Schwab’s game plan for a TD touchdown

For Tom Bradley and his team at Charles Schwab, the “big game” this year isn’t on a Sunday in February; it’s a Tuesday in September.

“This is the Schwab Super Bowl: Labor Day weekend 2023,” said Bradley, the managing director heading efforts to transition independent advisors and their clients from the TD Ameritrade Institutional platform to Schwab. “There’s something else going on [Feb. 12] but I’m not sure I’ll be paying as close attention as I will on our game.”

On Sept. 5, the first day back to work for many after a holiday weekend that traditionally signifies the unofficial end of summer, account information for thousands of registered investment advisors and their clients will no longer be on the TD Ameritrade brokerage platform, having been moved over to Charles Schwab’s. Roughly 7,500 financial advisors, 5,500 of whom have never opened a client account with Schwab before, will be affected by the move.

“As far as we know, it’s the largest conversion of any custody business that has ever taken place, and we’ll be bringing them all over on that one weekend,” Bradley said.

Including retail accounts, between 18 million and 20 million total accounts and $1.3 trillion in assets (based on 2019 data) will transfer over the next year.

Executives are optimistic that the transition will go as smoothly as possible. Simulated tests of the data conversion have been 99.9% accurate, Schwab CEO Walt Bettinger said at the company’s 2023 winter business update. The company has also learned from its 2019 acquisition of USAA, whose integration was a “rockier experience,” according to Joseph Martinetto, Schwab’s chief operating officer.

“We do believe that we are ready,” Martinetto said. “We have done everything necessary on the testing side to make sure that we are as prepared as possible.”

However, perfection is impossible for a data migration of this magnitude, and Schwab’s leadership has been publicly managing expectations before the inevitable technical hiccups.

“It won’t be without incident, unfortunately, but we’ll be there for you,” Bernie Clark, managing director of Schwab Advisor Services, said during Schwab’s Impact conference in November.

“Despite all of our best efforts, we know that there are going to be some glitches that are going to happen,” Martinetto said in January.

But it’s not just technical glitches that Schwab is up against. Since closing the acquisition of TDA in October 2020 for $22 billion, Schwab has faced questions about repapering client accounts, technology and support for smaller financial advisors — a key demographic of TD’s custody business. Despite answering each of these questions over the past three years, anxieties persist among advisors, perhaps due in no small part to pitches from competing custodians hoping for an opportunity to win new business.

This is the Schwab Super Bowl … it’s the largest conversion of any custody business that has ever taken place.

– Tom Bradley, Charles Schwab & Co.

As for advisors, many are in a “wait and see” period until they get access to a preview of the combined technology platform this summer.

“Since I’m already at Schwab, the merger should only help my business. I plan to stay the course for now, optimistic that Schwab will get it right,” said Kyle Simmons, founder of Broomfield, Colorado-based Simmons Investment Management. “If not, I will be actively looking to move.”

ALL ABOUT iREBAL

Simmons’ previous firm custodied assets with TDA, and he was “quite happy” with the Veo One technology platform and iRebal, TDA’s portfolio rebalancing software. With TDA no longer an option for launching his current firm in 2021, Simmons ultimately decided to onboard directly with Schwab after what he called an extensive evaluation of custodians.

“Despite what I’ve heard from my colleagues, I have found Schwab customer service to be about the same quality as I experienced at TD: good but not great,” Simmons said in an email to InvestmentNews.

However, Schwab’s technology has been a “letdown,” especially the user interface of the advisor platform and the lack of an alternative to iRebal, Simmons said. “I’ve been eagerly waiting for iRebal to come to Schwab, with the anticipation that I will switch back to it once available.”

Among the advisors InvestmentNews spoke to, access to iRebal was a priority, especially for those with previous experience with TDA.

“I used iRebal in the late 2000s when I first started in this industry and it was amazing then and would be amazing now. I was reviewing and trading 300-plus households on a Wednesday morning over my coffee,” said Jarrod Sandra, who launched Chisholm Wealth Management on Schwab in 2022. “Schwab has a portfolio rebalancer and their Institutional Intelligent Portfolios product, but iRebal is a massive win over those two features at Schwab.”

Bringing over iRebal to Schwab, along with the thinkorswim digital trading system, was one of the first announcements Schwab made about advisor technology after getting approval to move forward with the acquisition. iRebal will eventually replace Schwab’s existing rebalancing tool, but may not be available immediately to Schwab advisors on the day of conversion, said Jessica Heffron, managing director at Schwab.

“First and foremost, we need to maintain continuity for those TDA advisors who use it,” Heffron said, adding that Schwab expected to make it available to Schwab advisors soon after the conversion.

