So while we can talk about the fees, the reality is they absolutely see the value of getting these referrals. Our investment centers in the retail enterprise are real excited about the program and the changes we made. When the investor walks in, they're almost pre-sold on investment management-advisor firms, so that sale goes a lot faster. Already our close rate has gone from 25% last year to 35%, and in some of the areas, it's approaching 40%.
Simonoff: If a client walks in and says, "I want advice. I've got $2 billion, and I don't know whether my needs are appropriate for Schwab Retail, Schwab Institutional or U.S. Trust." What are some of the key tests branch employees try to apply to a client to see where he would best fit?
McWhinney: That's a lot of questions, actually. In order to, what we call "navigate" the investor to the right place, they need to really understand in depth where the psychology of that investor is. So they ask them questions. What kind of things have they been doing in the past? How involved in the investing process do they want to be? Do they want someone who tends to be more of a money manager, where they just turn the portfolio over to them, or are they looking more for wealth management and tax advice and some of the things that are a little bit more complex? Are they looking at something like a trust that they want to set up?
Once they kind of zero in on what that investor's looking for, then they talk to them about the firms that are in the Schwab Advisor Network. Then they suggest that there are eight firms that meet their needs, and then they set up the appointments.
Then they watch what happens with the account. They are paying attention to it. What I need in 2002 may be very different from what I need in 2003 or 2004. Just because someone is in one service model today, it doesn't mean that's where they're going to be their entire investing lifecycle.
Simonoff: What about Centerpiece? Why wouldn't Schwab charge two different prices for Centerpiece-one for people who use Institutional services, and another for other advisors? Schwab could charge more and have non-Schwab-affiliated advisors subsidize those who are affiliated with Schwab.
McWhinney: I could do that today. The reality is, I have a whole group of clients that I would like to serve with Centerpiece. Over 2,000 of our clients use it today. We're going from an old model of Centerpiece to an upgraded single-server platform, renamed "PortfolioCenter." It's going to take new resources to help those clients upgrade, and then it's a fabulous service that we've built. When we rebuilt it, we really made it very competitive. So if I'm going to invest the resources of Schwab in helping people convert from one platform to another and upgrade from the old Centerpiece to the new one, first and foremost I'm going to help the clients that are doing business with Schwab today.
So that just makes good business sense to me, to help those people who are really helping me grow. From the beginning, I told Nick Georgis, our head of sales, that if he had a prospect that he wanted to sell it to, he could. I've got more demand for the product than resources to convert people. I'm not in the software business; Advent is a software business. Software is a product to me. Centerpiece is a very important product that I offer to our clients, but it's not my core business.
Simonoff: If you could charge nonaffiliated advisors a higher price, would that give you some additional resources to increase your services?
McWhinney: It's not part of my core. It's not the most important thing I do. So getting into the software business is not a thing that I want to do from a strategic standpoint. What I want to do is offer my clients the best service that I can, the best portfolio management service that I can. The best advisor-branded Web services that I can. The best custody and trading services that I can. Right now, I want to stay very focused.
Simonoff: Right now many people are looking for new revenue streams.
McWhinney: It's a distraction; it's not enough new revenue. It's a slow sale, and I want to stay focused on those clients and get them the best custody and trading and give them good service. The reason that I want to build Centerpiece [being renamed PortfolioCenter] and the reason I want to offer [it] to my clients is that if they can have a very competitively priced product from Schwab, then they can grow their business. They can have a much more efficient back office. In the business that Schwab's in, if investment managers grow, we grow. We can't grow if all we have is a software product with them.
Simonoff: Some people think that at some point Schwab might start buying individual advisor practices. I believe you had a consulting group do a study of this and they questioned it. Right now you could probably buy certain people's practices. There are a lot of people in this business who are in their late 50s early 60s, and they could basically keep their job at a good salary. I'm not sure they'd demand fortunes for their firm right now. Why did Schwab's consulting group say this was not a good strategy at this time, and do you think it could change?
McWhinney: I think that I've learned in my career to never say never. But what we learned by really looking at the marketplace is that the firms that were for sale at a given moment in time may not be the firm that you would want to buy if you could just go in and choose the best, or the best fit in the market. So that, in of itself, is one of the major reasons why we chose not to go with that strategy.
There's a more important fundamental issue here, and that is that one of the beautiful things about the investment manager-advisor model is that it is so unique. In a metropolitan area or a small community, there are hundreds or tens or whatever of firms, that all are slightly different. Some are more aggressive; some are more conservative. Some are money managers; some are financial planners. Breaking that model down and turning it into a cookie-cutter model, I believe, is the wrong thing for the industry. What consumers and investors need are different choices.
The entrepreneurial nature of investment managers in growing their firms is really a beautiful model. Leaving as many out there to do business in as many unique ways as possible really serves the investment community way better than having it all become very standardized.
So I really think it's wonderful that in a market in New York or in Bend, Oregon, we can offer different programs and choices to the investor so that they don't just have one model. Having come out of banking and watching the consolidations in banking and then watching boutique banks be turned into the national cookie cutter, I think I probably have a bias toward the individual nature of each one of these firms.
Simonoff: What do you see as your biggest challenge going forward? Is it technology, is it competition, or is it trying to constantly adapt to a very dynamic marketplace?
McWhinney: I think I have one of the best jobs in the financial services industry, and the biggest challenge is that we are really hard on ourselves. We want to keep raising that bar. The service is good; let's make it better. The products are good, and let's make them better. I want the competition looking at where we were two years ago, not where we are today. And just raising that bar and looking at the business model of the investment manager and saying, "How can we help?" Not control. I always want them to have choice.
Simonoff: Thanks a lot for taking the time to talk here.