A prominent group of registered investment advisers, angered by Charles Schwab & Co. Inc.'s recent decision to stop accepting custody of alternative investments, are threatening to move other assets from the San Francisco-based company.
"This precipitous blanket decision during a time of extreme market stress places a crushing burden on your RIA partners at a time when few of us can afford to add more uncertainty to our client relationships," the group wrote in a Feb. 24 letter to founder Charles Schwab, president Walt Bettinger and Schwab Institutional head James D. McCool.
The decision "has many RIA firms, including ours, actively looking elsewhere for a long-term, supportive, full-service broker-dealer partner," according to the letter.
The letter was signed by 22 firms and organized by Steve Disenhof, a partner at Litman/Gregory Asset Management LLC, a Larkspur, Calif.-based RIA that manages $1.1 billion in discretionary assets. Other signers include Timothy Kochis, chief executive of San Francisco-based Aspiriant LLC, which has $4.1 billion under management; Tom Orecchio, principal and vice president of Old Tappan, N.J.-based Modera Wealth Management, which has $449.7 million under management; and Cheryl Smith, executive vice president of Trillium Asset Management Corp. in Boston, which has $931.2 million under management. Most of the signers use Schwab as their primary custodian, but also have other custody relationships.
Schwab told RIAs last month that it would immediately end custody of offshore-fund investments and extend the decision to all alternative assets by May 10. The ban affects hedge funds, promissory notes, private placements and other stock and bond alternatives that are an increasingly large part of some advisers' investment arsenals.
Schwab is continuing, however, to accept investments in the 31 registered funds sold on its Alternative Investment Source platform, an exception that drew accusations of hypocrisy from some RIAs. Schwab reaps as much as 0.6% of assets sold on the platform, compared with just $100 per transaction for alternative investments of any size that RIAs put in custody.
The alternatives ban was motivated by "anticipated regulatory changes" that are likely to focus on the role of
hedge fund custodians, Schwab told advisers last month without mentioning Bernard Madoff, Stanford Financial Group or other alleged frauds that have cast light on the role of fund gatekeepers. The letter, however, accused Schwab of tarring all alternative vehicles and conveyed dismay over the abruptness and extremity of the decision.
"We were thrown a curveball," said Bradley Alford, a signer and a principal of Alpha Capital Management LLC in Atlanta, which last summer shifted its more than $100 million of assets to Schwab from
Fidelity Investments of Boston.
Schwab Advisor Services spokes-woman Alison Wertheim declined to discuss whether the firm will modify its position in response to the letter. "We respect their views and are reaching out to them to hear more about their concerns," she said.
The firm, meanwhile, has suggested that RIAs place alternative assets with San Francisco-based Pensco Trust Co. and Waco, Texas-based Sterling Trust Co., which both specialize in custody of alternatives for self-directed retirement ac-counts. Advisers aren't impressed.
"We can't simply shut down the alternatives' position of our asset allocations while Schwab seeks a third-party solution," the letter said, noting that some RIAs have used the firms and found their capabilities inferior to Schwab's.
Some advisers, to be sure, understand Schwab's caution as Congress shines a new light on
hedge fund gatekeepers while discontented investors step up litigation against firms with deep pockets. "It seems suicidal for them to take on that risk with so little to gain," said William Baldwin, president of Pillar Financial Advisors Inc., a Waltham, Mass.-based RIA that has one or two clients who are affected by the decision.
Some of Schwab's competitors sniff opportunity.
"We believe we have the flexibility to continue to support advisers who utilize this important asset class for their clients," a spokesman for Fidelity said.
Pershing LLC, the Jersey City, N.J.-based clearing unit of Bank of New York Mellon Corp., "processes selected alternative investments where it can meet the appropriate operational controls and requirements," and will "continue to actively explore opportunities to expand our capabilities and solutions in a controlled manner," a spokesman said.
Omaha, Neb-based TD Ameritrade Holding Corp.'s custody unit sees "opportunity" and is taking a "good, hard look" at Schwab's new policy, said Brian Stimpfl, a managing director.
E-mail Jed Horowitz at [email protected].
