SAN FRANCISCO — After 15 years of serving their common clientele separately, Schwab Institutional and Cambridge Investment Research Inc. are showing those dually registered advisers a united front in recruitment, service and reporting.
Having melded their efforts as of March 1, the San Francisco-based custody giant and the Fairfield, Iowa-based broker-dealer field one recruiting team to court these hybrid brokers, and their client holdings now appear on a single statement.
Plug and play
Schwab intends to give prospective breakaway brokers who register both as brokers and as investment advisers with the Securities and Exchange Commission the plug-and-play ability that they cherish.
The deal gives the firm an edge over fellow asset custodians that continue to follow the old model of offering separate agreements for hybrid advisers, Schwab contends.
But it also sees the deal putting big-time independent broker-dealers more squarely in its cross hairs, according to Bernie Clark, senior vice president of sales and relationship management for Schwab Institutional.
“There’s more awareness of [Linsco/Private Ledger Corp. of Boston and San Diego] and Raymond James [Financial Services Inc. of St. Petersburg, Fla.]” from prospective breakaway brokers. [These brokers] look at [Linsco’s] platform and say, ‘That looks familiar.’ In reality, here’s an alternative, and you can go to the platform with the same ease,” Mr. Clark said.
“People view [Linsco] as a halfway house” between the full-service wirehouse model and full independence in the registered investment adviser model,” he added. “Now there’s no reason to stay at the halfway house; you can go all the way.”
But the Schwab-Cambridge deal is flawed precisely because it fails to go the whole way, according to Charles “Chip” Roame, managing principal of Tiburon (Calif.) Strategic Advisors LLC.
“This is certainly a step in the right direction. But as long as it is branded something other than Schwab, and as long as it is perceived as a glued-together model, LPL and Raymond James will maintain better brand awareness as a one-stop shop for the hybrid broker,” Mr. Roame said.
“Schwab needs the hybrid brokers to see it as a potential solution, which I think most do not today. They see Schwab as a rigid fee-only platform.”
Breakaway brokers accurately view Schwab as being a fee-only solution, according to Bill Dwyer, president of LPL’s independent-adviser-services division in Boston.
“You can create the look and feel [of dealing with a single organization] on the front end, but when you have an issue, it’s going to track back to the organization that produced the support,” he said.
There are certain sensitive broker-related issues that the Schwab service team will refer to Cambridge, Schwab spokeswoman Lindsay Tiles said. “Cambridge holds the broker’s license and has supervisory responsibility,” so, for instance, a payout question might be routed back to Cambridge, she said.
Yet hybrid brokers with a predilection for fee-based business sacrifice open architecture, better payouts and a better chance to build practice equity by going to an independent broker-dealer such as Linsco rather than the Schwab platform, Mr. Clark said.
But Linsco brokers soon can get the same open architecture of Schwab or The Bank of New York Co. Inc.’s Pershing LLC unit through West Palm Beach, Fla.-based Mutual Service Corp.’s platform, which is owned by Pacific Life Insurance Corp. of Newport Beach, Calif., Mr. Dwyer said.
However, there other factors, he said. “How many staff [members] does Cambridge actually have?” Mr. Dwyer asked. “We have 1,500 home-office employees and 7,700 advisers,” he said. “That’s 5.1 financial advisers to every home-office staff [member].”
Cambridge reported having 150 full-time employees as of last April, and 1,014 reps as of January.
Linsco brought 1,251 advisers on board last year, but company spokesman Kevin Dinino declined to disclose how many broke away from full-service brokers.
Schwab snared only 50 breakaway brokers last year, and
Fidelity Investments added 55, according to the companies. Schwab expects to improve vastly on this tally in part by adding this new hybrid offering to its choices, Mr. Clark said.
But executives from two competitors said that Schwab is reducing adviser choice by steering them toward a particular broker-dealer instead of letting them choose.
“We don’t push someone toward a certain model,” said John Iachello, chief operating officer of Pershing Advisor Solutions LLC of Jersey City, N.J. “Is [the Cambridge-Schwab alliance] the first among equals?”
Broker-dealer models vary widely because of geographical preferences and products, so tilting the playing field toward one vendor can be counterproductive to client interests, said Derek Bruton, national sales manager for TD Ameritrade Institutional, also of Jersey City.
Fidelity has a leg up on most competitors, because it also owns National Financial Services LLC, a New York clearing firm, Fidelity spokesman Steve Austin said.
But the Cambridge deal is only the first step Schwab is taking to make life simpler and better for breakaway brokers, Mr. Clark said. Although he declined to elaborate, he said that Schwab may eventually integrate with other broker-dealers friendly to holding commission-earning assets of fee-based advisers.
But you can’t cross a chasm in two small jumps, and Schwab will realize this, according to Mr. Roame. “This announcement will make Schwab look like it’s moving to the center, but the home run is when they actually do [move to the center of the commission and fee businesses] — by owning a broker-dealer,” he said. “Schwab must have considered Raymond James and [Linsco] as acquisitions.”
