted in the article that Schwab charges 80 basis points for their $500K+ Private Client service, whereas I pay 30 basis points at Vanguard Personal Advisor Services with a dedicated CFP.

 

[OldShooter]

... I found this passage confusing:

“Lately there has been another reason for Schwab to be bashful about its banking arm: The company has grown far too dependent on bank revenue, just when net interest margins are being compressed by falling interest rates. Last year’s sterling 3 percent NIM shrank by half in the first half of 2020. And Schwab doesn’t expect margins to improve the rest of the year.

So new revenue streams are needed. Says Michael Cyprys, director of financial equities research at Morgan Stanley: “That’s increasingly a top priority for this management team.”


Seems odd to quote a competitor as if it’s an unbiased source. Anyway, if I were at Schwab, I’d start keeping an eye out for whether my assets are part of the “new revenue streams.” ...

I think it's easier to understand if you view it in the bigger context. Schwab has been in the forefront of price cutting, together with Fido and VG, for several years. This, obviously, was not accidental. It was a frontal attack on TDAmeritrade, Blackrock, E*Trade and others. The move ended up destroying TDAmeritrade and E*Trade. Success, IOW.

The larger context is that VG, Fido, and Schwab are all suffering from self-inflicted wounds to their P&L's. My point in the OP was that as customers we have to keep our eyes open as these and the other companies in the business look for ways to recover some margin. One way is Schwab's little shell game with the sweep accounts. Another is to push advisory services that generate fees. Another, IMO especially at Fido, is to push clients toward managed funds with higher fees. ... and the beat goes on.

Re comparative fees, I think it's superficial to look only at the fee and not at the services provided. Maybe they are the same; maybe not. As an example, I wrote an RFP for a nonprofit about three years ago. We were looking for someone to run a relatively small amount of money, around $6M. Fee proposals came in from 40bps at VG to 1% at an insurance company we had to include on the list for political reasons. Our judgment was that the attractive VG fee would give us a lower service level than we wanted, so we ended up with a small advisory company at 59bps and have been getting attentive and exceptional service. YMMV, of course.

 

[Ncc1701]

I also noted in the article that Schwab charges 80 basis points for their $500K+ Private Client service, whereas I pay 30 basis points at Vanguard Personal Advisor Services with a dedicated CFP.

Not a fair comparison. Schwab created Intelligent Portfolios Premium to compete with Vanguard PAS. Schwab Private client provides more flexibility than both services which is the reason for the higher fee.

I cant stand Vanguard's website or customer service, so I buy funds at VG and then transfer them to Schwab - no fee.

 

[rodi]

Interesting article. FWIW - my kids match the example of the <18yo starting with a brokerage account. Both have Schwab accounts. But I will dissuade them from going the intelligent portfolio route - I've tried to teach them about asset allocation and index funds to reduce expenses. Both have Roth accounts. Youngest will be switching to Schwab checking when he graduates high school. (He gets SS until then and it's deposited into his credit union account... don't want to disturb that.)

But - as mentioned above - it's good to keep an eye on them. My sister has a managed portfolio with them, has refi'd her rental properties through them, etc... She is a source of revenue for them. We have the same consultant - and we laugh that we are very different... Sis doesn't want to be bothered with details and thinks the fees are worth it... I don't want to pay fees, and don't think the details of managing my own money are onerous. Our schwab consultant works fine with both of us, to her credit.