Schwab: Courting The "Mass Affluent"

It needs to win over a bigger share of those with $100,000 to $1 million to invest

If there's a holy grail for financial-services firms, it's the vast middle market of people who have money to invest but not enough to interest a private banker. This market is huge, rich, and elusive, with $6 trillion in assets held by 22 million households that switch firms every 5 or 10 years. Now, Charles Schwab Corp. (SCH ) is counting on this market for a much-needed boost.

Chief Executive David S. Pottruck aims to sell those customers advice, and if they still have questions, even more advice. He's backing up the effort by spending an extra $19 million on marketing in the first quarter. Says Pottruck: "We think this market is less well-served. The question becomes: 'How do we do more for these clients?"'

Pottruck hopes his new push, dubbed Schwab Advised Investing, will get the San Francisco-based firm back on track. The bear market hammered the company, forcing 10,000 layoffs, or 37% of its peak workforce. And despite a bull market that began last Mar. 12, last year Schwab's customer accounts fell to 7.5 million from 8 million, and its revenue was flat, at just over $4 billion. But Schwab's new services will help it fill a gaping hole in what it offers mid-market investors and may dissuade customers from defecting while attracting new ones.

Selling more advice is a key to reducing Schwab's reliance on commissions, which accounted for nearly half of revenue in the bubble years but dropped to around 30% during the bear market (the rest comes from asset-management and administration fees and interest revenue). Also, it's part of Pottruck's overall strategy of pushing Schwab into areas far beyond discount trading, eventually making it a full-service brokerage firm as the company broadens both the kinds of investors it targets and the services it sells to them.

ONE ON ONE. Schwab is aiming its campaign at the so-called "mass-affluent" -- people with $100,000 to $1 million in assets to invest. Schwab is already quite familiar with these folks -- its average account is $200,000 -- and it will now offer them two new levels of advice services. The basic "Foundational" package costs $500 a year and includes an annual session with an adviser either in person or on the phone to discuss a client's portfolio, and telephone access throughout the year to a group of advisers. The higher-end "Signature" service adds a second consultation each year and offers phone access to a single adviser. That costs 0.35% of assets invested, or at least $1,000 a year.

But Pottruck faces an enormous obstacle: Schwab lags far behind the competition in the race to cater to the mid-market. One out of every five households in this market has a Fidelity Investments account, according to a survey of 3,800 homes by SRI Consulting Business Intelligence in mid-2002. Vanguard Group Inc. comes in second at nearly 12%, Merrill Lynch & Co., (MER ) is third at around 10%, and Schwab is a distant ninth at 6.9%, tied with Salomon Smith Barney. In fact, Schwab lost ground from two years earlier, when 7.3% of households had a Schwab account.

What's more, Schwab is late to the advice game. Fidelity launched similar services in the 1990s that are free for customers who maintain a minimum $100,000 account. And Merrill began offering its Merrill Unlimited Advantage five years ago. That service charges a minimum of $1,500 a year, or 1.5% of assets. That's more than Schwab's Signature service, but customers get more services and 400 free trades a year. Erick F. Maronak of Victory Capital believes that compared with Schwab, "Merrill's got the upper hand. It's got more experience at giving financial advice to this market."

Still, Pottruck has some cards to play. Schwab doesn't do investment banking, so it's free of many of the conflicts that have plagued Merrill and other big Wall Street firms -- as Schwab trumpets in its ads. And with its 379 branches, Schwab can offer personal meetings to more customers than either Vanguard, which has just 3 branches, or Fidelity, with 92. Pottruck also argues that he's offering customers better value and more flexibility to choose what services they want. To top it off, Pottruck doesn't think his competitors' offerings have much of a profile. "When we ask investors which firm comes to mind for investors between $100,000 and $1 million, no one really did," he says. "Not even us. We want to be that firm that comes to mind."

Schwab isn't exactly a novice at the advice business, either. Since 2000 it has offered customers one-time meetings with a Schwab adviser, for fees ranging from $250 to more than $2000, to discuss stock holdings, retirement plans, or other long-term financial matters. Pottruck says customers began telling the advisers that they wanted periodic sessions. That's when the lightbulb went on for him. "We began to think about how we could do this and how we would price it," he says.

FATTER ACCOUNTS. Schwab might be able to lure customers away from the big firms because brand loyalty isn't all that strong. SRI estimates that as many as 20% of households are up for grabs each year because people often switch brokerage firms after getting a new job or moving to a new town. The market "is as much their territory as anyone else's," says Daniel D. Perrin, an analyst at Harris Bretall Sullivan & Smith, which owns Schwab shares.

Already, Schwab's fortunes are starting to turn. Pottruck notes that the size of a typical new account has reached $130,000, the highest ever. Customer trades averaged 215,100 a day in January, up 70% from a year earlier. And the total assets Schwab holds topped $992 billion in January, an increase of 31% in a year. It's too early for a read on whether Schwab Advised Investing is catching on, but if the mass affluent begin to show up, Schwab finally has some advice for them.

By Louise Lee in San Mateo, Calif., with Emily Thornton in New York and Faith Arner in Boston

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