In 2011 Charles Schwab launched a new business model designed to expand the company's national footprint by creating franchises run by independent branch leaders, or IBLs. This Independent Branch Services model enables franchise owners to run their own shop while leveraging the brand, tools, resources and subject matter expertise of Schwab to exponentially grow their business on a scale they likely couldn’t do on their own. A lot of advisors view more assets as more work and more overhead. Schwab says its franchise model aims to help franchise owners grow their assets without the associated burdens that come with growth.
Financial Advisor magazine spoke with Craig Taucher, Managing Director and Head of Independent Branch Services, and Erin Yost, an independent branch leader and Schwab franchise owner in Bozeman, Montana, to learn about the nuts and bolts of this program which currently has 93 franchises around the country.
FA: What was the impetus for creating the Independent Branch Services model?
Taucher: We landed on the franchise model for a few reasons. One, it allows for business ownership that in turn enables our franchisees, or independent branch leaders, to have equity in their business through that franchise model. That gives them the ability to sell it. Second, the franchise model enables us to standardize what we do and how we do it so we can take a lot of the difficulties off of our franchisees’ plates. That includes real estate and other things that are hard for independents to manage when they get to the point of what we call the “ceiling of complexity.”
The third reason is to protect Schwab’s brand. One of the biggest reasons why our franchisees want to do this model is the brand. The brand creates credibility and consistency. The brand attracts clients in markets such as Bozeman and helps drive the growth of those businesses.
FA: What are the responsibilities of the franchise owner?
Yost: My responsibilities include hiring the team whether it’s other financial consultants or non-registered client service specialists. I manage and train them, and set their compensation.
Of course, a big responsibility is meeting with clients in the role of being a financial planner and consultant and knowing where the best fit is for any client—whether that be self-directed or in need a lot of help with planning and investments—so we can get them to the right place.
FA: How are investments handled?
Yost: We’re not portfolio managers. For self-directed investors we point them to Schwab’s tools and platforms that help them do that. If they need more help from an investment standpoint we have Schwab’s different managed platforms with discretionary portfolio management. For non-discretionary portfolio management we use Schwab Wealth Advisory.
Taucher: When financial advisors manage individual portfolios it’s hard to do the other tasks required for comprehensive wealth management for clients. Erin’s job is to know the Schwab platform and the experts to go to and make them available to the client. She doesn’t have to know it all herself. That creates some of the scale we talk about with the model because the franchisees don’t have to do it all themselves. Instead, they use the larger, broader Schwab network to meet a lot of the things that clients need.
FA: Erin, describe how you’ve scaled your business.
Yost: At my prior firm before coming to Schwab I felt I had maxed out the level at which I could work with my clients. I was a CFP doing financial planning, but it was my responsibility as essentially a one-person firm to do everything from A to Z. I was just shy of about $100 million in assets, and most of those were being advised. I couldn’t scale much above that.
Since coming to Schwab and the scale we have here, we’re closing in on $1 billion in assets under management in less than five years. We feel like we can double that with the team we have—there are three financial consultants including myself, and one non-registered client service specialist. The reason we feel we can do that is the scale that comes from not managing the portfolios.
FA: How are franchise owners compensated?
Taucher: It’s a revenue-share model. Most independent broker-dealers or wirehouses have some kind of gross-dealer-concession model, whether that be some combination of commissions, fees, products, etc. And they go to a grid and get a certain percentage of that. We share real revenue with Schwab. How it works is that Erin has the assets in her branch, and those assets generate revenue. Each independent branch generates revenue from various sources whether it’s from cash, fee-based offers, trading and the like. Those are aggregated through the entire independent branch network to create what we call a revenue rate. So Erin takes her assets and multiplies it by that revenue rate, and that’s her revenue to the branch.
The branch’s expenses come out of that in the form of the facilities fee, rent and technology fees. Then Erin gets her paycheck, and from her paycheck she decides how much she wants to pay her staff or spend on marketing. She makes those decisions as a business owner.
