Schwab's referrals drying up?

New honcho says demand still exists

Feb 2, 2004 @ 12:01 am

By Brooke Southall

While Charles Schwab & Co. Inc.'s nationwide referral service for financial advisers is going like gangbusters, some worry that the program is rapidly running its course.

Schwab's Advisor Network program handed $5.8 billion in client assets to about 325 advisers in 2003. That is an impressive 190% jump in assets from the level of the previous year, when it doled out $2 billion to 340 advisers.

"We did much, much better in 2003 than 2002," said Gus Gast, principal with the Moneta Group Inc. in St. Louis, which has $3 billion under management.

But while most advisers in the program echo his sentiments, others question how much longer San Francisco-based Schwab can keep it up.

Perhaps reflecting this concern, Deborah D. McWhinney, president of services for investment advisers for Schwab Institutional, promoted Schwab veteran Edie Heilman to head the Advisor Network in August. The promotion came despite the fact that Ms. McWhinney had consistently and publicly praised Ms. Heilman's predecessor, Robert S. Klapper, now senior vice president, individual investor marketing, service offers at Schwab.

Ms. Heilman is known as a steely executive, with a reputation for overcoming tough business obstacles at Schwab. For example, she was put in charge of the complicated task of preparing Schwab's retail business for Y2K.

winning is everything

"Having a sense of urgency is vital to success; I bring that to the party," Ms. Heilman said, adding, "I want to win."

She will need that sense of urgency in her new job.

While the referral program has won the praise of many advisers, it still faces a number of critical challenges. One challenge is addressing the fact that the program is inherently cannibalistic.

About 91% of referrals that resulted in conversions to adviser assets last year were from existing Schwab customers.

According to some advisers, that means that Schwab branch brokers may have - in their own parlance - "converted" most of the clients who are rec

eptive to delegating full responsibility for the management of their portfolio.

"The book is pretty well worked," said Neil C. Hokanson, president of Hokanson Capital Management Inc. in Solana Beach, Calif., which has $190 million under management. "At the branch level, they're saying: `I've worked my book."'

He added that he has heard this from brokers at various Schwab branches but not from anyone speaking on behalf of the entire staff in those locations.

Richard D. Steinberg, president of Steinberg Global Asset Management Ltd. of Boca Raton, Fla., concurs. But he also sees greener pastures ahead.

"The moving-the-marbles game is thinning," Mr. Steinberg said, "but the skilled reps at Schwab realize that people don't keep all their assets at Schwab. The lazy reps say they've worked the book."

Mr. Steinberg's firm grabbed $90 million in 2003 from Schwab's referral program, which brings his company's assets under management to $375 million.

Scott Van Den Berg, vice president with Century Management Inc. in Austin, Texas, said the branch representatives with whom he works are getting clever about bringing him big advisory assets from small retail accounts.

Scores of employees of big oil companies in his home state keep modest retail balances at Schwab. But those accounts explode when the people retire and roll over their 401(k) assets, he said.

No-nonsense approach

Mr. Van Den Berg, whose firm brought in $60 million from Advisor Network in 2003, is counting on as many as 15 years' worth of this rollover business coming through the branches in Austin and Houston with which he works.

Ms. Heilman, whose title is senior vice president, Schwab Advisor Network for Schwab Institutional, said that Schwab's book is hardly tapped out, especially when you consider that the company opened 592,000 accounts last year.

"As long as the retail engine is in gear, it's going to stimulate demand," she said.

Ms. Heilman's schedule reflects this focus on leveragi

ng the ability of retail to open doors. She meets every week with Mark Phillips, senior vice president of individual-investor enterprises for Charles Schwab, to make sure the Adviser Network figures prominently in the corporate strategy for courting affluent investors.

Advisers say they appreciate Ms. Heilman's no-nonsense approach.

"If I were to bet on a horse, I'd bet on her," Mr. Steinberg said.

"We're all third-graders," he added. "She's a taskmaster."

Ms. Heilman, who left last week to begin a short sabbatical in Kenya, sees her task largely as one of educating investors about the benefits of using financial advisers.

To accomplish that goal, Mr. Hokanson said, branch reps need to be more aggressive in finding leads.

"They're like angler fish; they only bite what swims by" he said.

"When are Schwab reps going to start joining the Rotary Club?" Mr. Hokanson added. "In the long run, they've got to do that."

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