Morgan sets sights on Schwab’s financial consultants

Wirehouses traditionally look to each other for recruits, but recently at least one, Morgan Stanley Wealth Management, has trained its sights on another, somewhat unlikely source: Charles Schwab & Co., which pioneered discount brokerage.
While Schwab says its financial consultants are not traditional advisers, those licensed representatives are taking on more sophisticated clients and building larger books of business, according to Tim Welsh, a former Schwab director who is now president of the consulting firm Nexus Strategy.
That’s attracted the attention of wirehouse firms who have traditionally focused on recruiting among each other, Mr. Welsh said.
“They have been doing it for a long time and now those advisers have built a pretty nice book of business,” said Mr. Welsh, whose firm has done business with some of Schwab’s competitors, such as TD Ameritrade. “You see the result where rivals are looking at Schwab’s advisers as a great target because they have experience, they have been doing fee-based accounts and they are at the lower end of the pay spectrum.”
It also may be clouding the lines between what Schwab offers in-house and what its network of RIAs who custody with Schwab Advisor Services offer, he warned.
“The lines are being redrawn every day,” Mr. Welsh said. “A long time ago, it was a firm black line where Schwab does this and the advisers do that, but now the lines are blurred.”
FULL SERVICE
Schwab has been pushing financial consultants to do more financial planning for clients in recent years as the firm looks to shed the discount brokerage label in favor of being what its executives refer to in earnings calls as a “full service” firm.
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“Schwab began as a discount broker, offering customers cheaper rates and more limited services than traditional broker-dealers,” said one former Schwab broker, Wai Kee Chan, in a court filing. “But more recently, Schwab has captured fee-based market share, selling financial advice on fee bases in addition to charging discounted commissions for executing trades.”
Schwab now has more than 1,100 financial consultants in about 300 branch offices, according to an annual presentation by executives in July. John Clendening, the firm’s executive vice president of investor services, said 110,000 clients had a planning conversation with a financial consultant in the past year, up 80% year-over-year. Clients in a relationship with a Schwab financial consultant had an average of $1.3 million in assets at the firm, which was more than the average wirehouse client, he claimed.
In many cases, Schwab’s financial consultants represent an “ideal candidate” for major brokerage firms, although they are not thought of as a traditional recruit, said Bill Willis, president and CEO of Willis Consulting.
“They are more sophisticated than you might imagine,” he said. “In many cases, they have converted the client from a transactional person to a fee-based person.”
There is a tension, however, as the financial consultants mature and see themselves as more than relationship managers, according to former Schwab adviser Kristian Colvin who had to fight a legal battle when he left Schwab in 2009 after 10 years. He said he joined an independent broker-dealer, Emerson Equity, to become more involved on the investment side.
“You go home at night and put your head on the pillow and don’t worry about anything, but that wasn’t for me,” Mr. Colvin said. “I liked having it more hands-on with the client and helping manage their portfolio versus farming it out.”
HIGHER LEGAL RISKS
While there aren’t specific numbers on how many advisers leave Schwab for other brokers, a number of court cases indicate that firms such as Morgan Stanley are interested in Schwab brokers despite the legal risks. Unlike Morgan Stanley and many other brokerage firms, Schwab does not sign on to the broker protocol, an agreement that makes it easier for brokers to take certain client information with them when they move firms.
Many of the disputes have been high profile, including a $15 million raiding case against Morgan Stanley in 2012. Schwab’s claims in that case were denied, according to an award issued by an arbitration panel with the Financial Industry Regulatory Authority Inc.
This week, Schwab lost another case that sought about $1 million in damages and attorneys’ fees from Morgan Stanley and former Schwab adviser Wai Kee Chan, whom Schwab pursued in both federal court and with Finra when she moved to Morgan Stanley in Honolulu in 2013. She managed about $454 million.
Morgan Stanley spokeswoman Christine Jockle declined to comment on the case or its practice of hiring Schwab advisers.
A Schwab spokesman, Rob Farmer, e-mailed a statement that promised the firm would continue to “pursue an aggressive course of legal action” in similar situations.
He declined to comment further.
Another case, against former Schwab adviser Joshua Winston, was filed in federal court last year in the Eastern District of Virginia. Mr. Winston, who purportedly served hundreds of clients with $545 million in assets, was allegedly paid hundreds of thousands of dollars in transition incentives, according to Schwab’s complaint.
Another case is pending in the Superior Court of the State of California for the County of Los Angeles against a Schwab adviser who went to an independent firm.
MORE PROTECTIVE
As its financial advisers evolve, Schwab has grown increasingly more protective of those relationships, filings show.
“Schwab required me to sign multiple, increasingly restrictive employment contracts and documents over the course of my employment there,” Ms. Chan, who was at Schwab from roughly 2006 to 2013, said. “More recent documents purport to broaden Schwab’s definition of prohibited solicitation, and require advance written notice if a consultant plans to resign.”
Even recalling client names and then looking up their contact information in public directories could have violated Schwab’s 2013 confidentiality, nonsolicitation and intellectual property ownership agreement, according to the complaint against Mr. Winston.
“[Mr.] Winston made a number of promises in his 2013 agreement … that, except as necessary to perform his duties for Schwab, he would not use or disclose Schwab’s customer information, including the identities of his customers, even if he retained this information in his memory,” Schwab emphasized in its complaints filed with the U.S. District Court in the Eastern District of Virginia.
Ms. Chan, who had to provide four weeks’ notice prior to resignation, according to her contract, said she was not given a choice in signing the agreement.
“Schwab presented these documents to me on a ‘take it or leave it’ basis, denying my opportunity to negotiate their terms,” she wrote to the court. “My understanding was that if I did not accept the terms as presented, I would have been terminated.”
UNCERTAINTY FOR RIAS
Schwab’s push into financial planning has been closely watched by registered investment advisers, including those on Schwab’s Advisor Service platform, which custodies more than $1 trillion in assets for RIAs. Those on the platform can receive referrals from the Schwab Advisor Network of financial consultants when clients ask for more in-depth planning.
Mr. Colvin, who left the firm five years ago, said Schwab’s advisers are careful not to recruit or step on the toes of the advisers on their network, even if the client approached them.
“We were very cautious not to do anything that could resemble solicitation,” he said. “If we followed the protocol, we pushed the client back to the adviser.”
Still, Mr. Welsh said the full service push may increase uncertainty.
“If you’re in the referral program for Schwab Advisor Network, you see much more competition for referrals because they can go to Schwab Private Client,” Mr. Welsh said. “If you’re not in the program and you’re an average RIA out there, you see them moving further into the advice space, and you’re wondering what does that mean for you one day?”
The difference is sometimes not so obvious, according to Schwab’s recounting of a conversation Mr. Winston had with a Schwab client after he moved to Morgan Stanley: “Client 1 told [Mr.] Winston, ‘You always told me there was no better place than Schwab to be, and now you’re telling me why I should leave Schwab,’” the firm recalled in its complaint against Mr. Winston. “Client 1 reported that [Mr.] Winston said, ‘Well, we’re really all the same.’”
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Related Topics: Charles Schwab & Co., Morgan Stanley & Co.