Windhaven's results and Schwab Private Client's non-resullts could have investors on edge despite record assets from RIAs

January 20, 2015 — 8:56 PM UTC by Lisa Shidler

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Brooke’s Note: Wall Street analysts, the mainstream financial media and Schwab’s PR department all agree that Schwab had a dang good 2014. The one dissenting vote comes from investors who refuse to bid up the price of its stock. With that in mind, we wrote this article by reading between the lines of the Schwab earnings release to penetrate this disconnect.

Charles Schwab Corp. gained $214 billion in assets in 2014 and beat estimates. Analysts are bullish — but investors continue to be unenthused with shares sagging nearly 5% on Friday before rebounding.

Shares in the San Francisco-based firm’s shares are down about 11% this year, well behind the Dow Jones Industrial and S&P 500 averages that are off more like 2%. As of 1:32 p.m. EST on Weds. the Schwab shares traded at $26.59. They ended 2013 at $26.

Though Schwab was able to hit its bigger numbers with ease, some of the details behind those numbers may continue to fill investors with unease.

Windhaven worries

One rough spot is Windhaven. Assets in the ETF manager continue to trend in a troubling direction, losing 12% in the fourth quarter alone. It ended the year at $16.2 billion in assets.

In a year where the stock market grew about 10%, Windhaven struggled as the company’s assets have dropped nearly $2 billion with the manager’s ADV still showing assets of $18 billion. On its website, Schwab describes Windhaven as having more than $17 billion in assets. See: What’s up with Schwab getting into the robo-style online advice business and is Windhaven the linchpin?.

Analyst Chris Allen with Evercore Group LLC’s ISI team wrote that that asset management revenue indeed was lower than he’d expected.

Full service push

Overall, Schwab held a total of $2.46 trillion in client assets at year end. RIAs continue to gain on Schwab at its own wealth management game — accounting for $124.8 billion in new assets in Schwab Advisor Services last year. RIAs now have $1.1 trillion of assets held in custody at Schwab — just a half furlong behind Schwab retail’s investor assets at $1.3 trillion.

Schwab declined to break out the numbers of Schwab Private Client, its RIA aimed at high-net-worth investors. Considering that its advertising seems so focused on this segment, such a omission may receive notice from careful readers of the release. Schwab also declined to update its effort to franchise branch offices. See: Why I moved my account from Schwab’s RIA and what Chuck could do to improve Schwab Private Client.

Walt Bettinger, Schwab’s chief executive lauded his firm’s “full servicing investing model” saying that by the end of 2014 assets were at $1.23 trillion for those who were enrolled in some form of “ongoing advisory services” up 12% from December 2013. See: 8 takeaways from Schwab’s earnings report and commentary including: We are 'full-service’, dammit. Schwab Private Client’s ADV still shows $58 billion of assets in that RIA.

“We ended 2014 with record client account levels — active brokerage accounts were up 3% to 9.4 million and banking accounts rose 8% to 985,000,” said Bettinger in the release.

Retail shake-up

However, there were signs that Schwab’s retail accounts face challenges. For instance, new retail brokerage accounts for the quarter totaled approximately 146,000, down 5% from the year-earlier period. Total accounts were 6.7 million as of Dec. 31, 2014, up just 2% year-over-year.

Another perhaps concerning occurrence happened in December when Schwab replaced John Clendening, who had overseen management of Schwab’s Private Client division and much of its other retail business. He walked away with a separation deal of $5.17 million and a newcomer Terri Kallsen is now in charge of the retail division as executive vice president of investor services. See: Schwab promotes relative newcomer Terri Kallsen to head retail, with John Clendening getting the golden parachute and Andy Gill transitioned. Kallsen has yet to reveal what if any changes she will make in retail strategy or tactics.

Bettinger offered no new information about the company’s much-anticipated robo effort dubbed Schwab Intelligent Portfolios, adding that the roll-out is still planned for the first quarter of 2015. See: Can Schwab, six years late to the robo party, 'freeze the market’, catch up and blow doors?.

Good news

One bright area of asset growth for the firm is in exchange traded funds. Assets in Schwab’s ETFs totaled a record $26.9 billion at the end of 2014, up 60% from December 2013.

But the company has had less success in bringing ETFs into 401(k) plans.

As previously was reported, Schwab transitioned its first ETF-only 401(k) plan but the firm has 120 plans and 73,000 participants using both ETFs and mutual funds in their retirement plans. Schwab ETF OneSource added 65 additional funds last year. See: Schwab garners $4 billion in index-only 401(k) assets fast out of the gate.

Schwab’s proprietary funds posted net inflows of $12.3 billion in 2014 with the largest inflows to Schwab’s own ETFs, which took in $8.7 billion of the $12.3. But that’s not in the big leagues among mutual fund or ETF providers. For example, Vanguard Group added i$163.4 billion to mutual funds and exchange traded funds through the nine months of 2014 ended in October.

Total client assets invested in Schwab proprietary funds reached a record $267.5 billion at the end of December 2014, up 8% from the end of December 2013.

Proven potential

Schwab appears poised to throw some big resources at turning around Windhaven.

Last year, founder Stephen Cucchiaro, who was the magician behind the results before Schwab acquired the firm, was replaced by Schwab superstar, internally and externally, Liz Ann Sonders. See: With Stephen Cucchiaro out, Liz Ann Sonders takes the Windhaven reins. Since that announcement, however, Sonders has kept a seeming low profile in terms of how she will connect to that role.

Cucchiaro’s departure caused ripples, acknowledges Schwab spokesman Greg Gable. But he says Windhaven’s strength is its ability to deliver in both up and down markets.

“Windhaven is designed to provide downside protection as well as long term growth, so naturally investors were biased towards other solutions when the market was up in 2014. You tend to see that kind of activity reflected in general industry flow data where money often moves with the market in search of performance during up markets, periods where people can lose sight of the value of downside protection. So that’s one factor. We also saw some outflows during the summer following Steve Cucchiaro’s departure, the legacy founder with whom a number of longstanding clients had direct relationships. This pattern is not atypical when a management shift occurs.”

Schwab knows the potential of Windhaven. In the two years following Schwab’s purchase of Windhaven the company’s assets soared from $4 billion to $12.5 billion and sources said Schwab’s branch brokers worked hard to sell the funds. See: Windhaven misses its 12-month benchmarks again but still hits asset-gathering mark.

In fact, from its inception in 2001 until it sold to Schwab in 2010, the assets grew 56% annually according to a press release by Schwab related to the Boston company’s purchase.

But whether these hyper-diversified products that get beat by the S&P 500 in good years can experience growth in an indefatigable bull market — especially as the last bear market becomes a distant memory, is open to question.



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