Was Schwab's letter of apology to RIAs good enough?

Brooke’s Note: The Charles Schwab Corp. is pressing hard to gain ground on Fidelity Investments in the 401(k) business and it’s trying to make its 2010 purchase of Windward Investments pay off. It’s also working to stay number one in the RIA custody business. Schwab is typically as effective as dense wave division multiplexing in keeping these channels close yet separate. But this incident showed how one letter can scramble the signals.

Executives at Charles Schwab had to eat some crow this week, apologizing to advisors after the company sent out a letter to advisors’ clients promoting Schwab’s retirement retail services.

In an interview Thursday, Bernie Clark, head of the Schwab’s RIA business said the company’s letter encouraging plan sponsors to consider Schwab’s products such as Windhaven Investment Management and Schwab’s Managed Portfolios should not have been sent to advisor’s clients. See: Schwab’s purchase of Windhaven made its asset growth soar — and RIA assets may be the afterburners

The letter should have been sent only to retail clients. See: Schwab’s rapid response to letter snafu seems to be smoothing ruffled feathers.

As a result, Clark fielded numerous calls and e-mails from frustrated advisors and decided to send out his own e-mail just before midnight EST on Wednesday apologizing to advisors:

A Message from Bernie Clark
August 17, 2011

Retirement Plan Sponsor Mailing

I’m emailing you today to apologize for the recent mailing that was sent to retirement plan sponsor(s) with whom you have a client relationship. I would like to assure you that this mailing only went to the plan sponsors of Company Retirement Accounts (CRA), Qualified Retirement Plans (QRP), and SIMPLE IRAs.

I have heard from many of you about this mailing which noted the option to include Schwab Managed Portfolios Mutual Funds (SMP-MF) and Windhaven Portfolios as new investment products for these plans. Schwab, which has a contractual agreement with the sponsor, notified each plan sponsor about these changes as the overall fiduciary for their plan. It is the plan sponsors’ decision whether or not to elect to use these investment products. If the plan sponsor does not want these products to be included, they must simply return the form provided in the mailing.

In hindsight, it is clear that we should have worked more closely with you prior to communicating directly with the plan sponsor. We understand your role(s) with the plan sponsor, and we attempted to honor that in the letter. However, we recognize that we should have handled this in a different manner.

I assure you in the future we will work with you and give prior notice when communicating to your plan sponsor(s). I apologize and regret any inconvenience this communication may have caused you and your plan sponsor(s). If you have any further questions, please call your relationship manager.

For copies of the mailing and more information, go to schwabadvisorcenter.com.

Bernie Clark
Executive Vice President
Schwab Advisor Services

Click here to see the original letter.

He also intends to talk to more advisors this week.

“This was a mistake,” Clark said. “There’s no way getting around it. It’s a regretted mistake. We can’t undo the emotions of it but we can make sure it doesn’t happen again.”

But for some advisors it wasn’t enough.

“Schwab’s not a huge player in the 401(k) side and with moves like this, I don’t think this will get them to be a huge player with advisors. It’s disappointing,” says Bart Bonga, vice president with Rothschild Investment Corp. in Chicago, whose firm manages around 60 401(k) plans totaling about $500 million. His office custodies some assets with Schwab but the bulk on the 401(k) side is with Fidelity.

Schwab is making moves to be stronger in the 401(k) business. See: Schwab’s CEO engages in a Q&A about how his company’s deep-discount, more-advice 401(k) plan will work .

Same song, different tune

This issue of Schwab sending correspondence to its own advisor’s clients is nothing new, says Timothy D. Welsh, CFP, president of Nexus Strategy. Welsh, who used to work at Schwab, says he recalls crafting these types of letters. It’s increasingly becoming more difficult for Schwab to keep its advisor and retail business separate because the company’s retail business is starting to overlap with its advisory business with RIAs.

“They’re increasing the likelihood that they’ll trip over themselves when they unveil these advice programs,” he says. “It doesn’t surprise me that they’re having these issues.”

Bernie Clark: There’s no way of
getting around it. It’s a regretted
mistake.

Welsh says that unfortunately when something like this happens it sends the wrong message to Schwab’s advisors.

“It shows advisors that they care more about retail than they do about supporting their own advisors,” he says. “As retail becomes more and more prevalent at Schwab they sort of forget these things.”

The letters

The original letter was sent out on Aug. 9 by Ann Insley, director of retirement plan sponsor services, with an “important note” heading. It addressed those clients who work with independent investment advisors.

“If all the current eligible plan participants in your retirement plan work with an investment advisor, the information in this mail package does not apply to your retirement plan at this time,” it read.

However, the letter states that the clients will be added into Schwab’s Managed Portfolios and Windhaven’s Portfolios unless the clients opt out.

After calls and e-mails from advisors began pouring in, Clark crafted his own e-mail Wednesday night.

In it, Clark explains that Schwab has a contractual agreement with the sponsor to notify them of changes. However, he adds, the company should have worked more closely with advisors.

“We understand your role(s) with the plan sponsor, and we attempted to honor that in the letter,” Clark wrote in his e-mail to advisors. “However, we recognize that we should have handled this in a different manner. I assure you in the future we will work with you and give prior notice when communicating to your plan sponsor(s). I apologize and regret any inconvenience this communication may have caused you and your plan sponsor(s).”

In an interview, Clark emphasized that the company has a strict policy about not sending mailings to advisors’ clients.

He also added that the company intends to bolster its processes and procedures to ensure nothing like this happens again.

“We have a policy in place for not mailing to advisors and not co-mingling,” Clark said. “My job is to assure advisors that there was no ill intent.”

Open architecture?

Not only does it appear that Schwab is going after its own advisors’ business, but it also goes against advisors’ goal of advocating open architecture for clients, Bonga added.

Roger Hewins: It wasn’t like an
intern got on the fax machine
and accidentally hit the wrong number.

“I truly think Schwab would have been better off going to advisors and saying here’s why we think you should use our funds and leave the decision up to advisors,” he says. “This could be a negative for Schwab with advisors. I thought the apology was fairly tepid.”

Awkward spot for advisors

Another Schwab RIA agrees and says he’s torn about how to handle the situation with clients and doesn’t want to make a knee-jerk reaction.

“We’re taking some time to figure out how to address this,” says Roger Hewins, president of San Mateo, Calif.-based Hewins Financial Advisors, which manages about $2.5 billion of assets. “It’s really important and we need to be thoughtful about what we do.”

Hewins also says he believes there will be significant fallout from advisors about this topic, noting that this issue has been frequently addressed at Schwab conferences.

“There’s going to be a lot of conversation about this for awhile,” he says. “I’ve been in public forums and there’s been heated discussion about Schwab going to our clients. Mailings don’t happen by accident. It wasn’t like an intern got on the fax machine and accidentally hit the wrong number.”