Brooke’s note: Schwab Private Client is a big, successful RIA. See: Starting 2012 with a bang, Schwab will place its private client business under a new RIA. It has gotten that way presumably by using its brand and by providing a good service. But any big firm — even one that operates as an RIA like Schwab — has to deal with the challenges that have made financial advice one of the few businesses that is often more successfully administered as a mom and pop rather than as a big company. This column, artfully written by a former newspaper editor, is the tale of a perfect little storm that demonstrates both the strengths and vulnerabilities of the personnel aspect of Schwab’s RIA — with a few thoughts about Windhaven, a marquee financial product of Schwab’s, included for good measure.

Brooke’s added note: I told Schwab a bit about Karl’s concerns and have included its response at the end of the piece.

When I decided to stop managing my own portfolio of mutual funds and stocks, I was very excited to hook up with Charles Schwab. Our new broker was thoughtful, insightful and plainspoken. My wife—who had never taken an active interest in our investments—liked him as much as I did. And he could talk to both of us—me with my decided ideas about investing and her with her intelligent questions that would lead her to a balanced index fund—without pandering to either of us. See: Joe Duran tries out novel financial planning strategy on himself and his wife.

Things only got better when we were introduced to our portfolio manager via a conference call. He was based in another city, and was as bright and considerate as our broker. In the era following the Bernie Madoff scandal, it was comforting to find an institution that based its management of our accounts in two cities. Best of all, both these paragons were younger than our children and said they had no intention of moving to other fields. It felt as if we were fixed for life. See: Next-gen advisor breaks the standard RIA mold to grow with her young clientele — many with $100,000 or less of assets.

Dual defections

For nearly two years, things hummed along beautifully. I would drop by the broker’s office for a quarterly conference call. I was persuaded to reduce my unreasonably large investment in Berkshire Hathaway. We frequently communicated by phone and e-mail.

And then trouble visited our little paradise. The portfolio manager called with a heads-up that our broker had left Schwab. It was amicable, but he was not allowed to contact us and we would not be told where he had gone, although he was still in the business. Within a few weeks came another blow: Our prized portfolio manager had also left Schwab. The branch manager called and offered his help in arranging for a new broker. He was very helpful and generous in listening to my concerns. At one point I told him I would be happy to have him as my new broker, but he had his hands full. I soon learned that I could track my broker’s whereabouts at finra.org, but months went by without his name showing up in those files. See: Ben Brigeman is exiting Schwab and his position atop its retail business — perhaps portending bigger changes.

Separation anxiety

Gradually, I began to realize I had a few problems with Schwab. I’ve tried to boil them down into three points:

1. Given the company’s slogan, “Talk to Chuck,” Schwab should revisit how it treats clients after their personal “Chuck” has moved to another company. See: What Chuck Schwab’s talk showed about his complex relationship with RIAs.

In the weeks following the double departure, I began feeling more like a commodity than a valued client. Everyone tried to be considerate, but the overwhelming effect of this double amputation—they’re gone and we can give you no information—led me to question whether I should stay. I was assigned to a new broker. In retrospect, I wish I had insisted on being given the names of three or four brokers to interview. I had chosen to come to this company.

Now I had no choice, except to complain if I found a bad fit. Even supposing I found worthy successors, what would happen when they left? I know that absolute and instantaneous severing may be the industry norm, and that my appeal for reform may seem laughably naïve. But think back to the day when sales commissions fueled the financial service industry, and the idea of charging flat fees based on the size of portfolios must have seemed radically unrealistic. Schwab has an opportunity to put its values into action by radically changing its separation policies.

Information gap

2. When Schwab is selling a proprietary investment vehicle, such as the Windhaven ETF portfolios, it should provide its clients with independent analysis of that vehicle.

For some months before my advisors left, I had been talking about putting a portion of my money in one of the Windhaven portfolios. These are tactical funds of ETFs that choose from among 40 investment vehicles as they try to anticipate the direction of the economy. I wasn’t shown any outside analysis, but my portfolio manager discussed it in comparison with another strategy using a notably successful bond fund manager. I went with Windhaven, and was thinking about doubling my stake, but I found a frustrating lack of information in the wake of the great departure. See: Windhaven misses its 12-month benchmarks again but still hits asset-gathering mark.

