Executives, technology, philosophies and the event itself will be scrutinized

October 26, 2010 — 4:32 AM UTC by Brooke Southall


Brooke’s Note: When companies hold open-invitation conferences, they’re doing so because they want a big stage to strut their stuff and build solidarity with customers. But what also comes along with the territory is increased scrutiny of the services and products that are being delivered. In the case of Schwab Advisor Services, it is putting itself on stage for its RIAs and its vendor partners at IMPACT 2010. And it’s doing it all with the watchful eyes of most of the trade media, including RIABiz, in attendance. This article underscores some of the issues that clients and prospects will have in mind when they travel to Boston for the industry’s largest under-one-tent event .

The overarching takeaway about Schwab Advisor Service headed to IMPACT 2010 continues to be that it is the undisputed market leader in perhaps the most promising market in all of financial services. The San Francisco-based brokerage giant is the primary custodian of 6,600 financial advisors who have the right business model at the right time – from the perspective of regulations and consumer preferences — to compete as fiduciaries. The company has $600 billion of assets in custody, a 50% advantage over its nearest competitor, Fidelity, which has $400 billion.

Yet, being the largest in such a lucrative market also means Schwab has a giant target on its back.

Northeastern hotbed

Its competition, from TD Ameritrade to RBC Advisor Services is literally everywhere. IMPACT 2010 in Boston is a perfect example. It is invading the home territory of Fidelity Investments and LPL Financial. Schwab executives know this and clearly they believe they can achieve a net win by placing themselves in this hotbed of Northeastern U.S. wealth.

Last year Schwab entered IMPACT with its alternative assets policy unresolved, and it had no established buck-stops-here executive for RIAs. This year it isn’t facing any festering issues of this magnitude, though the fortunes of many technology providers are hanging on an announcement, expected at IMPACT, of which have been chosen to be part of its new integrated platform.

The intangible factor working in Schwab’s favor is its fraternity and sorority of highly loyal and gigantically successful big RIAs. One small indication of that was its ability to hold an elite conference, EXPLORE, in late June that attracted 128 advisors from firms that manage a combined $150 billion of assets to Amelia Island, Fla.. The average firm represented had 700 clients and 25 employees.

Here is the breakdown of some of the competitive dynamics that Schwab is living with as it lights it up in Beantown.

1.) Schwab is inviting dozens of prospective advisors — both existing independent advisors and wirehouse brokers — to look over its services. Schwab has traditionally been known as the home of the pure RIA but last winter, through Bernie Clark, the head of its RIA custody business, it softened its stance toward hybrid advisors. See: A giant is awakening in the hybrid RIA market Since then Schwab has not made any specific proclamations about this dually-registered crowd. But it still has two competitors — Pershing Advisor Solutions and Fidelity Investments — that go out of their way to welcome this ambi-business modeled approach. Perhaps Schwab will reveal more at IMPACT. The other possibility: the hybrid model may have achieved an out-sized importance in 2009 when wirehouse brokers were hastily leaving their employers in droves. In this more normalized atmosphere, could Schwab be returning to its more pure RIA-favoring approach?

2.) Schwab has promised that IMPACT 2010 will be foremost about Schwab Intelligent Integration, its planned grand ecosystem of best-of-breed technology providers to financial advisors. The glass half-full version of what Schwab is attempting is that it’ll combine its market-leading position as a custodian with its leading position as a portfolio management system provider under the Schwab PortfolioCenter brand and create an unbeatable universe. The half-empty version is that it has nothing to show yet and Fidelity’s WealthCentral is really getting somewhere with its own overarching technological umbrella. See: Technology review: Fidelity’s WealthCentral is solid and smart but still has seams

Analysts are not sticking their necks out to discuss who leads in the arms race of integrated technology. This is a long-term battle with too many variables to account for. Schwab still needs to build out the technology, name partners and then – over a period of years – get advisors to convert to the new system. Fidelity’s WealthCentral and TD Ameritrade’s Veo both have admirers who believe that they have big leads. But other advisors believe that in fact some of the micro-custodians have their own technological leads. Trust Company of America attracted Schwab alumni like Frank Maiorano and Bob Oros on the strength of its technology platform. Schwab’s former technology chief for RIAs, Dan Skiles, is in San Diego working to create a combination of Pershing’s NetX360, Black Diamond and a few Shareholders Service Group touches.

