This month, MFI interviews Charles Schwab Investment Management CEO Marie Chandoha, who will be stepping down at the end of March 2019. We wanted to ask Chandoha to look back at her tenure at Schwab, which included the extended post-crisis stretch of zero yields, and to get some parting words of wisdom. She tells us about her "crash course" in cash, the struggle against more onerous money fund reforms and a number of other issues. Our discussion follows. (Note: The following is reprinted from the February issue of Money Fund Intelligence, which was published on Feb. 7. Contact us at info@cranedata.com to request the full issue.)
MFI: Talk about your decision to retire. Chandoha: I've been in the business for 35 years and have had a really great run. I've loved being in the industry, but now it's time for my next chapter.... I'm going to spend a little more time with my family and do some traveling. But I also still love the industry. I just want to interface with it in a different way [going forward by] serving on boards.
MFI: Give us a little history on CSIM. Chandoha: CSIM has been around for almost 30 years. We actually got started with our money funds, and our very first hire was ... Linda Klingman who [now] heads up our money fund portfolio management. So, it's been a very important business for us from the very beginning.... When I think about our money fund team, we have a diverse group.... For example, Lynn Paschen heads up our Government money fund area, [so there is] definitely a good contingent of women and other diverse individuals.
MFI: Money funds are still very important to CSIM, right? Chandoha: Yes, they are the biggest asset class that that we manage. We're the 7th-largest provider in the country and manage $153 billion in money funds. Prime funds are the predominant fund category with about $90 billion in AUM.... One thing I realized in coming to Schwab is just how important money funds and cash products are for retail investors. It's such a core part of people's portfolios, so, it is a very critical part of what we do and how we serve our clients.
My background is in fixed income. I was a portfolio manager and ... when I was at Barclays Global Investors, I headed up the global fixed-income business…. But I did not ever manage or oversee money funds until I came to Schwab. Having a fixed-income background was incredibly valuable. One thing I realized very quickly is that people think money funds are relatively straightforward, 'It's just cash.' But there is a complexity to money funds that many people do not realize. Certainly, coming in right after the Financial Crisis, Money Fund Reform was a very big part of my life at Schwab. So, not only was it a crash course in overseeing money funds but also in the [regulatory] reform process.
Overall we have 11 portfolio managers that support our money fund business and 15 credit analysts. They oversee our whole process. When I came on board, most of our operations were based in San Francisco. We felt it was important from a business-continuity perspective, and also a recruiting perspective, to have more than one location. So, we began building out our operations in Denver. The team is now split between those two locations, and that works well.
MFI: What's your proudest accomplishment? Chandoha: I spent a lot of time on Money Fund Reform and testified in front of the U.S. House of Representative's Committee on Financial Services.... I think as we went through reform and reviewed many different proposals, there were ... existential moments for the money fund business. You realize that retail investors just don’t have that much choice when it comes to cash investing. They have bank-type products and can invest in short duration funds. But money funds are a really important choice for retail investors. The average retail investor is not going to have access to separately-managed accounts; if you're ultra-high net worth you might. Being able to preserve money funds for retail investors was a really important mission. And I do feel like it is one of my proudest moments to have come through that money fund reform process [with] that investment choice for investors still available.
Even though it was a dark and challenging time for the industry, I do think the industry has come out of that stronger and safer than ever. And that's really important. Some of the rules around what we can invest in make money funds safer and help ensure that a fund does not get into trouble in the future. Because if any one fund has a problem, then it's a big issue for the rest of the industry.
In terms of the challenges, even though most of our clients are retail investors or registered investment advisers, you wouldn't expect that we'd have a lot of institutional investors. But the way the SEC defined 'institutional,' we actually did. So segregating clients, identifying who was deemed institutional, and making sure they were in the right products, was a very big process for us. I would also say because we had over 3 million shareholders at that time, educating everyone about money fund reform was a big undertaking. We had to explain to investors why things were changing and why they were being put in new funds. Educating clients ... and ensuring they were comfortable with where they ended up took a significant amount of time. Many did not understand why this was happening.
