Editor's Note: In early October, Deborah McWhinney, president of Schwab Institutional, was interviewed by Financial Advisor Editor-in-Chief Evan Simonoff about the myriad issues confronting the firm and its relations with advisors during the turbulent bear market of the last 30 months. A 17-year veteran of BancOfAmerica, the Montana-born McWhinney describes herself as a "cowgirl," a term fans of the Washington Redskins, New York Giants and the late Houston Oilers reserve for a pro football team in northern Texas. As the interview makes clear, McWhinney is a fresh face who isn't wedded to old ideas.

Simonoff: Thirty months ago, many providers of custodial services to advisors expanded their own proprietary advice platforms and marketed them aggressively to investors. For many advisors, it's been viewed as a competitive onslaught and they've been frustrated. Do you have any ideas of why some people have singled Schwab out?

McWhinney: While there may be conversation about what we're doing, our [affiliated] advisors continue to just vote by bringing more and more assets. So if you look at this same timeframe, I think we've been able to have our advisors bring about $75 billion in net new assets during that same time. So you look at that, and then you say in the same time we have worked with them to come up with the Schwab Advisor Network, which is a referral program to advisors. While we are moving to help all consumers understand that getting advice-and really getting good, credible, unconflicted advice-is good for them, the solution that we choose, or that the investor would choose, might be what we're offering in [Schwab] retail. It might be what an advisor gives them, or it might be what U.S. Trust gives them.

We believe, and certainly our advisors I believe understand, really what we're doing is [leaving] it up to the investor, and it's really important that the investor have multiple choices of what they would want. Because at one point in their life, they may want low-level help and advice. As their financial needs become more complex-they inherit money, they change jobs, they now have control over a 401(k) plan, things like that-all of a sudden they need more sophisticated help and advice, and they want to delegate that money management to one of our advisors.

Simonoff: Many independent advisors are long accustomed to doing business with people they also compete with. What worries them about Schwab is that they feel that Schwab is constantly changing the rules of engagement. When they see the [Schwab] advice platform out there and all of the promotional material, it appears more threatening. Do you think saying that Schwab is changing the rules of engagement is a fair charge?

McWhinney: I can understand how an advisor could see what we're doing as changing, but if you look at the bigger picture together, all of the Schwab advisors, all of U.S. Trust, all of our retail [network] only represent less than 9% of the affluent assets in the United States. So I look at this and say 91% of the affluent assets are out there with the wirehouses, the banks, and there is a lot of business to go get. So from Schwab's perspective, we really believe that the multiple choices that we have for advice give investors a place to come where they really can find what they need when they need it. In the end, what's most important is what is right for the individual investor.

So when you say that we're changing the rules, the reality is I think that it's been an unprecedented shift in consumer belief and feelings about their own ability to manage money, and Schwab's a very vibrant company. When you've got a vibrant company, you've got to change with what investors want. A lot of times I use the analogy-because I come out of different businesses where during my career I've watched how consumers have changed-of how they use ATMs, point of sale, you know things like that.

To me, one of the best things Schwab can do for the investment advisor business is to teach the average investor that you should pay for good, credible, unconflicted help and advice, which is exactly what the advisors do. So as new investors come to Schwab, we have the opportunity to not just explain what we do in retail, but we've trained all of our employees in retail to understand what we offer in retail, what we offer with our Schwab Advisory Network, and what we offer with U.S. Trust, and then find the right place for that investor.

Simonoff: You said that consumers' belief about their ability to manage their own money has changed significantly. How has it changed?

McWhinney: Oh, overwhelmingly. Are you as good at managing your money as you were in the '90s? It's just a huge shift in the average investor saying, "You know, I'm very good in a bull market. I'm not so good in a bear market, and I need more help." And it's not just help on the investments-there's tax issues and changes in tax laws, there's issues with passing money between generations.

There's all sorts of issues that make investing far more complex, and it's a big piece of what people have in terms of their overall assets. So it is more complex, and people need help. They've been asking us. In fact, we would have been negligent had Schwab not responded to what our investors were telling us. Frankly, I wouldn't say we were fast to respond. I think that we would even say that we were slow to respond, that we should have reacted to the help and advice need of our clients faster than we did.

But overall, we have got such a good strategy within Schwab [because] it's so inclusive, and we've got very strong policies on how our retail branches work with our [affiliated] investment advisors to protect those clients of investment advisors. I think that's a fabulous strategy.

Simonoff: Some of your competitors say privately that Schwab has made only one mistake in dealing with its clients: That a decade ago several officials from Schwab said publicly that there is a line that they would never cross. Since then, the environment has changed dramatically, and the direct investing boom has fizzled out. It looked like it was going to take over the world 10 years ago. If your position was essentially that Schwab simply came out and said that its retail arm's new emphasis on advice represents a necessary response to changing competitive conditions, the whole issue might recede to its proper perspective. Do you think your competitors have a point?

McWhinney: I think we've said that. I think Dave [Pottruck] and Chuck [Schwab] have been very clear in saying that we're responding to investor needs; we need to give help and advice. We are giving it in the branches. But coming back to this 91% of investors who aren't doing business anywhere in the Schwab family, our goal is to help provide all of the solutions for investors, and this company is going to grow and change and respond to what the investors need. The reason we started discount brokerage is that there was a huge need out there. There still is a need, and there still are a lot of our clients who are self-directed clients.

Right now, they're not doing a lot of trading, but they still want to manage their money themselves, and there's a huge group of clients out there who continue to want to do that. But there's also this huge amount who are saying, "I wasn't as smart as I was in the '90s, I need more help," and responding to that is really important, and we will evolve the model. But we won't evolve it just at the retail end.

Schwab Institutional is a huge and really important part of the overall corporation. At our competitors, [advisor business] is still maybe less than 10% of what happens in their company; we're between 30% and 40%, depending on the measure you're using.

Simonoff: People would have estimated 10 years ago that the direct investor market was maybe 40% of the total. Research from Schwab in the last few years shows that it's a lot smaller, maybe 10% to 20% of the total investment market. I can't believe that it's grown in the last two years. Do you have any feel on the size?

McWhinney: It would be so great if we could put people in boxes, and we could say that these people fit here, and these investors fit here. At different times of their lives, in different markets, people will be a self-directed investor; then they'll be validators-they just want to get some advice or a second opinion. Then there are people who want to delegate the responsibility. There are people who want to delegate it fully, and there are people who want to delegate part of their investment portfolio.

So to try to pretend that all investors can be put into these nice little buckets or clusters, I think really underestimates the intelligence of the investor. We would be very well served by understanding that they're looking for multiple things. A husband and wife may manage their money very differently. Same household, but one may be "I want to do it myself" and the other one would be "I want to delegate it."

Trying to put people in these buckets, I think, is really counterproductive. What we need to do is give people a better understanding of the solutions available to them so that they understand the difference between a wirehouse solution and a solution that is unconflicted.

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