Net new assets from advisers slide again, Schwab says

Firm's second-quarter profits down 31%

Jul 19, 2009 @ 12:01 am

By Jed Horowitz

In another barometer of the continuing pain that fee-based financial advisers are experiencing, The Charles Schwab Corp. has reported that net new assets in its adviser services businesses fell 47% in the second quarter to $7.7 billion, from $14.5 billion a year earlier.

Schwab is by far the largest provider of custody services to registered investment advisers, and its disclosures offer a good directional read on the RIA marketplace, said Bing Waldert, a director at Cerulli Associates Inc., a Boston-based consulting firm.

The deterioration in RIA assets continued a trend begun in the first quarter of the year, when net new assets from advisers at Schwab fell by 52% year-over-year to $9.6 billion.

Although many advisers place assets with more than one custodian, it is unlikely that rivals benefited at Schwab's expense. The San Francisco-based firm continues to have about twice the market share of Boston-based Fidelity Investments, its nearest competitor, according to industry surveys.

Schwab made the announcement last week in reporting that its second-quarter profit fell 31% to $423 million, reflecting a sharp rise in waived management fees for its money market funds, as well as one-time restructuring and regulatory charges.

The asset slowdown from advisers reflects their high-net-worth clients' reluctance to invest in a still-volatile market, the beginning of the traditional summertime investment doldrums and a disturbance in advisers' ability to prospect for business, said Greg Gable, a spokes-man at Schwab.

“They are spending considerable attention helping existing clients manage through a pretty stressful time,” he said.

Advisers, to be sure, continue to be a formidable source of business. The net new assets they sent Schwab last quarter was more than double the $3.7 billion that came from Schwab's direct retail investors.

Net new assets from direct retail investors fell 38% from the year- earlier period and were off 40% from this year's first quarter.

Trades from RIAs in asset-priced accounts fell 3% from last year's second quarter, and 24% from this year's first quarter, to an average of 20,800 a day in the three-month period ended June 30 — their lowest level in at least five quarters.

“Wealthy investors are more concerned with preservation of their assets, and their advisers are reluctant to dip their toes into the market,” Mr. Waldert said.

Less affluent investors, who trade online directly with Schwab or invest through its branch or phone representatives, were more active during the quarter. Their average daily trading in asset-priced accounts rose to 26,300 trades, a 20% increase from the comparable period last year.

Schwab doesn't break out the channel sources for its commission-based equity trades or spread-based fixed-income trades. Those so-called revenue trades rose 18% in the second quarter to an average of 301,200 a day, from 254,700 a year earlier. Average revenue per trade fell 4% from a year ago to $13.84.

Since advisers are generally conservative about trading, the surge indicates that direct retail investors were swept up in the rise of the broad equity market — which saw a quarterly gain for the first time since the third quarter of 2007. Schwab executives, however, were cautious about raising expectations for a continuation of retail-investor engagement.

“As we enter the second half of 2009, the economic and market outlook remains challenging,” Schwab chief executive Walter Bettinger said in a statement. He noted that broad market indexes were still 20% to 30% below year-earlier levels at the end of the quarter, while short-term interest rates that affect margin account and fee-based revenue remain disturbingly low.

“It bears repeating that with the equity markets still so unsettled, and no catalyst for higher rates on the horizon, revenue pressures, including increasing money fund fee waivers, may persist in the months ahead,” added Joseph Martinetto, the firm's chief financial officer.

Interest rates hovering near zero have forced Schwab and many of its rivals to waive fees on money market funds to avoid creating negative returns for investors. Schwab waived $26 million of such fees in the second quarter, up from $4 million in the first quarter, and could swallow as much as $200 million in lost fees for the year, Mr. Gable said. That matches the most “pessimistic scenario” that Schwab executives outlined at the beginning of the year.

Advisers and other Schwab investors lost patience with money funds' lowly returns last quarter and showed more confidence in stock and bond funds. They withdrew $19.3 billion from its money market funds in the three-month period ended June 30, while adding assets in every other mutual fund category, Schwab said.

The biggest benefactor was the firm's taxable-bond funds, which attracted $7.44 billion, a sharp contrast to outflows of $5.04 billion from those funds during the darkest days of the credit crisis in last September, October and November.

Among equity funds, international funds were on the rise. Investors added $1.77 billion to such funds during the quarter, including $683.2 million in June alone.

Large-cap-equity stock funds, on the other hand, showed a major decline. Investors dribbled just $97 million of net buys into the funds on Schwab's platform in June, compared with an average of $428.7 million in the previous two months.


Schwab doesn't break out mutual fund inflows and redemptions by its client channels, but funds remain “the product of choice” for most advisers, said Cerulli's Mr. Waldert. Indeed, Schwab's initial foray into the RIA custody market revolved around its mutual fund supermarket, particularly its OneSource subset of no-transaction-fee funds.

Despite the relatively sober report — Schwab's pretax profit margin fell to 30.9%, from 39.3% in the second quarter, while its return on stockholders' equity, a key measure for investors, fell to 18%, from 32% — the discount-brokerage pioneer ended the quarter with at least one high note. Daily average revenue trades on which clients paid commissions or bond markups set a company record for June, Mr. Gable said. And Mr. Waldert said that RIAs continue to take market share away from broker-dealers.

E-mail Jed Horowitz at


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