MFI: Were you pleased that retail funds were spared from some rule changes? Chandoha: Preserving a product that is an important choice for retail investors was crucial. And it did seem to us that a lot of the things that were being discussed were geared more to institutional investors.... We didn't see retail investors exiting funds during the crisis in the way that institutional investors were.... That's why we actually felt it was important to segregate retail investors from institutional investors.
MFI: What are your successor's priorities? Chandoha: When I announced my retirement last year, I shared that Jonathan de St. Paer was named President and that he would succeed me as CEO when I stepped down at the end of March. We've been working together for the last eight years that I've been here. He is incredibly well regarded by the team. So, it's a very smooth transition. He will continue on with our strategy and approach that we've had for the last eight years.
MFI: What about the biggest challenges? Chandoha: The asset management industry has been immune from a lot of big shifts. But I do feel like we're at an inflection point, and I see major things happening. First, product preferences are changing. The adoption of index-based products and ETFs has been growing tremendously. The adoption of multi-asset strategies is growing as well.... So, client preferences are shifting dramatically, which is creating a situation where there are winners and losers in the industry, depending on their product offerings. I think the second thing that's happening is that there's margin pressure -- there is fee pressure while the cost of doing business is going up. Post crisis, regulatory costs increased in addition to other expenses such as managing cybersecurity, etc. So, it's creating an environment where asset managers have to operate in a much more efficient way to ensure that they have reasonable margins going forward.
The final thing that I see -- from all clients whether they're retail clients, RIAs or institutional clients -- is that they are overwhelmed with information and choice. There are a lot of products out there and it's a lot to keep track of. We have always been focused on trying to keep things straightforward and offering what's really relevant for clients.... So, that's a real challenge.... One of the things that I say is: Simplicity is the new innovation in asset management.
MFI: What's the relationship between CSIM, the brokerage and bank? Chandoha: Schwab has three major lines of businesses. Brokerage is obviously one of the biggest, but we also have a very substantial bank, and we have our asset management business. All of these have been growing ... and as we've been growing, there was cash investing happening in each of these different areas. The firm more broadly wanted to rationalize how clients were using cash while ensuring a strong financial foundation for the whole company. So, it was really about being clearer on different uses of cash. So, for clients who need cash in their brokerage accounts for sweep purposes, those types of assets have and are being moved from the 'sweep' money funds to the bank. Bank sweep is very convenient, very flexible, and has FDIC insurance. But although those yields are competitive relative to other banks, they are generally lower than what you'd see with a money fund. For clients looking for yield, maybe they have cash they can put aside, we offer 'purchase' money funds. There are also other options that are available at Schwab through the brokerage side: fixed-income securities, separately-managed accounts, etc. So, we're really trying to segregate different uses of cash and the products associated with them.
MFI: Talk about the fee waiver era. Chandoha: Certainly that was a difficult time when I look back. We waived $4.1 billion in fees from 2009 through 2017. So, it was quite substantial. But as I said, cash is a really critical part of retail investors' or RIA's investment approach. While that kind of revenue give-up was significant, the asset class was always viewed as critical for our clients. So, it was just a period we needed to go through. I'm glad we're out of it. Soon after we stopped waiving fees, we reduced the OERs [expense ratios] on our money funds to make sure that they were competitive.
MFI: Any final comments about MMFs? Chandoha: The industry went through such a tough time after the Financial Crisis. What I see from my vantage point is that clients really value the money fund product. We hear it every day. They appreciate the fact that they're getting competitive yields, especially retirees who are really excited to finally see some yield.... They appreciate the fact that they're run conservatively and that there's transparency into the underlying investments. I feel the future is bright for the money fund industry. MFI: Thanks Marie, and best of luck!
