Schwab is a big custodian with plans to step it up in 2010

Brooke’s Note: This is the third custodian to be featured in this Asset Custody Project series. TD Ameritrade and Trade-PMR have already been profiled.

In the world of asset custodians, Schwab Advisor Services is a mammoth with more assets under management than its three largest competitors combined. It has $590 billion.

Fidelity Institutional Wealth Services has about $390 billion, a number muddied somewhat by its habit of mixing assets from trust banks and third party administrators.

TD Ameritrade Institutional has $100 billion and Pershing Advisor Solutions has about $74 billion.

The published total for those three: $564 billion.

The question on the minds of analysts, RIAs and competitors is whether Schwab’s great size will make it more or less successful in the future. Its greater scale positions it well to outspend and outmarket its rivals, and to take on the wirehouses.

But its size could also make it harder to notch significant growth. Its executives could be inclined to play it conservatively, less willing to swing for the fences on innovation and growth.

More competition

Schwab is facing more competition. With profits harder to come by in the rest of financial services, the giants that own asset custodians are looking to those divisions for growth.

TD Bank CEO Ed Clark, speaking at TD Ameritrade Institutional’s national conference two weeks ago, indicated that he sees opportunity in the large market shares of Schwab and Fidelity.

“I’ve told Fred [Tomczyk, CEO of TD Ameritrade], ‘Pedal to the metal,’” he said. “Why don’t you just go ahead and blow Schwab and Fidelity out of the water and take market share?”

Schwab will be plenty aggressive, according to Bernie Clark, now the head of Schwab Advisor Services.

“We will be spending a great deal of money,” he says. “We really haven’t begun to satisfy all the demand that is coming our way” as a result of brokers leaving wirehouses to become RIAs.

Here’s the quick facts on Schwab’s asset custodial services:

Name of custodian: Schwab Advisor Services


Address: 211 Main Street San Francisco, Calif.


Phone number: 877-687-4085

Founded: 1987


Parent company: The Charles Schwab Corporation


Total Assets in custody: $590 billion


Number of RIAs using platform: 6,000


Head of RIA custody business and executive’s starting year with the company: Bernie Clark, 1998


Head of RIA sales and starting year: Jon Beatty, 1997

Date of last major update on tech platform: 2009 


Minimum assets for advisors: $10 million


Fees for RIAs that fall under the minimum: $1,200 quarterly service fee

At its annual IMPACT conference in September, Schwab revealed for the first time that the annual budget for its RIA business is greater than $1 billion.

Schwab appointed Bernie Clark to head up its advisor business about three weeks ago. The move was in some ways a reversal of the decision in November 2008 to cut out the dedicated head of the whole RIA business, Charles Goldman.

When Goldman left for Fidelity, his duties were merely added to those of Jim McCool, Schwab’s executive vice president for institutional services

Dedicated exclusively

Clark says he understands why advisors wanted someone who was dedicated exclusively to overseeing the RIA business.

“There’s a familiarity and a sense of knowing whose accountable,” he says. “Advisors just appreciate us understanding them and this [move] supports that understanding.”

Clark adds: “Absolutely, the buck stops with me,” he says. “That is a difference.”

As an industry leader, Schwab needs to keep its eyes not only on the competition but on Washington D.C. The company seems to be positioning itself on high ground when it comes to the issues that post-crisis regulators might care about.

Certainly, it decision to stop keeping custody of alternative assets was a cautious move. Schwab’s newly revealed practice of calling the clients of RIAs to confirm wire transfers seems to have been done in a similar spirit.

High-flown executive action

Of course, the real test of a custodian is not high-flown executive action but the performance of people on the front lines.

Schwab’s RIA business brought on $41 billion of net new assets for all of 2009; $13 billion of that came with breakaway brokers.

Schwab is the runaway leader in the fight to win the business of the largest RIAs. Its largest client is Fisher Investments. It custodies a major chunk of its $36 billion of assets at Schwab. It has 75 RIA clients with $1 billion or more of assets in its custody.

