Charles G. Goldman's appointment last week to run the RIA custody and correspondent clearing businesses of
Fidelity Investments presents a challenge to The
Charles Schwab Corp., his former employer, and highlights contrasting strategies as the discount brokerage giants battle for assets from registered investment advisers, wealth managers and corporate retirement plan sponsors.
While San Francisco-based Schwab dominates the business of providing custody services to RIAs, the fastest-growing channel in wealth management, it far trails Boston-based Fidelity in servicing the corporate retirement plan sponsors and consultants who buy huge amounts of mutual funds and packaged investment products.
Now, with the appointment of Mr. Goldman, who spent three-and-a-half years at the top levels of Schwab's RIA business, Fidelity is poised to mount an aggressive challenge to its West Coast rival in that business — while Schwab has reorganized to attack Fidelity's dominance in corporate retirement plans.
A former consultant who joined Schwab in 2001 and served for a time as its expense czar, Mr. Goldman unexpectedly left the company two weeks ago when Schwab merged his unit with its much slower-growing retirement business and grouped them under retirement services head James McCool, a close associate of Schwab chief executive Walter Bettinger.
Schwab positioned the reorganization as a more efficient way to capture assets for both its businesses at a time when the wealth management channels of brokerage,
financial planning, insurance and retirement planning are converging. People who advise corporations on retirement offerings for their employees also have expertise in
trust companies — another new market targeted by advisers — and RIAs are increasingly prospecting investment consultants as clients.
Fidelity, which Mr. Goldman will join in January, at the same time hired Michael Durbin to run its RIA unit. Mr. Durbin, who will report to Mr. Goldman, is an 18-year veteran of retail-brokerage sales at New York-based Morgan Stanley. That strongly positions Fidelity to capture the business of disgruntled brokers who are expected to flee the likes of Morgan Stanley, Merrill Lynch & Co. Inc. and Wachovia Securities LLC over the next two years.
While Mr. Durbin focuses on renegade brokers, Mr. Goldman will coordinate improvements to operations support and business development, which some advisers said Fidelity has neglected as it has focused on legal and compliance issues. Mr. Goldman also has other responsibilities that could meld well with adviser needs, consultants said. He will oversee Fidelity's National Financial Services LLC, one of the largest providers of securities clearing and custody services to small broker-dealers, as well as its embryonic efforts to serve hybrid brokers offering both commission- and fee-based services.
"Fidelity clearly got the right guy here, and Schwab could lose out," Alois Pirker, a senior analyst at consulting firm Aite Group LLC in Boston, said of Mr. Goldman's hire. "It represents a huge opportunity for them to catch up to Schwab's dominant market position. It is bad enough losing one of your top executives, but losing him to its chief rival when breakaway brokers are becoming very important must hurt very much."
Fidelity, to be sure, has catching up to do.
Schwab's $542 billion in RIA assets at the end of 2007 represented a 24% market share, compared with 11% for second-place Fidelity, according to a Schwab presentation to analysts two weeks ago that was based on a study from Cerulli Associates Inc. of Boston and its own data. Fidelity officials disputed the data, saying the firm ended 2007 with a 15% share of RIA assets on its custodial platform, but its executives conceded that its $335 billion in adviser assets lags its West Coast competitor because of a loss of customer focus.
"Schwab has been renowned for its very good customer service, and that will be one of Charles' first objectives here," said Michael K. Clark, president of Fidelity's Institutional Products Group, who will be Mr. Goldman's new boss. "I want to get 10 out of 10 on our customer surveys."
Fidelity, however, lost ground to Schwab in its third quarter as net new client assets in its RIA and correspondent clearing businesses plummeted from the year-earlier quarter. The privately held firm also is in the middle of a round of layoffs that could affect about 10% of its 44,000 employees.
"They've got a lot to deliver on in a fairly tough market that includes layoffs and asset values [in client accounts] dropping," said Daniel Banis, president of First American Trust FSB in Santa Ana, Calif., which uses Fidelity as a custodian for about $2.1 billion in assets. Mr. Banis, who sits on one of Fidelity's advisory committees, characterized Mr. Goldman's job as "challenging" but laden with opportunity "because there is room to improve.''
Mr. Clark said Fidelity has invested about $50 million in a new technology called Wealth Central that lets advisers easily access forms and processes to handle both commission- and fee-based services from a single platform. He also said that in each of the last six months, Fidelity has won more assets from Schwab clients than it lost to its rival, reversing an earlier trend.
A Schwab spokeswoman disputed Mr. Clark's assertion. "There has not been a single quarter in almost three years in which our outflows to Fidelity were greater than our inflows from them," she said, adding that is difficult for either firm to parse whether assets transferred between them come from the retail channel, the RIA channel or — in Fidelity's case — the correspondent clearing channel.
"Fidelity has made strides, but Schwab advisers continue to say that Schwab is the best in service, and it's not about pricing or the mutual fund platform," said Sean Cunniff, research director in the brokerage and wealth management practice at the Tower Group Inc. in Needham, Mass. Hiring Mr. Goldman to re-create Schwab service is a "surprising and brilliant move," Mr. Cunniff said.
Schwab officials declined to comment through a spokeswoman, but at the firm's semiannual business update two weeks ago, Mr. McCool acknowledged that the reorganization could create confusion among clients.
"Reaffirming our commitment to this business is Job One for me," he said of the RIA unit. "My first priority is to be out meeting with advisers."
Schwab officials declined to say whether Mr. Goldman, who is 47, was offered an opportunity to stay and run the RIA unit under Mr. McCool, who is 49. One person close to the company's top level said Mr. Bettinger, 48, who built Schwab's retirement business and became chief executive in October, felt that Mr. Goldman was a bit too ambitious and independent.
"Charles was the only guy with CEO-itis left at the firm," said the person, who requested anonymity. "He did a good job while he was here, but he was a little bit too entrepreneurial and knew he wasn't going to get the top job."
E-mail Jed Horowitz at [email protected].