One thing that makes this a little unique in this industry in that in most models if your client wants to go to cash then all the revenue disappears from that financial advisor’s practice or from the business. In the case of our branch owners, if the client wants to go to cash or stay in fee-based offers or buy CDs or Treasuries, that’s fine because they get paid on the assets, not on the individual products. The feedback we get from branch owners is that it’s a really great feeling because that enables them to do what’s best for the client without worrying about the revenue.
FA: Have franchises seen any benefit from Schwab’s acquisition of TD Ameritrade?
Yost: It has been a great opportunity for us. We didn’t have a TD Ameritrade branch in Bozeman, but we have a lot of clients with accounts at TD Ameritrade who didn’t before have an opportunity to sit down and work with someone in person. The ability for them to work with a financial planner and to have available all of the resources of Charles Schwab is an add-on for them. Those clients are happy to have somebody to talk to and are excited to know what financial services opportunities are available to them here.
There is an opportunity for us to bring in new assets from those clients where they can consolidate their assets in one place. We’re not just a place for them to trade; we can provide the full breadth and width of financial services. I think we’ve just scratched the surface of having people come in and have meetings and know what all of the opportunities are. They’ve responded very well to all of this. We’re very excited.
FA: How do you get these people into your office?
Yost: Schwab is doing a great job helping us send out emails to them to tell them there’s a local Schwab branch in Bozeman. We contact people via postcards and other techniques of local marketing. For example, we have a billboard on the interstate telling people that Schwab has a branch in Bozeman, and that has worked really well. We run ads in the newspaper, and use digital marketing as well. And some people just walk in the door.
FA: How does Schwab find real estate for its franchise offices?
Taucher: Once we find a finalist to become a franchise owner we go into that market and find real estate agents to scour what’s available there. We look for a specific amount of footprint space that’s between 1,200 and 1,800 square feet. Then we work with our independent branch leader to gauge what they want in terms of number of offices, conference space and other aspects related to how they want to build their office.
Otherwise, Schwab does all of the heavy lifting. We do all of the negotiations with the landlord. Schwab signs the lease with the landlord, and then we do a sublease with the franchise owner. We find general contractors and we get all of the bids. We do all of the technology. After we do all of that the IBL shows up the day the office opens, we hand them the keys, and we show them and the staff how all of the technology works. It’s literally turnkey.
FA: Who’s ideal candidate for the franchise model and how do you find them?
Taucher: We don’t open all that many franchises in a year. We look for the right talent, and then try to marry that with the right market and the right real estate. Those three things are really important.
What we look for in that talent is someone with a client-first mentality who really cares about their client base. Yes, everyone in this business wants to make money, but these advisors really do have a client-first philosophy. We dig into that to find out how they run their business model and how they think about their clients.
The second thing we look for are people with an entrepreneurial mindset because they are going to run their own business as a franchisee. They’re going to have to wear many hats as the financial advisor, the business owner, the H.R. person and other duties.
The last thing is that this needs to be the right model for them. There are many successful advisors who love to manage portfolios or work with one type of client. They have no desire to be retail and work with someone who walks through the door with $10,000. We want someone who understands and embraces our model. A lot of advisors aren’t right for retail and that wide-open front door.
FA: What are Schwab’s expansion plans for the franchise model?
Taucher: We found that we have a Midwest/East Coast skew of our franchises today. Schwab started as a West Coast company, so we have a lot more marketshare there than in the Midwest and the East.
We’re always looking for great people in what we call “white space,” which means we have no Schwab presence. Erin is an example of that in Bozeman, Montana. We had no Schwab branches in Montana; now we have two and soon will have a third one as a TD Ameritrade group comes over to Schwab.
Through our analytics we look at Schwab’s marketshare penetration and the household opportunity and asset opportunity to see if it makes sense to open an office in a particular location that would create a win-win where our independent branch leader can be successful and where Schwab can be successful because we’re helping more clients.