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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 once again will accept assets into domestic and offshore 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 reopened 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.”
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 last week.
“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 a review process at Schwab before the company will hold them 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 has 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 about $624 billion in custody. Mr. Clark said that asset level is an all-time high for the firm, besting the previous peak of $605 billion reached in May 2008.
E-mail Dan Jamieson at [email protected].
