Schwab’s separates success a warm-up

Now nobody stands between Charles Schwab & Co. Inc. and the wirehouses in the managed-accounts business.

But the San Francisco broker says it is just warming up as it charts major improvements in its program over the next year.

Having pushed its assets past $11 billion as of Sept. 30, Schwab has leapfrogged the more established managed-accounts programs at Wachovia Corp. of Charlotte, N.C., A.G. Edwards & Sons Inc. of St. Louis and Deutsche Banc Alex. Brown Inc. of New York, according to a recent survey.

Schwab had put Lockwood Advisors Inc. of Malvern, Pa., in its rearview mirror as of June 30, 2002, when a similar survey was completed, according to data from Cerulli Associates Inc. of Boston.

That puts Schwab’s five-year-old managed-accounts program in sixth place, behind only the five wirehouses, according to Cerulli.

But Schwab still trails the wirehouses by a wide margin. No. 5 on that list is Prudential Financial Inc. of Newark, N.J., which Cerulli lists as having $16 billion.

larger ambitions

Yet Schwab executives say these early successes have only whetted the corporate appetite for a much bigger push.

By emulating the wirehouses and adopting better technology and more-unified accounting, they hope to take business away from the leaders in bigger chunks.

“Now we’re poised to take on the wirehouses,” says John Morris, senior vice president of Schwab’s managed-accounts business.

The hunger for battle on this front is intensifying at Schwab because the assets won in the managed-accounts arena offer glimmers of hope in two much more contentious battles – bringing new advisers to its custody business and wresting the assets of affluent investors from Wall Street brokers.

Of the new advisers coming to Schwab this year, 20% of them cited Schwab’s managed-accounts platform as the primary reason. The accounts that advisers bring in by offering separates are about 50% larger than others, Mr. Morris adds.

The bigger accounts are a reflection of the fact that, armed with managed accounts, independent financial advisers can speak a language affluent clients understand.

“If you have to kick people out of separate accounts, that severely limits the kind of client you can compete for,” says T. J. Gilsenan, national sales director of managed accounts at Schwab Institutional.

He adds that Schwab’s managed-accounts platform is an easy sale because it has lower prices generally and because advisers can consolidate all managers onto its platform.

“People found out they can put all managed accounts in one spot,” Mr. Gilsenan says.

It appears that Schwab advisers are catching on in a hurry, considering that 17% of its 5,400 advisers used them as of Sept. 30, compared with only 13% a year earlier.

Before Schwab can close the adviser participation gap, it needs to close the technology gap on their behalf, Mr. Morris says.

His first goal is to slow the blizzard of paper that is currently drowning advisers’ clients. That’s because virtually every trade in every managed account creates a confirmation that is sent to clients. Mr. Morris wants to reduce this to a quarterly page as mutual funds do.

He acknowledges that some wirehouses already have quarterly statements for managed accounts.

“That’s going to be one of the biggest things for Schwab Institutional this year,” Mr. Morris says. “Advisers say: `If you can shut confirms off, managed accounts are going to be a lot more attractive to us.’ They don’t want their mailbox filled.”

To further magnify Schwab’s attractiveness, he says he is in the process of creating a manager-of-managers program. This would allow an adviser to bundle together all of the client’s managers into a single account.

Historically, manager-of-managers programs have threatened the role of the financial adviser, but Mr. Morris says his program addresses that concern.

The adviser himself serves as the manager of managers, making allocations, and hiring and firing managers.

Still, Robert Powell, a Salem, Mass.-based consultant, says that while Schwab may have a better mousetrap, its marketing machine is disadvantaged.

Smith Barney Inc., which Cerulli credits with $86 billion in managed accounts as of Sept. 30, “has a very centralized story, and Schwab has a very fragmented story,” he says. “How does Schwab tell the public it has this wonderful service?”

tighter target

Indeed, Jeff Cusack, who headed Schwab’s managed-accounts program until this summer, when he left for Bank One Corp. in Chicago, says that the effectiveness of the program may be lost on the average investor.

“The real advantage will be with the superhigh-net-worth individual,” he says.

But Mr. Morris says he also plans to use a different approach than Mr. Cusack, who was brought to Schwab from Smith Barney of New York for his experience in its industry-leading separate-accounts program. Mr. Cusack was largely responsible for creating Schwab’s bundled managed-accounts product, Managed Account Select.

In that program, Schwab screens managers, using the research of San Francisco-based Callan Associates Inc.

“It was a missing piece,” Mr. Cusack says.

Mr. Morris says he plans to take the managed-accounts program back to its roots as a clearinghouse for hundreds of separate-accounts managers.

“Advisers certainly don’t want to be boxed in,” he says. “That’s my gig.”