Schwab has a total of 6,000 RIA clients. TD Ameritrade is the closest second with 4,000 RIAs, but many of them are very small.

One major reason Schwab has these clients, this growth and this giant book of custodial business is because it has – by almost any measure – cracked the service code. It spends much of its massive RIA budget on service.

A recent report by Celeste Mellet Brown of Morgan Stanley in January and another one completed by Citi Investment Research seem to bolster the anecdotal view that Schwab comes out ahead in service – at least when it comes to larger RIAs. This is particularly true of advisors at Schwab with $100 million or more of assets. They generally qualify for a dedicated service contact.

Schwab can’t afford to waver on staying tops in service, according to Sean Cunniff, research director of the brokerage and wealth management service of TowerGroup of Needham, Mass.

“It must commit to remaining so,” he says. “Any slippage in the service offering will hurt their value proposition.”

Fidelity is in the midst of a major restructuring of its own service offering but Schwab is prepared to stave off that challenge, according to spokeswoman, Alison Wertheim in an earlier interview.

“As they attempt to replicate, Schwab will continue to innovate,” she says . “We’re constantly changing and improving our game.”

She adds: “Every three months, we ask advisors who custody with us to rate our client services representatives on a number of metrics. For the third quarter [ended Sept. 30] their overall score — across clients of all sizes — was 92%.”

Attack the hybrid market

But there are other ways that Schwab Advisor Services plans to crank up its growth. For instance, Schwab plans to attack the hybrid market by making big investments in technology in 2010, according to Clark. It’s doing so by investing heavily in the technology that will make it easier for hybrid RIAs to straddle its platform and that of broker-dealers.

“It’s a home run for us and it’s a home run for them,” he says.

That may address what some have seen as a hole in Schwab’s service model, which allowed other custodians and independent broker-dealers to grab the business of hybrid advisors who wanted to leave wirehouses but continue doing transactional business.

“This is a biggie,” Cunniff says. “Schwab is built for true advisors, not hybrids. It does not have the infrastructure to support brokerage like a Pershing or LPL. How will it respond in this area? Will it continue to focus on fee-based advisors or will it attack the hybrid space. This is an interesting choice with a lot of implications.”

Already 30% or about 1,900 of Schwab advisors are dually registered but it requires these hybrids to maintain a second relationship with another broker-dealer. It’s a bit like running two separate businesses, according to some RIAs. Schwab already works with 100 different independent broker-dealers [and 30 of them primarily].

Clark also speaks of forming better connectivity with outsourcing experts like Fortigent LLC. A contract with Fortigent allows an RIA to offer a full array of wealth management services.

Decentralized approach

Another trend for Schwab is to take a more decentralized approach to training RIAs. Schwab announced last week that it held 153 practice management and technology events attended by more than 3,000 advisors in 2009.

This comes in addition to 400 consulting events. “We touched and advised 1,600 advisors” through 400 technology events and other consultations, Clark says.

Schwab has consulted about 930 advisors through practice management-related events through October 2009. These are smaller and more intimate sessions the company conducts around the country, according to the company.

De facto house calls

These kinds of initiatives tend to sail beneath the radar because no single event commands much attention. When the quality and quantity of these de facto house calls is added up, it amounts to more impact on advisors than a national conference.

Two of Schwab’s other notable advancements in 2009 were its Make the Move program and the revamping of the website used by financial advisors. See “Schwab Technology undergoes metamorphosis”: https://www.riabiz.com/a/20104.

“Advisor-facing technology is a dynamic area and Schwab must continue to invest,” Cunniff says. “It does not always have to be the leader in every area, but it can never be a laggard.“

Through Make the Move, Schwab tried to get prospective clients of RIAs off the fence and to move assets from their wirehouse, bank or other custodian. Schwab waived the transfer of asset fees and trading fees associated with these kinds of moves.

Net new assets

By year-end 2009, Schwab RIAs had attracted 107,085 new accounts through Make the Move, amounting to $22 billion of net new assets.