One of the most significant, but largely unnoticed changes occurring in the wealth management industry right now is that its most-widely used custodian, Charles Schwab, is in the early stages of creating an owner-operator model for some of its branches. Although it still has about 300 of its traditional, company-owned and managed locations, over the last three years it has also launched 24 owner-operated franchisee-owned branches.

While this might seem a bit counterintuitive (and no one would ever accuse us of being cheerleaders for any custodian, including Schwab), we think that, for the right person, getting one of these franchises is an incredible opportunity to make a lot of money without taking a tremendous amount of risk.

Why? Because the wealth management industry is on the verge of a seismic shift in what it costs to capture new clients, and this shift is going to make owning a Schwab branch very attractive.

Consider for a moment where the industry has come from: Twenty years ago, marketing in the wealth management industry was analogous to going fishing and waiting for the fish to jump into the boat. American workers were no longer provided pensions and were expected to fund their own retirements through 401(k)s. An entire generation of people suddenly realized that they needed comprehensive, holistic advice to manage their wealth, or in retirement they might wind up living in a cardboard box under an overpass. Consequently, many more prospective clients were trying to find financial advisors than the good firms had capacity to accept.

Demand for advice continued to grow during the following decade up until the 2008-2009 crash. Although many larger wealth managers began to emerge, the capacity that advisors had available to accept new clients was still exceeded by the number of them looking for advice. Thus, most firms did not have to spend very much on marketing.

However, if one looks at the industry’s current macro data, it is clear that this supply/demand imbalance is close to correcting itself. Billion-dollar firms are now commonplace and the relative rate of new client growth is much slower than it was only a decade ago. And while there will continue to be large numbers of new prospective clients, the demand for them will soon exceed their supply.

When a supply/demand imbalance corrects itself in any industry, it causes its economics to change significantly and quickly. This, too, will be the case in the wealth management industry. The costs of marketing and distribution will jump; in fact, in the not-too-distant future they will be most firms’ largest operating cost.

Now back to buying a branch: Schwab has been able for many years to attract extraordinarily large volumes of prospective clients to its branches. Although it initially created the branch network to attract retail customers who wanted to invest their money on their own, it soon figured out that many of these new clients wanted the kind of holistic, sophisticated advice that only independent fee-only advisors could provide. So it created a program in which it refers out thousands of them every year to independent firms, in exchange for agreeing to custody the assets at Schwab and a referral fee equal to the greater of 0.25% of assets or 25% of client revenue.

However, now that the industry’s new client supply/demand imbalance has been corrected, there will soon be significantly more competition for new clients. This competition will invariably make many wealth managers much more willing to pay more—in fact, a lot more—for referrals. Moreover, custodial branches will soon find that (savvy) wealth managers will soon volunteer to do whatever is necessary—sponsor branch client events, help fund local ad campaigns, underwrite branch employee training, etc.—so as to become a “preferred” firm for referrals. All of these steps will help branches grow faster while lowering their costs.

Thus, it appears that Schwab is now offering prospective franchisees the opportunity to own a branch right at the very point that owning one is about to become much more economically attractive. An obvious question is, given this shift, why Schwab would do this.

Our guess is that Schwab has concluded it has two core competencies—technology and branding—and like any successful organization, it wants to focus its energies on what it does best. And creating and managing hundreds of more retail branches is not going to move the needle when it comes to creating shareholder value.
 

But if it can find individuals who want to be owner-operators—you know, the kind of people who, unlike employees of a big company, come in at 5 a.m. and work until 7 p.m.—and who are willing to start de novo branches in locations where Schwab branches currently do not exist, it can rapidly and cost efficiently expand its national footprint and capture a much larger share of the individual investor market.

Certainly like any new program, Schwab is still figuring out its long-term approach to franchising, and the first few years of this program have had more than a few kinks. We also believe that this opportunity makes the most sense for a potential franchisee only if Schwab will allow him or her to ultimately own and operate multiple de novo branches.

But we have little doubt that Schwab will figure all this out and individual franchisees will ultimately get to own many locations. We also are willing to bet that Schwab ultimately will sell the 300 branches it operates today to its most successful franchisees. Keeping and running these branches for any big company will at best be a low-return proposition over the long term.

When we first heard about the franchising program, it struck us that in many ways it is similar to the mother of all franchising opportunities: getting a McDonald’s 50 years ago. Back then, families rarely ate out and then typically only at local restaurants. In the late ’50s and early ’60s, Ray Kroc figured out that over time, eating out was about to become more popular. And if someone could provide a consistent product with a national brand, clients would flock to it.

A relatively small number of entrepreneurs recognized the opportunity, launched their own franchises and benefitted from the revenue wave that accompanied a shift in Americans’ eating habits. Many built substantial fortunes doing so.

However, the Schwab franchisee opportunity strikes us as much less risky than starting a McDonald’s in the 1960s. Schwab is already one of the strongest brands in the United States, and prospective clients already flock to their branches.

Moreover, right at the point that the economics of servicing those clients are about to become immensely more favorable for branch owners, there is an opportunity to own one.

Certainly, becoming a Schwab franchisee is not for everyone. It is a very different role than being a financial advisor, and our sense is that people with the personalities to do well in that field probably would not do very well as franchisees. However, for those individuals whose personalities and skill sets are better suited to owning and operating some sort of franchised business, this appears to be an incredible opportunity.

Mark Hurley co-founded Fiduciary Network in 2006 and serves as its CEO. Yvonne Kanner is the firm’s president and chief operating officer.