Expansion at Schwab rankles RIAs

Oct 21, 2012 @ 12:01 am

By Dan Jamieson

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With its acquisition of money manager ThomasPartners Inc. last week, The Charles Schwab Corp. took another step in building out its small but fast-growing proprietary separate-account platform.

But by buying the firm, Schwab risks once again ruffling feathers among its army of more than 7,000 registered investment adviser custody customers, some of whom worry about competition from the money managers.

“I'm always concerned about a custodian buying asset managers,” said Ken Winans, president of Winans International Corp., which manages about $140 million. “As a money manager, you have to be concerned with this.”

The deal parallels the 2010 purchase of Windhaven Investment Management Inc., a tactical manager of exchange-traded-fund model portfolios. By all accounts, Windhaven has been a success for Schwab, with assets under management tripling to $12.5 billion since the acquisition.


The $85 million cash purchase of ThomasPartners, which has $2.3 billion in assets under management, adds a dividend strategy to Schwab's money management mix, a hole that the firm wants to fill as investors increasingly search for yield.

The deal also adds to Schwab's profitable stable of fee-based offerings that have bolstered earnings as traditional business lines tread water, and it positions the company to meet a goal of having a quarter of its retail clients in some type of managed account — close to what the wirehouses have — up from about 16%. The transaction is expected to be completed before year-end.

For some RIAs, the acquisition brings back bad memories of August 2011 when Schwab sent a marketing piece to companies with retirement plan assets under its custody — including advisers' clients. The letter said that Schwab would be adding Windhaven portfolios and another managed-fund programs as investment options, but that the action didn't apply to those who worked with an independent adviser.

Bernie Clark, head of Schwab Advisor Services, later apologized to advisers, saying that the letter was a mistake and against Schwab's policies.

In an interview, he said that he hasn't heard negative feedback regarding the Thomas-Partners deal.

But some advisers can't help wonder about the competitive implications.

Schwab branch brokers have been encouraged to put clients into Windhaven, potentially cutting referrals to advisers, according to one adviser who is in the firm's branch referral network and asked not to be identified because of his continuing relationship with the company.

The message to its registered representatives has been, “We won't say you have to put money in Windhaven, but if you want to be a team player, you'll put in a certain amount,” this adviser said.

Schwab officials are clearly sensitive to these concerns.

Company spokeswoman Alison Wertheim called it “a myth” that the company competes with its RIAs for clients.

In-house asset managers “are meant to be ... packaged and scalable solutions” primarily for branch customers, she said.

“Advisers know the unique way they serve high-net-worth in- vestors, [and] it's an entirely different relationship” that won't be affected by Schwab's own offerings, Ms. Wertheim said.

As for branch brokers' being encouraged to sell Windhaven, she said that Schwab doesn't “advantage one product over another,” but that investors increasingly are seeking advice, and Schwab shows them a range of options.

In addition, 2012 was “our first full year with Windhaven ... so naturally, marketing has been active,” Ms. Wertheim said.

Mr. Winans appears to be giving Schwab the benefit of the doubt, and as long as no more marketing pitches are made to his clients, he said, he is OK with Schwab's expansion in money management.

Matt Cooper, managing director of Beacon Pointe Advisors LLC, which runs $4.5 billion, said that firms as large as his probably have less concern than smaller RIAs.

“Perhaps for the smaller, local adviser [the ThomasPartners deal] could create some competition and stress,” he said. “Smaller advisers are more likely to be less discerning about the clients they take, and the smaller client would consider Schwab as an advice giver.”

But even some smaller firms said that they aren't concerned.

“We're relationship-oriented,” said Jay Healy, president of Century Wealth Management LLC, which has about $155 million under management. “My clients are not going to be inclined to take an off-the-shelf product from a custodian.”

Like Windhaven portfolios, ThomasPartners management will be made available to RIAs as well as individual investors.

Schwab plans a discounted fee arrangement for clients of RIAs who sign up with ThomasPartners, as it does now with Windhaven. RIA clients pay 75 basis points or less for Windhaven portfolios, versus the maximum 95-basis-point fee charged to individual investors.

Despite the discount, most of Windhaven's growth has come from the retail side. Just 82 advisers have money in Windhaven, but Schwab officials say that doesn't surprise them, because advisers tend to move slowly into new products.

Schwab executives stress that Windhaven's tactical approach with downside risk management, and the dividend strategy used by ThomasPartners, meet investors' needs.


But in-house money management also fills a need for Schwab. Windhaven is perhaps the brightest light among Schwab's efforts to build more-profitable fee-based revenue.

A revenue category Schwab calls “advice solutions,” which includes managed-account programs such as Windhaven's, in-creased 9% to $427 million over the nine-month period through Sept. 30.

By contrast, revenue from Schwab's Mutual Fund OneSource program fell 3.6% to $501 million, and its once-huge revenue from money market fees dropped 8.7% to $218 million over the nine-month period.

Schwab's “advice solutions” programs are also its most profitable fee-based products, earning an average of 49 basis points.

Proprietary management is “about making money ... within a low-interest-rate environment,” Mr. Cooper said.

For its part, Schwab offers a variety of products at different pricing levels, Ms. Wertheim said. 

In the end, “We make money ... with a very satisfied client,” she said.

djamieson@investmentnews.com Twitter: @dvjamieson


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