The product will be kept distinct from Institutional Intelligent Portfolios, Schwab’s robo-advice engine for RIAs (though IIP could potentially make use of TDA’s model market center), and Schwab has no plans to alter how the tool functions or add requirements for advisors to use it, Heffron said.

As for other improvements to Advisor Center, Schwab has invested tens of millions of dollars into upgrades, including bringing over some of the most popular features of Veo, Bradley said. “By the time we’re finished, the one combined system is going to be better than either were separately.”

SMALL ACCOUNTS AND REPAPERING

TDA advisors will get access to Advisor Center in June in a preview mode so they can learn and explore it.

Though just a few months before Labor Day weekend, this should be plenty of time to get comfortable with the system, according to Ashlee deSteiger, founder of Gunder Wealth Management. Her firm so far hasn’t been impacted by the merger. Between Schwab’s negative consent process and not requiring clients to sign any additional paperwork, deSteiger isn’t worried about the transition disrupting the business. 

She’s more concerned about whether Gunder Wealth Management will continue getting the same level of support she received as a new firm launching on TDA without any assets. She describes the two-person shop, consisting of deSteiger and husband Joe, with $60 million in assets under management as “a small fish in a ginormous pond.”

“Will I still be able to get service regardless of [the firm’s] size? TD was able to deliver on that,” deSteiger said.

The question about support for small advisors is perhaps the longest-running issue Schwab has faced since first announcing plans to acquire TDA, and the most difficult for it to overcome. Schwab hired Bradley, a former TDA senior executive who spent 12 years as the head of its RIA custody business, in 2019 to bolster Schwab’s service for firms with less than $100 million.

In February 2020, Schwab pledged to continue supporting smaller financial advisors. In January of this year, Clark reiterated that Schwab has no intention of introducing an AUM minimum or custody fee, while Martinetto said the firm has hired thousands of support staff and is training them to meet a spike in service calls.

“We are there for every advisor that is serious about being in business,” Clark said, adding that 80% of RIAs that custody with Schwab have less than $200 million in AUM.

CUSTODIAL COMPETITION

The ongoing anxiety among small advisors has not been lost on competitors hoping to claw market share away from Schwab. For example, Pershing reportedly lowered asset minimums in late 2019 from $250 million to $100 million and saw an uptick in RIAs evaluating its options. A Pershing spokesperson declined to say whether the $100 million figure was still accurate. 

Interactive Brokers’ sales team has been actively reaching out to advisors. The company’s pitch revolves around lower costs, more investment products and better technology, said Steven Sanders, Interactive’s executive vice president of product marketing and development.

Though convincing advisors to switch custodians traditionally has been difficult, the company has seen an uptick in interest. Interactive Brokers has 6,334 registered advisors on its custody platform, an 8.4% year-over-year increase, Sanders said.

Another active firm is Axos Financial, which bought ETrade’s custody business from Morgan Stanley in 2021. Though he didn’t name any other firms, two of the company’s key differentiators cited by Mike Watson, head of RIA custody at Axos Advisor Services, seemed targeted at Schwab.

“In the current environment of declining service levels, we deliver personalized service with a dedicated team who gets to know the advisor’s business inside and out so we’re able to provide high-touch support and remedy any issues in a timely fashion,” Watson said in an email. “Further, we don’t compete with advisors. We don’t have any proprietary wealth management services or an in-house staff of financial advisors competing for the advisor’s prospects.”

TDA advisors with less than $100 million of AUM should be concerned about what their future will look like on the Schwab platform, said Jason Wenk, co-founder and CEO of digital custodian startup Altruist, another firm that’s been actively pitching itself as an alternative for TDA advisors. Firms with less than $50 million are “crazy for staying,” he said.

Digital infrastructure such as Apex Fintech Solutions, which powers Altruist, is making the traditionally painful process of repapering accounts easier than ever before. Wenk’s company secured $50 million in funding in 2021 and now serves 1,600 financial advisors.

“If you have faith in your business, this is the least disruptive of a time to make a change,” Wenk said. “For someone to negatively consent their way into being one of the smallest, most insignificant firms [at a huge custodian], that doesn’t feel like a very smart business decision to me.”

Growth isn’t just coming from small advisors, but also firms in the $100 million to $250 million AUM range that are rapidly growing and looking to get out in front of any issues caused by the Schwab-TD merger. December and January were Altruist’s best months for net new asset growth, Wenk said.

WHEN THE DUST SETTLES

However, even the loudest advisor bellyaching rarely results in many assets changing locations. It would be a surprise if even 5% of advisory assets went from TDA to a new custodian, Wenk added.

