Top service exec at big custodian says the tumult of the last 18 months led to the escalation of asset safeguards

February 25, 2010 — 5:36 AM UTC by Brooke Southall


Nearly four weeks ago, Schwab Advisor Services began a new security program under which the giant custodian calls RIA clients to confirm they authorized certain wire transfers. Now, Schwab has told RIABiz in an exclusive interview that it plans to continue the calls indefinitely, and that the program is one of a series of measures designed to protect clients in a post-Madoff world.

“We’re just stepping it up in light of the last 18 months,” says Joseph Vietri, head of service, trading and operations for Schwab Advisor Services. “We avoided [putting assets at risk in the period of economic downturn and scandals] and that’s really important to clients.”

He declined to specify what the next steps might entail.

The confirm-call program is not popular with all advisors. In essence, their clients are receiving a call from their custodian that could be inferred to mean: we don’t trust your financial advisor 100%.

Pecking order

The move reflects Schwab’s position in the pecking order of RIA custodians, says Timothy Welsh, principal of Nexus Consulting LLC in Larkspur, Calif.

“It’s a sign of true leadership when you take unpopular steps knowing that you could lose business because of it,” he says. “Nobody wants to go first. Schwab is going first then Fidelity and TD Ameritrade can say: ‘That’s where the industry is headed.’ It’s a game of chicken, in a sense.”

Fidelity and TD Ameritrade respectively said their policies “may” and “could” include calls to clients.

“We are very focused on the importance of safeguarding customer assets and our supervisory obligations to ensure

that all transactions, asset transfers and disbursements are authorized by the client,” says Steve Austin, a spokesman for Fidelity Investments.

May include call-outs

“We have formal monitoring and control policies around money movement and trading in advisor-managed accounts which may include call-outs to advisors or customers for certain transactions,” he says.

Kristin Petrick, spokeswoman for TD Ameritrade says her company also has intensive procedures in place to safeguard assets.

“We have extra steps and precautions, which could include contacting an end-client directly, on third-party wire transfers,” she says.

Like its rivals, Schwab also placed such phone calls on a case-by-case basis in the past; it began making those calls as a matter of policy on Feb. 1.

Schwab declined to disclose what size of wire transfers it focuses on or what percentage of wires it checks because it doesn’t want to tip its hand to potential fraud perpetrators.

J.J. Burns, president and CEO of J.J. Burns & Co. LLC of Melville, N.Y., says that he stands behind Schwab’s heightened vigilance. His firm advises about $250 million of assets.

Intrusive to their business

“There are advisors out there who think is intrusive to their business,” he says. “I look at it like: I’m proud we chose a custodian that’s proactive.”

Burns’ viewpoint is colored by his experiences with his clients after the Bernie Madoff scandal. He was getting suspicious questions from clients who had known him for 20 years. “They said: 'How do I know you’re not going to be like Bernie Madoff?’” Burns says.

The reaction of advisors to having Schwab calling their clients to check up on them has been mostly positive, according to Schwab.

[Vietri received one of these check-up calls from his own company because of a wire transfer made from his retail investment account related to the purchase of a house. The calling protocol was already in place for wire transfers from retail accounts prior to February.]

One reason RIAs are accepting the program is that the phones calls placed to their clients are being made by the same people who provide service to them as advisors, Vietri adds.

Level of comfort

“It’s the people they deal with day in and day out, and that gives advisors a level of comfort,” he says.

Welsh agrees that Schwab appears to be on solid ground among advisors with the new procedure.

But he believes that with each security procedure Schwab implements, it will be pushing the envelope of advisor tolerance a little further.

Welsh doubts advisors will suddenly move assets. But RIAs all use multiple custodians, and new accounts get steered to the ones that they most enjoy working with.

Advisors blink?

“The real question is will advisors blink and begin to diversify custodians as a result?” he asks.

Schwab views risk and reward in a different light than competitors, Welsh adds.

“That’s always been the way it is,” he says. “Schwab is the biggest so they have a high risk profile to manage. It’s [Schwab CEO Walt] Bettinger saying: if we lose some business [in an attempt to protect assets] then we can live with that.”

