Editor’s Note: Bernie Clark has been at Charles Schwab since 1998 and for the past six years has run Schwab Advisor Services, its $1.3 trillion custody business, which also provides practice management, business consulting services and technology solutions to wealth management firms. Over the past 18 years, he has also held a variety of other positions in Schwab’s institutional business and served a stint in its retail arm. He was kind enough to share his views on the future of the industry.
Hurley: Let’s go out 10 years. What is this industry going to look like?
Clark: I believe we are going to see enormous change in the industry. We know the independent model is the favored model among the boomer generation, and I believe it will also appeal greatly to millennials. But we see big changes coming.
Our most recent “Independent Advisor Outlook Study” found advisors see more growth and change to come in the decade ahead, especially in how they work, the nature of their service deliverables and the makeup of their teams. Technology will play a major role in the future, but relationships have always been the secret sauce of the RIA profession, and they’ll remain at the core of the model.
Hurley: Today about 95% of the assets are held at about 5% of the firms. What about 10 years from now?
Clark: We will see larger firms on a national scale in the future. Some will get there organically, others through acquisition. We are already seeing larger firms coming together. The advisor role is also shifting and can include estate planning, tax preparation and legal work and other value-added services like career and family planning or life coaching. Firms will continue to come together to create more capabilities and broaden their offerings. We will see firms that participate in managing the investment portfolio and planning, but also new value-added services, which I see as a hallmark of the future firm.
Hurley: How many big firms, if you had to guess?
Clark: Where there used to be a handful of $1 billion firms, now there are nearly 2,000 firms that are between $1 billion to $5 billion.
Hurley: Isn’t the real risk [to the economics of many wealth managers] that of client capital consumption?
Clark: Yes. But it is really the story of the asset life cycle. We are entering a period where existing clients are starting to spend down their principal. That creates some urgency for advisors to get to know the next generation. The average age of the RIA client is 60. The focus of the advisor needs to be on getting to know the ones who are accumulating wealth, and also likely to be inheriting wealth from the boomer generation.
Hurley: What role will specialization play in reshaping the industry?
Clark: Client needs will intensify and capabilities in many areas will be the biggest differentiator. Active management of the investment portfolio is becoming a smaller piece of the overall offer as wealth management has come into focus and firms further diversify into areas like tax and estate planning. There are so many new opportunities for increasing the breadth of their offering, and advisors will have to decide [whether] they will consider using trusted third parties within their businesses.
Hurley: A lot of your focus is on capturing money from the millennials. The preponderance of new wealth manager firm clients still tend to be individuals in their early 50s.
Clark: It is, and appropriately so. Important to note, though, this isn’t an “either/or.” It’s a “both.” Advisors have had tremendous success in growing with their current client bases and, in some cases, [the clients’] wealth accumulation could continue on for the next 30 years. But we also know the millennial generation is well on their way to being in the ultra-high-net-worth space.
There is a transfer of wealth under way between these two generations which will only augment the wealth accumulation of millennials. So it’s a balance—taking care of current clients and making sure the next generation also has a path to prosperity guided with the same rigor, transparency and relationship as the boomer generation.
Hurley: How big a role are mergers/acquisitions going to play in reshaping the industry?
Clark: Mergers and acquisitions are incredibly important to the health of the industry. There were 85 deals last year, which doesn’t sound like too many when you consider we are talking about a $4 trillion industry. We expect to see 75 to 100 deals each year. One observation I’d make is that we thought we would see smaller firms wanting to join larger firms, but we’ve actually seen large firms coming together.
Hurley: In addition to being a trillion-dollar custodian for advisors, Schwab has a $1.5 trillion retail business. How is it going to get the people to keep building and growing the business over the next decade?
Clark: Financial services is, at its core, a relationship business, and that requires great people. That is why it is imperative we start early with high school and university students to help them see what our industry is about. Schwab is a good example of how a single strategy can reach multiple segments of a business.
Our “Through Clients’ Eyes” strategy truly speaks to both our institutional side and our retail side. We know future leaders will need to be diverse and representative of the future client base—on both the retail and the institutional side of our business, so we’re investing in both.
We run an internship program every summer, and many of those interns find themselves working with our advisor clients following college graduation. In addition, our Executive Leadership Program is very special and helps ready the next generation of leaders for future generations of clients.
Hurley: Are independent firms large enough to make the kind of investments necessary to develop sufficient future talent?
Clark: Independent firms need our help on a national level. Our brand can help extend further the work they do on the recruiting front so firms can keep their focus on the relationship with their clients. We are proud to help with university recruiting, with national advertising and new technologies.
We’re an extension of their firms, and in the development of talent, we can help support their hiring, again with our national internship program and with our Executive Leadership Program, which includes a curriculum we’ve taken from the best schools focused on leadership and entrepreneurship. Advisors go through the yearlong program as a cohort.
Hurley: How many people have graduated from your Executive Leadership Program so far?
Clark: After this year, which is our third, we will have graduated 103 people. We have 40 people selected for our 2017 class. We rely on our advisory board to help us with the selection process.
One of my favorite parts of this program is that it began with a single conversation with a next generation professional simply saying, “I don’t think I have the skills to take over. How do I get them?” From that conversation, we’ve put together a program that really does help our clients, their firms and ultimately the investors of the future.
Hurley: How does this industry create the perception amongst millennials and Gen Xers that this is a fabulous business to be in because of what it does to help people?
Clark: That is part of the challenge that we have. People don’t understand our industry. Working as an independent wealth manager allows one to make a big difference in clients’ lives and still have a good lifestyle. We know the millennial generation wants to “do good” and be in a position where they can marry their personal and professional lives. When you consider that this industry is really all about helping people and then put that together with the independent nature of the business, it really is a perfect combination for a new generation of talent.
We supported a new program with Texas Tech this summer which targeted high school students interested in learning about careers in financial planning and wealth management and gave them real insight into the RIA industry. Programs like that are instrumental in increasing awareness about the options in this industry.
Hurley: How do you think the relationship between advisors and custodians will change?
Clark: The mission is the same—the strategy will continue to evolve. Custodians will do more to ensure advisors can continue to focus on the most important thing—the relationships they have with their clients. Custodians will continue to support advisors by becoming more of an extension of their businesses to provide capabilities and scale that they can incorporate into their businesses.
On the horizon, we will have to learn together how to best make use of the technology changes afoot. And we will work together through the generational transfer and make sure we provide the best for current and future generations and add value to the economics.
Hurley: How do you get paid?
Clark: We get paid on the success of our advisors—as their asset base grows, so does ours.
Hurley: Will Schwab at some point be a paid consultant to wealth management firms?
Clark: We are already a consultant to wealth management firms—we consult on business planning, succession, technology and operational efficiencies. We have not and don’t foresee charging for this—it is just a part of how we serve our clients.