Schwab reverses course on alternatives

The firm says it will once again accept the assets in its custody unit

The Charles Schwab Corp. has reversed course and will allow advisers to hold in custody additional alternative investments.
The move helps stem something of a revolt among the firm’s registered investment adviser clients, which erupted in February 2009 when Schwab’s custody unit said that it would stop accepting new alternative products, close off additional funds into alternatives and no longer hold offshore hedge funds.
Beginning May 3, Schwab will once again accept assets into domestic and off-shore hedge funds, registered but non-traded real estate investment trusts, and the private securities of registered financial institutions, employer stock or private deals underwritten by broker-dealers.
“We’re back at the point now where we’ve re-opened to most of what we were doing before,” said Bernie Clark, head of Schwab Advisor Services.
“We never exited the [business of holding in custody alternatives]. We just stopped building it,” Mr. Clark said.
The firm holds about $6 billion in alternative assets for its advisers.
Under the new policy, the firm won’t hold promissory notes, but has referral arrangements with several trust banks for that service.
“We will talk to [adviser] clients with material [alternative] positions to ensure a good solution,” Mr. Clark said.
Schwab announced the change in a webcast with advisers yesterday.
“Because of pressure [from advisers] they changed their mind,” said Christopher Casdia, compliance and operations manager at Homrich & Berg Inc., an advisory firm that uses Schwab’s custody services and manages $1.9 billion for high-net-worth clients.
“Alternatives are a wonderful complement to a portfolio, so to say no [to alternatives] on Schwab’s part was a bad move,” he said.
“I will acknowledge that at some point we could [have gotten] more aggressive at” holding alternatives in custody after pulling back last year, Mr. Clark said.
“We learned a lot” about how to address issues involved in ensuring proper custody of the assets, he said.
Mr. Casdia welcomed Schwab’s change of heart.
“They understand it better now,” he said about Schwab. “Once you understand how a third-party administrator works and the trading and custody issues … the comfort level” returns, Mr. Casdia said.
Under the new policy, alternatives have to pass an review process at Schwab before the company will hold their assets in custody.
Assets have to have “a good offering document, audited financials for the past three years and an independent valuation,” Mr. Clark said.
Alternatives that are accepted onto the Depository Trust and Clearing Corp.’s Alternative Investment Product service will qualify for custody without going through the approval process.
Schwab had hired a dedicated person to help advisers get their alternatives onto the DTCC platform, Mr. Clark said.
Schwab, the largest custodial firm, serves 6,000 advisers and holds $624 billion in custody as of the end of the first quarter.
Schwab, the largest custodial firm, serves 6,000 advisers who custodied $624 billion at the firm as of the end of the first quarter.
Mr. Clark said that asset level was an all-time high for the firm, besting the previous peak of $605 billion reached in May 2008.