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Actually, Schwab Just May be “Killing it” With Millennials

Posted on Friday, October 18th, 2019 by Chris Markoch

Speaking at Fortune’s “Brainstorm Finance” conference in September, Charles Schwab CEO Walt Bettinger disputed the notion that his firm would have a hard time appealing to millennials.

On the contrary, Bettinger pointed out that approximately 53% of Schwab’s new-to-firm accounts were millennials. He went on to mention that the average retail household of these millennials has approximately $350,000 in assets. And when it comes to their investing needs, Bettinger says the firm is discovering that there’s really not much difference between this generation and the generations that came before.

Exchange-traded funds are the investment of choice for millennials

In its 2018 Investor study, Charles Schwab cited 96% of millennials view ETFs as a necessary part of their portfolio.

“It’s a trend we’ve seen with millennials, but the surprise is how the numbers continue to trend upward to the point that when millennials think to invest, they think ETFs, which are becoming synonymous for that generation,” said Kari Droller, Schwab vice president of third-party platforms for mutual funds and ETFs.

An exchange-traded fund is a pooled investment vehicle that has some of the attributes of owning individual stocks and some attributes of owning a mutual fund or an index fund. One of the major attractions of owning a mutual fund or index fund is the diversification it provides. Because of the range of options that are available, investors get diversity not only between asset classes (stocks, bonds, commodities, etc.), but within niche asset classes (small-cap, mid-cap, emerging markets, technology, oil, etc.). Diversity is essential to managing risk because when one asset class is moving down, another may be moving up.

A generation that is awash in student debt

However, where this generation may be different is in the area of student debt. It’s not a secret anymore that millennials are postponing buying a new house, getting married and having children because of their debt burden. However, they are also putting off their larger financial goals such as saving for retirement and general wealth management.

According to a recent study conducted by Northwestern Mutual, millennials carry an average of $36,000 in debt and spend about 34% of their monthly income toward paying it down. As you can imagine that leaves very little left for investing. This was confirmed by 82% of the survey respondents who said their financial planning needed to be improved.

Schwab will be allowing the purchase of fractional shares to go along with eliminating commissions

To help alleviate this plight, Schwab has just announced a plan that will allow investors to buy fractional shares. Investing apps such as Stockpile and Stash have been permitting customers to trade fractional shares. However, they charge for trades and account maintenance. It is not immediately clear if these companies would now be changing their business model to match Schwab.

That’s because of another recent initiative that does not specifically target millennials but certainly has them in mind. On October 1, the firm announced they would be eliminating commissions on online trading for U.S. stocks, ETFs and options trades beginning on October 7. Shares of Schwab dropped nearly 10% on the news.

In a press release, founder and Chairman Charles Schwab said that the firm’s “passion has been to make investing easier and more affordable for everyone.”  However, at the “Brainstorm Finance” conference just a couple of weeks earlier, Bettinger had expressed skepticism that companies such as Robinhood and Betterment would be able to force Schwab to lower its prices. Let’s not kid ourselves: Everybody’s paying, nothing is free…it’s just a matter of how you pay,” said Bettinger. “If you’re an account holder at a firm that is charging a zero commission, you’re just paying in other ways—whether it’s in yields on cash, whether it’s in quality of execution.”

Schwab says they hope to recover the lost revenue from fees with new assets. History suggests that may be the case. When the company lowered their commissions in February 2017, assets under management swelled from $2.92 trillion to $3.72 trillion.

Schwab’s Chief Financial Officer Peter Crawford said the move to eliminate fees removes “the last remaining barriers to make investing accessible to everyone.”

Making use of technology

However, beyond making it more affordable for millennials to invest, Schwab has been on the forefront of other leading-edge financial technology (fintech) initiatives that target this demographic. Schwab was a pioneer in the use of artificial intelligence to steer customer service and, in some cases, trading advice. Although the company’s Intelligent Portfolios Robo-advisor service accounts for only 1% of assets, it is growing steadily.

This is another area where Schwab is again facing competition from startups like Robinhood and Wealthfront. However, Bettinger acknowledged that these companies can provide a valuable service. The consumer probably wins at the end,” he said. “Models like a Wealthfront or a Betterment in some cases do better for consumers than many consumers could get from an investment advisory model in years past.”

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