Advisers rebuilt investors’ faith

The Charles Schwab Corp. had a few challenging years following the financial crisis. But a focus on the RIA business has paid off as the firm’s RIA custody unit crossed $1 trillion in assets last fall.

As competition heats up among custodians, Schwab is looking to continue that momentum, tapping into developing trends in the RIA space, including consolidation and the rise of aggregator firms. It is also preparing for what a uniform fiduciary standard could mean for advisers, according to the head of Schwab Advisor Services, Bernie Clark.

InvestmentNews: How has the custody business fared following the 2008 crisis?
Mr. Clark: This industry has come through a hellacious seven years. The last two to three years have been good, but there has still been a fair amount of uncertainty because of what had gone on for the last decade, starting with the tech bubble and geopolitical challenges and ending with the credit crunch in 2008. It hasn’t been very friendly to the less sophisticated investor or to the next generation. Changing that outlook has been critically important, and that’s where advisers became the sweet spot.

We went through a period where there was a lot of nondiscretionary spending on mortgages and health care and school bills, which were getting paid for by one individual for another family member who hadn’t weathered the storm as well. Advisers helped with that. The advisory business, by our benchmarking, had strong retention numbers. What they were doing is creating confidence in their client base and, in turn, the last several years have been nothing but growth. We now have $1 trillion in assets under management.

InvestmentNews: What’s been the biggest driver of new assets?
Mr. Clark: The $1 trillion in total assets under custody on the adviser services side has come from a lot of organic growth. About 80% of the adviser services growth is from existing advisers adding new assets. Over the last three years, we’ve added about $60 billion a year in net new assets. Even in 2009, which was one of the more challenging years, we brought in at least $50 billion in assets. So it’s been quite a consistent flow. We tend to bring in 170 advisers turning independent each year, coming out of traditional employee channels. That accounts for around $12 billion to $15 billion of the $60 billion in net new assets each year.

InvestmentNews: How has consolidation in the RIA space helped your business?
Mr. Clark: We have 7,000 advisers and 2.3 million accounts that we serve. The market of advisers transitioning to independence is very consistent in terms of the number of teams that come out. One thing that fluctuates is the average size, which now is about $105 million in assets per adviser coming into independence. That’s about a 17% increase over the average of last year. Part of it is the market; part of it is obviously that we have success landing larger teams that are coming out. There are acquirers that are helping grow the marketplace and finding large teams that want to come out and be a part of a partnership or have a liquidity event as well. Those acquirers, such as Focus Financial Partners, HighTower and United Capital, are helping to free up assets from the wirehouses as well, and in turn, we become the preferred custodian.

InvestmentNews: In earnings releases, you’re emphasizing Schwab is full service, not a discount brokerage or clearing firm. How do you define that?
Mr. Clark: It’s about a continuum of services for the client. Obviously, we still have significant self-directed clients who handle their own portfolios. But if they need advice on a more detailed level, they can get a referral to our adviser network and get served by that. Or they can select an adviser on their own from our network. We also have a bank where we can serve clients and have lending programs. Full service includes our open architecture that has some proprietary products, as well as debt products. We’re making sure that the full broker-dealer suite of services is available.

InvestmentNews: How do you avoid the conflicts of interest you see in traditional full-service broker-dealers?
Mr. Clark: Our full-service model is not commission-based. It’s transparent in its fees. It’s open architecture in its products. Plus, we can’t forget that we don’t have an investment banking arm. We don’t have a proprietary trading desk. The way we make money is quite clear and it’s transaction-based. It’s based on the spread in cash that you see. In some cases, it’s based on the [operating expense ratio] of some of the indexed proprietary products that we have, and then there’s partner products like the OneSource platform and others. But it’s all very transparent for the client in terms of what’s happening and what products they’re buying.

InvestmentNews: As you add more proprietary funds to the platform, are you shifting strategy at all?
Mr. Clark: We’ve been very effective in launching indexed proprietary products, but most of what you’ve seen is around ETFs and low-cost products. We think that’s a very effective strategy and you’ll see very little on our platform in active management products. It’s all meant to be indexed low-cost products.

InvestmentNews: What’s the motivation in expanding Schwab’s branch offices?
Mr. Clark: We had a strategy where we wanted to extend our footprint in the retail ranks and have more locations where we weren’t represented quite as well. What we elected to do is go with a franchise structure. In reality, when Schwab started, its first couple branches were franchises. So it was a concept in extending the branch footprint. Those branches behave exactly like what you consider to be a Schwab company store or branch would behave like. They use all the same solutions, but they’re not giving personalized portfolio advice. Sometimes people think we have advisers like the RIAs within our model, but in fact we don’t.

InvestmentNews: Are you concerned about a uniform fiduciary standard?
Mr. Clark: We think the fiduciary standard is a good thing. Advisers are principle-based as opposed to rule-based, and we believe you should always do what’s in the best interests of the client. But when you start to introduce the harmonization of rules, it starts to distract from the principle itself. By harmonization, I mean trying to overlay the Finra broker-dealer, rule-based approach on top of the adviser model. In reality, we think that’s a competitive play. We think it’s a competitive play by the traditional model to encumber the new models.

Related Topics: Charles Schwab & Co.