The changed atmosphere in Washington likely pushed Schwab to act, too.

“With the move towards a fiduciary standard across the board, brokers like Schwab may get caught up in being held to a higher standard, both for their retail and institutional clients,” Welsh says. “Thus, to minimize their potential exposure, they are being pro-active to protect the firm and put policies in place that will lower their risk profile from whatever future regulatory changes may apply.”

Vietri said Schwab did not implement the program in response to an “incident” that was reported in an earlier press report.

Inaccurate information

“That was inaccurate information,” he added.

The issue is truly a matter of protecting client assets from harm, he adds.

Though retail clients don’t need to worry about the security of assets held at Schwab because the company has pledged to reimburse them for any losses resulting from hacking and fraud, RIA clients don’t fall under that same umbrella.

“It doesn’t apply to advisor clients,” Vietri says. “[Advisors] are responsible for protecting clients.”

Retail-directed pledge

As it has previously stated, Schwab will consider applying the retail-directed pledge at RIA clients under certain circumstances, according to its spokeswoman Alison Wertheim.

One final reason the new security measure seems to have gone over without too much of a fuss from advisors is that Schwab forewarned them.

The custodian posted the information on Schwab Advisor Center and in its operations newsletter. Its service teams were also told so that they could inform clients.

Advance communication

Some Schwab RIAs criticized the company last year when it stopped providing custody of some alternative assets without much advance communication.

Schwab appears to be on solid ground with RIAs with both its alternatives program and its authorization calls to RIAs over wire transfers, Welsh says.

Mentioned in this article:

TD Ameritrade
Asset Custodian
Top Executive: Tom Nally

Nexus Strategy
Consulting Firm
Top Executive: Timothy D. Welsh

Share your thoughts and opinions with the author or other readers.


reporter said:

February 25, 2010 — 2:46 PM UTC

Brooke: Re article’s reference to “Vietri said Schwab did not implement the program in response to an 'incident’ that was reported in an earlier press report. 'That was inaccurate information,’ he added.”
It flatters me when pubs like ours, Investment News, break stories and are followed by others on the beat. But if you’re paraphrasing you should put in context that it was an adviser who said he was told by his Schwab service rep that Schwab’s new policy stemmed from a recent incident. Schwab declined to respond. We report the news, we don’t create it. You might also think about use of terms like “exclusive interview” and disclosure of whether people quoted in your stories are paid by firms they are commenting on or by rival firms, and also whether they are contributors to your interesting pub.


Elizabeth MacBride said:

February 25, 2010 — 6:48 PM UTC

Congratulations to InvestmentNews for breaking the Schwab wires story; we are pleased that you are flattered by our follow-up story. We are flattered, in turn, that you’ve commented on our site. RIABiz is a small start-up publication, but it is committed to high journalistic standards. We stand by our sources.


David Lucca said:

March 4, 2010 — 4:11 PM UTC

In so many ways, Charles Schwab leads the industry. This is one more great example. RIABiz, thanks for covering this!


Roger said:

January 8, 2016 — 4:54 AM UTC

Charles, great article….
I was one “unintended victim” of the overzealous Charles Schwab security check for an overseas wire transfer in December to Hong Kong. I have been a customer for over 20 years, but my wire transfer to Hong Kong was rejected after initial indications it was going through. I did not receive a 'check up call’, only the Charles Schwab rejection email. I could never get any reason why it was rejected when I asked by phone or by email.
My workaround was to wire the money to Bank of America and used my Merrill Lynch Wealth Management account to wire the money to Hong Kong. I did answer the many questions to Merrill Lynch asked to verify my identity. Charles Schwab asked me similar questions also. In the end Merrill Lynch transferred same day as my phone call request.

Mr. Vietri, you and your team at Charles Schwab will be losing my business in the near future. I know you are big guy, and big picture guy. I am just a small potato trying to buy a home for my family here in Hong Kong. You force me to make my decision, without the respect to give me any reason.

Timothy Welsh, take your head out of the sand and look around. Bad decisions are made by those not willing to think about the consequences to valid customer requests. Your cookbook decision making process is a loser and shows your weakness and inflexible, “I know everything” attitude.


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