Charles Schwab Focuses On Younger Investors: Risky Marketing Plan?

Would you consider it worthwhile for major brokerage firms to focus marketing dollars and valuable time on investors in their 20’s and 30’s? Perhaps more squarely phrased: Does this demographic have any money to invest? If you simply view the past behavior of major financial firms, you’ll find them targeting mostly those aged 50+ in terms of product construction, speaking engagements, and the direction of marketing dollars. An interesting example lies in the prime advertising spaces purchased by financial firms showcasing aging professionals relaxing by the beach after a seasoned advisor helps them quantify and realize their retirement dreams.

The implication here is that retirement is a hot topic among aging professionals who seemingly have big bucks. Besides the fact that they are passing what we call “accumulation phase” and quickly entering the “distribution and gifting phase,” many are also the beneficiaries of inheritances left by those passing away in their 80’s. So, why are some financial firms shifting their focus over to a younger and less profitable generation?

If you ask me, it’s not really who has the money which is changing. It’s the marketing and profitability strategies of the big financial firms which may be changing. Keep in mind that advertising doesn’t strictly reflect the needs of the market--the advertisers influence and spread messages to the market as well. Some call it manipulation, others find it enlightening. Here is, in a nutshell, the logic which probably gets bandied around at brokerage firm management meetings: If a bank can garner the trust of a young professional at age 30 through accumulation products such as checking, saving, and money market instruments, they may eventually have an easy in to offer more profitable brokerage-oriented investments such as stocks, bonds, funds, and a list of structured products which seems to grow by the day.

At an even deeper level, if brokerage firm X is responsible for informing an otherwise ignorant generation about the risks they face, they may be rewarded with some business. According to Jonathan Craig, who heads the “Generation X” initiative at Charles Schwab (SCHW), “It’s (20’s and 30’s) a generation that in many ways is facing challenges that their parents didn’t face. They can’t count on defined-benefit plans. They’ve entirely written off Social Security. Many of them are purchasing a first home. They face skyrocketing education costs for their kids. And, of course, like everybody these days, there are the ever-rising health care costs.”

Mr. Craig makes the important point that planning issues which exist today are in many ways different from those which existed 10, 20, or 50 years ago. But how does this equate to profitability for firms which primarily earn money through commissions on products and fees for investment advice? Some of the actions Schwab is taking include lowering account minimums, and removing minimum-balance charges and account service fees. They are also launching products such as high-yield checking accounts which will ultimately integrate with other brokerage products. This helps Schwab keep all the business in-house, rather than sharing clients with other financial firms. Somewhere in that logic and exposing the changing retirement landscape, Schwab probably hopes to pick up an IRA here and there, along with setting up some long-term college savings business. Overall, it seems like a branding issue.

Still, I remain convinced that Schwab is implementing a risky, but perhaps strategic marketing plan. I doubt they expect to instantly attract the business of dot-com millionaires and young guys who get bonuses at work. I think the idea is to keep the Schwab name on your subconscious from an earlier age and remember them in the infinite choices for financial planning and money management which once crosses in their lifetime. Whether or not they are successful in gathering assets, I hope at the very least they spread the message about saving money and being responsible during younger years.