“I suspect that in a year from now, when we look back and all the dust settles, it’ll be like a lot of other M&A deals and the assets stayed,” he said. “Inertia is the biggest competitor.”

Schwab’s own model predicts just 2% attrition from the TDA merger, though the number also includes retail investor accounts. The company recently sent Schwab’s advisory agreements to TD Ameritrade advisors and nearly all have signed it, Bradley said. And Rick Wurster, president of Schwab, said 46% of TD Ameritrade financial consultants have already opened accounts on Schwab’s advisory platform despite not yet fully converting.

While 25% of RIAs are exploring adding a custodian in the next year, just 4% have switched in the past 12 months, according to data from research firm Cerulli Associates. The logistical challenges are too steep, although emerging custodians do have an opportunity to target breakaways and help them establish RIAs with functionality they can’t find elsewhere, said Cerulli associate director Marina Shtyrkov.

“The transition process for breakaways is already a period of disruption for their clients and repapering is unavoidable, rendering those common objections irrelevant,” Shtyrkov said in a statement.

Technology is a significant part of the pitches that competing custodians are making to RIAs. Apex even recruited Jon Patullo, one of the architects behind TDA’s advisor technology, to lead product strategy for its advisor solutions business.

Technology is also key for Schwab’s biggest competitor. Fidelity Institutional is accelerating investment in both investment products and technology to create a more attractive destination for advisors, said head of client growth Rohit Mahna.

“We are speaking with many advisors and firms choosing Fidelity because of our commitment to helping firms grow — not just custody assets,” Mahna said in an email. “This includes firms exploring new custodians due to service and technology challenges, as well as breakaways looking for the right partner to help them plan, launch, and run their new venture.”

Even the best technology and customer support aren’t enough for many advisors to turn away from the recognizable brand name that Schwab offers.

For example, deSteiger said Altruist’s all-in-one technology stack provides things like performance reporting and billing that she has to provide for herself at TDA, and offers a more modern digital portal for both clients and advisors. But that isn’t worth the effort of making a client feel comfortable with storing their money on a platform they’ve never heard of.

“For the clients that initially went with us, a selling point was that we were on a reputable platform,” deSteiger said. “From a client’s perspective, I view [the Schwab merger] as a positive. It enhances our reputation and is something we heavily considered.”

THE BRAND IS STRONG

Sandra echoed this statement, adding that Schwab’s recognizable brand name and lack of asset minimums were critical in getting a firm started from scratch. “Anytime I’m putting my name on the line and advising clients to put down their money, Schwab is a reputable brand name that carries a lot of weight,” he said.

During Schwab’s winter business update, Clark addressed competition in the custodian market. Envestnet recently announced plans to develop a custody business for RIAs, while Goldman Sachs’ attempt has struggled to gain momentum.

The amount of private equity and venture capital flowing in makes the RIA market an attractive place, but the custody business is challenging without the sort of scale that Schwab has achieved, he said. Even in the down market of 2022, Schwab’s custody business brought in $220 billion in net new assets.

“This is a business you need to love in order to stay with it,” Clark said. “And we are, and we do, but it is a hard business and it’s a business that’s taken us two decades to build in making sure that we could get all the capabilities that advisors want.”

As for the company’s biggest rivals, Pershing is moving more toward being a fintech provider with its Pershing X project, while Fidelity is focusing more on its roots as a fund company, Clark said.

“So that’s how I look at our two competitors, still fierce and still with great capability,” he added. “When it comes down to capability, we will not be outdone. When it comes down to longevity, we will not be outdone.”

Schwab welcomes the competition as it pushes everyone in the business to continually improve, Bradley told InvestmentNews. Heffron added that advisors should always be looking at alternatives and considering their options, and that she hopes ultimately firms stay with Schwab because they want to, not because they have to.

The company is focused for now on the first stage of the conversion, which began this past weekend, Presidents Day weekend, with a test group of 500,000 TDA accounts, primarily lightly active investors, moving over. This will provide an opportunity to test the service experience and make sure the technology is working as expected, Martinetto said during Schwab’s 2023 winter business update.

A large group of predominantly non-advised retail investors will follow in May. After advisors migrate in September, the remaining traders at TD will transition either in November or early 2024.

The game plan is in place. Now it’s just a matter of how the firm executes during its big weekend.

Then the real fun can start, Bradley said.

“This isn’t the end, this is the beginning,” he said. “The investment of millions of dollars into this platform will continue, and that’s an evergreen thing. It’s not going to stop. It will continue to evolve, and we’ll keep it on the cutting edge.”

Related Topics: Charles Schwab & Co., Chisholm Wealth Management, Gunder Wealth Mmanagement, Simmons Investment Management, TD Ameritrade