Schwab Eyes Financial Advice as Cash Sweeps Dry Up

Financial advice may be back in style at Charles Schwab.

For decades, the largest US publicly held brokerage has relied on cash-sweep programs that shuffle clients’ cash into higher-yielding accounts as a source of revenue while it pioneered offering free trades to customers. Fast forward to today, and historically high interest rates have clients rethinking those arrangements — a rash of high-profile lawsuits over the practice have taken the industry by storm. 

Executives now want to beat the company’s decades-old dependence on banking revenue cold turkey, and that means a renewed focus on more predictable fee-based revenue streams from, you guessed it, financial advice. “The fact that Schwab is renewing their focus on financial advice is a positive for consumers,” said Kevin R. Miller, CEO at E-Valuator Risk Managed Strategy Funds. “It’s not a negative for most independent financial advisors and wealth managers, either.” 

What’s the Plan, Stan?

Remember that whole “Schwabitrade” tie-up a few years back? CEO Walt Bettinger said in a second-quarter earnings call that, now, the onboarded TD Ameritrade customers brought over in the blockbuster acquisition are starting to bear fruit. Schwab acquired roughly $2 trillion of Ameritrade’s client assets, according to Bettinger. “Ameritrade is clearly an important part of our business,” he said.

Schwab’s wealth management division, known as Advice Solutions, brought in about $510 million in the second quarter, accounting for 11% of total revenue, according to a Wall Street Journal report, and executives hope to juice those numbers next year. While the exact plan is unclear, a renewed focus on wealth revenues will put it on a collision course with banking giants like Wells Fargo and Morgan Stanley, who are facing cash-sweep dramas of their own. 

Sweep Problems. Schwab was one of the first major brokerages to get hit with a regulatory penalty over cash sweeps in 2022. It was one of the largest cases of its kind; Schwab was fined $187 million by the SEC for failing to disclose the program to clients. One study found customer losses could have risen to as much as $500 million over a six-year period. Bad brokerages, bad. 

But will other industry titans copy Schwab’s shift from cash-sweep revenue to a more wealth management-focused game plan? “An industry leader like Schwab will always have followers,” Miller told The Daily Upside.