3.) Like McDonald’s with hamburgers and Starbucks with coffee, Schwab is still the clear service leader in asset custody. But companies like Fidelity and Pershing are flat out co-opting Schwab’s methods. See: Goldman aims to make red carpet service for RIAs universal at Fidelity Investments Pershing has continuously hired Schwab service personnel. Fidelity hired Schwab’s ex-president of custody, Charles Goldman, as it began a complete overhaul of its service.

Yet I doubt many RIAs are travelling to IMPACT 2010 with serious doubts about whether Schwab can continue to offer good service. But I have spoken to some RIAs who are moving assets away from Schwab because other custodians — in the Burger King have-it-your-way vein — say that special instructions do not upset them.

The comments of Kim Arthur, principal of Main Management, which manages $450 million of assets from San Francisco, speak to this aspect of service. “You can tell the people at Schwab have more depth of knowledge than the equivalent people at TD [Ameritrade]. The quality of the people is high at Schwab but if you ask them to move out of their comfort zone, they say they can’t do it but at TD they’d say: let me get back to you. They give you the heave-ho effort,” he says.

4.) Indeed, a growing demand to handle special circumstances and a lessening willingness on Schwab’s part to address them is helping Pershing to build its RIA business at an accelerating rate, according to Mark Tibergien, CEO of Pershing Advisor Solutions.

“We’re having far more inquiries from advisors at Schwab based on a declining service experience and the inability to deal with out-of-the-box issues.”

These kinds of comments are outliers that are belied by the broader trend of competitive success that Schwab continues to enjoy, according to Schwab spokesman Greg Gable. “Based on our check of the data, we continue to see net positive flows of accounts from our competitors, meaning we’re we are gaining share. We will never rest on past performance, but again I would caution against speculating on trends when the facts don’t support it. You have to take anecdotes on their individual basis.”

One example of that encountered by RIABiz was the choice of Chuck Bean to take more than $500 million of assets to Schwab after fulling vetting competitive custodians. See: How a big-time IBD rep ended up as a Schwab RIA

Schwab’s net new assets of $8 billion from RIAs for the quarter ended Sept. 30 were off 22% from the $10.2 billion from the quarter ended June 30 and 28% from the same quarter last year.

Schwab — and Morgan Stanley analyst Celeste Mellet Brown – attributed the slowdown to a seasonal shift. RIAs interviewed for this article confirmed that the recent summer was a brutal one for winning assets on the whole.

5.) Schwab Advisor Services – for all its years in business – still has an executive team on the steep part of the learning curve. Bernie Clark — who officially took the reins of the RIA custody business in February — will be center stage speaking publicly and privately with RIAs of all sizes. See: After lunch with Bernie Clark, the future of RIAs seems to have no limit Schwab added Nick Georgis to deepen its bench with industry veterans. Both of these executives are exceptionally popular with most advisors but they haven’t been on board long enough to prove their abilities in steering the big Schwab ship. This will be the first IMPACT for each executive in their new roles. The dark horse star: Neesha Hathi. If she can make believers in Schwab Intelligent Integration out of the 3,400 attendees, she will go a long way to making RIAs believe that Schwab’s future is as bright as its past.

6.) Even Schwab IMPACT 2010 itself – perhaps symbolic of the deadly intent of the competition — is getting competitive pressure. TD Ameritrade – half a trillion in custodial assets behind Schwab – put on a conference in Orlando that appears to have had a bigger budget based on its speaker line-up and considerable attendance. It had both George W. Bush and Bill Clinton speaking and Ed Clark, chairman of TD Bank in Toronto, also participated. [I don’t know if Charles “Chuck” Schwab is attending. TD Ameritrade attracted a record crowd of 1,279 RIAs to its event held Feb. 3-6, 2010 in Orlando, Fla.. — up more than 30% from the previous year. [It’ll feature Tony Blair at its next one] Schwab’s marquee speaker, Henry M. Paulson, Jr., former U.S. Treasury Secretary.

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