My new advisors seemed to know little about Windhaven. When a Windhaven executive visited my branch office, I asked where I could find independent analysis of the portfolio and its competitors. “We really don’t have any competitors,” he said. See: Windhaven’s success draws attention to emerging ETF managers. In a sector of the market that is seething with competition, this response seemed untenable. There’s an information gap. I think Schwab should contract with an independent analyst to provide a quarterly report on Windhaven, covering its performance, its management (is there a succession plan?) and, yes, its competitors. Make it a five-year contract, ensuring the analyst’s impartiality.

Soon after I was reunited with my broker, he sent me a Morningstar report on tactical funds (dated Feb. 13, 2012), which asserted that as a group these funds have had difficulty meeting their objectives. I suspect that Schwab may very well respond that Windhaven isn’t one of these. Fine—then how about an independent evaluation of what it is?

Buried disclosure

3. When Schwab alters the role of brokers and portfolio managers, it should tell clients up front, instead of leaving them to figure it out on their own.

This may sound fuzzy, but it might be the most important of my concerns. Once I was assigned to my new broker and portfolio manager, they seemed less open-minded and forthright than their predecessors. I felt they were trying to rein me in, and that they seemed to be operating in a world far more circumscribed than the one I had been accustomed to.

Much later, when I raised this issue with my original broker, he confirmed that there had been a change. He had been forbidden to provide portfolio advice to his private clients. I chose him for his insight and capacity to think. Why should the company withdraw that from me, and without notice? When I showed a draft of this piece to my broker, he told me that Schwab sent notification in the fall of 2011, and required that the broker, or “financial consultant” or the portfolio consultant verify that clients receive notification.

He said that buried deep in the document was the disclosure that portfolio consultants would provide all investment advice, leaving financial consultants to manage other aspects of the relationship. I had been notified. So what’s my complaint? See: Ex-RIA chief: 'How I learned more in a month as a client than in 20 years as CEO’.

I vaguely remember receiving that disclosure statement, and failing in my effort to read it. I resolved to ask my guys at our next quarterly meeting if there was anything significant in it. I forgot, and I forgive myself. Who in this world can keep up with all the blithering, fine print “disclosure” statements our financial institutions send us? If there’s a major change, as this was, please send us a short, specific letter.

Ironically, the approach used by my broker’s new organization might seem more circumscribed than Schwab’s. Its line of attack is strategic, not tactical, and utilizes low-cost index-like strategies in the majority of its portfolios. But you learn this up front; you don’t have to deduce it. I recently sold the last of my Berkshire—not under pressure but because it looks as if the company will operate much differently in the post-Buffett era. I still have my Costco holding. I have a smaller position in Ford, based on my admiration for Alan Mulally. Perhaps I’ll sell when he retires later this year. But if Trader Joe’s ever goes public, watch out! I’ll be first in the buyers’ line.

Still a fan

In most respects, Schwab is an excellent company. Its website is easy to read, and full of useful information. After the double departure, Schwab waived my management fee for two quarters. And, when I started to initiate a rollover to follow my first broker, the portfolio manager advised me to wait a few days—otherwise I would be charged the full service fee that had been waived. They were still looking out for me. Schwab has punctiliously responded to surveys I filled out about the company.

I contacted RIABiz because it was one of the few sites on the Web that had any reporting on Windhaven. I e-mailed Brooke Southall to ask if he would consider developing an article addressing my concerns. He replied by suggesting that I, having been a journalist — even a business editor — in a time long, long ago, write about it myself.

I agreed. Then I dithered. Why did I suppose this would have any effect? Then, as the RIABiz line began to buzz with stories about Schwab gearing up to be becoming the leading player in catering to registered investment advisors, I realized this is a good time to put these ideas forth.

This is their best chance to be heard at Schwab’s front office. Just imagine what a boon it would be to Schwab if it could spare its next generation of clients from such disillusions as I have described here.

Karl Thunemann and his wife live in Redmond, Wash. Now retired, he spent 26 years as a journalist, working for weekly and daily newspapers in suburban Seattle, including six years as business editor. He looks forward to a list of suggestions for Schwab from a professional — one of those “Ten Top Suggestions” posts that make RIABiz.com so readable.

As promised, a response from Alison Wertheim, vice president of public relations at Charles Schwab & Co. Inc.: “We try to communicate openly and quickly, and while we can’t satisfy every request, we listen intently and do our best to address issues raised by our clients. This was certainly the case with Mr. Thunemann. We certainly try to match personalities and styles when making client assignments, and but unfortunately, we aren’t always successful.”