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Schwab offers fee rebate to unsatisfied advisory clients

Jed Horowitz
Monday, 9 Dec 2013 | 5:48 PM ET

NEW YORK, Dec 9 (Reuters) - Charles Schwab Corp on Monday said it will rebate quarterly fees paid by clients in its fee-based investment advisory programs "if, for any reason, they are not happy" with the service they receive.

The move is the latest attempt by Schwab to convert its image from primarily a cheap place for do-it-yourself investors to trade stocks, bonds and mutual funds to a full-service firm that offers advice to up-and-coming and experienced investors.

Firm founder Charles Schwab told Reuters he hoped the move would be disruptive to the financial advisory industry.

Like its large competitors such as Bank of America's Merrill Lynch unit and Morgan Stanley, Schwab likes the stability of fees attached to client accounts because they are paid irrespective of whether investors trade. Only 18 percent of Schwab's revenue comes from trading commissions, while about $150 billion of the $900 billion of client assets it holds are in fee-based accounts, firm executives said in an interview with Reuters.

Schwab said the rebate policy will apply to the last quarterly fee paid by any client who feels his or her needs were not met by their Schwab adviser.

Schwab charges less than 1 percent of assets annually for its fee-based programs, which can start with an investments of as little as $25,000 for a prepackaged portfolio of mutual funds or exchange-traded funds. Independent financial advisers and large brokerage firms typically charge between 1 percent and 2.5 percent of a client's assets in fee-based accounts with much larger minimums, with rates falling as total assets rise.

"Accountability means delivering advice in a way that puts clients' needs first, encouraging clients to engage with us in the investing process, openly discussing the reason for investment recommendations, being clear about costs and fees, continually asking for feedback and working to make things right when needed," Chairman Charles Schwab said.

The policy, which will be advertised in the national media, is a shot across the bow of full-service competitors, said Alois Pirker, research director and head of the wealth management practice at Aite Group. Pirker said he had not heard of any other company offering this kind of guarantee.

"Schwab is always good for new ideas, and it should resonate with consumers who will see this as a strong proposition on top of managed account fees that are already lower than most full-service firms," Pirker said. But he noted that it could be problematic for Schwab to measure when dissatisfaction really occurs.

Schwab, which during the dot-com boom ran television ads depicting its full-service competitors as fast-talking hucksters of over-valued stocks, said the policy will cement its reputation in a post-2008 world as a trusted, reliable firm for investors who are highly suspicious of financial service giants.

It also does not expect the program to be costly.

"We haven't set aside a large number," John Clendening, co-head of Schwab's retail brokerage, said when asked about the budget for the program.

Bing Waldert, a research director at Cerulli Associates, said he cannot imagine that many investors will bother filling out forms to get back a small fee, though he described the offer as unusual. "I can't decide if they're opening a can of worms or it's pure hype," he said. "It's probably a non-event."

The "accountability guarantee," according to Clendening, should open conversations with dissatisfied clients so that Schwab can provide more education or better service.

"It's a very expensive thing to have an unhappy customer," Charles Schwab said.

(Editing by Dan Grebler)

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