Schwab steals a big chunk of SMA market share from wirehouses, according to new Cerulli data

Brooke’s Note: Smith Barney brought separately managed accounts to prominence years ago as a means of competing against fee-based financial advisors. The idea was a huge success and all of the other wirehouses followed (and they were generally known as wrap accounts in that realm). So, it’s somewhat ironic that separately managed accounts are now a big part of the arsenal that RIAs are using in winning assets from the likes of Morgan Stanley Smith Barney and the others. This story shows just how far the worm has turned.

As a windfall of its strength in the RIA custody business, Charles Schwab & Co. has also quietly become a force in the separately managed account business.

Schwab is now in fourth place, bumping Wells Fargo Advisors LLC down to fifth. The discount brokerage giant and RIA custodian tripled its SMA market share from 3.1% and $17.9 billion in assets in 2004 to 9.1% and $56.2 billion in the second quarter of 2011, according to a soon-to-be-released report from Boston-based Cerulli Associates Inc.

Schwab is making such headway in the SMA business by grabbing big wirehouse advisors and by relying on some of its biggest existing RIA clients. The attraction is Schwab’s extensive SMA platform with more than 1,100 money managers. SMAs now account for $56 billion of the firm’s nearly $700 billion advisory business.

An SMA is an investment vehicle with similarities to a mutual fund, in which the customer pays a fee to a money manager for its services managing the customer’s assets. The big difference is that the mutual fund investor owns shares of a company that in turn owns other investments. An SMA investor owns the invested assets directly in his or her own name — which can have tax advantages.

As advisors flee the wirehouses, they are eager to find similar types of separate-account products in the independent arena, and Schwab offers the best options for these advisors, says Scott Smith, a Cerulli Associates analyst.

“This is happening because wirehouse advisors are leaving and landing in RIAs and want to use similar programs and they’re going to Schwab,” says Smith. “These are a more sophisticated higher-end advisor. The RIA channel is maturing and using a broader set of SMAs. Schwab has a more robust platform than others in the independent channel.” See: TD Ameritrade paves the way for breakaway books of business to transfer intact.

Patty Loepker: Relative to our competitors,
we’re holding up very well.

Full SMA menu

For its part, Schwab says that its growth stems not just from the breakaway movement. It is also due to an increased appetite on the part of advisors to offer separate accounts to clients, says David Lindenbaum, the firm’s vice president of managed accounts.

He says that 80% of the SMA net new assets come from existing advisors, and that they’re generally the largest advisors.

“Our platform is growing and is being used in a way that helps the largest clients of our RIAs,” he says.

Schwab’s platform has been growing by an average of about $6 billion in net new assets yearly over the past four years, Lindenbaum says, adding that the company has the largest SMA platform in the industry with more than 1,100 money managers and 3,600 individual strategies.

Pecking order

Morgan Stanley Smith Barney LLC is still the clear leader in the SMA market, but its market share has dropped dramatically — from 40.7% in 2004 with $236 billion assets to 28.4% with $175 billion in assets as of the second quarter.

MSSB officials did not return an e-mail seeking comment for this story.

Virtually unchanged are the market shares of Bank of America Merrill Lynch, which remains in second place at 23.8%, and UBS, in third place at 9.3%.

Despite getting bumped by Schwab from fourth place down to fifth in the second quarter, Wells Fargo doesn’t intend to make any dramatic changes , says Patty Loepker, senior vice president and director of externally managed and institutional accounts.

Wells Fargo fell a notch despite a slight gain — from $51.1 billion in assets and a 8.8% market share in 2004 to $54.9 billion and 8.9%.

“The competitive spirit in me never wants to move down without a doubt,” Loepker says. “We’re certainly holding our own in this separate accounts space. Relative to our competitors, we’ve held up very well.”

She acknowledges Schwab’s growth and attributes it to the ongoing evolution as advisors move to the independent arena.

“The move to independence is helping Schwab,” Loepker says. “We’re seeing transition of SMAs into some of the advisory spaces. The market share is changing a little bit. We continue to do what we have been doing and continue to support all of our advisory platforms and give flexibility to advisors to choose the model that best fits them.

There are other more Schwab-specific reasons that the SMA assets continue to swell.

“We’re broadening our platform all of the time, which is appealing to large advisors,” Lindenbaum says.

When advisors leave wirehouses, Schwab has a dedicated investment management consulting group ready to help them find similar SMA strategies.

“Our group will help advisors who may have 50 separate accounts make the transition,” Lindenbaum says. “I’d argue that we have the most robust platform for advisors as it pertains to separately managed accounts.”

In the marketplace

Despite SMAs taking a beating over the last few years, Schwab’s program has remained successful, Cerulli’s Smith says.

The firm’s success in the retail separate account arena is driven by its Marketplace program, an open separate-account program available only to RIAs, Cerulli notes. In this program, the advisor negotiates fees directly with the asset manager. Schwab allows its retail investors to acquire separately managed accounts on their own.

“Schwab’s growth is attributable to growth of the RIA channel overall and increasing appeal of separate accounts in the channel as they add wirehouse advisors and existing RIAs look to broaden product set,” Smith says.

Lockwood is also on the rise

Schwab wasn’t the only firm in the independent arena to show growth at the wirehouses’ expense. In fact, Pershing’s Lockwood platform went from $15.5 billion in assets and a 2.7% market share in 2004 to $25.2 billion in the second quarter of 2011 with a market share of 4.1%.

John Phoenix says Envestnet’s technology enables
advisors "tax-loss-harvest SMA accounts all year
long."

In 2004, Fidelity Investments wasn’t in the Top 10 list among SMAs, but now the firm comes in ninth with $9.7 billion in assets and a 1.6% market share.

A Fidelity spokesman noted that through its Separate Account Network, the firm offers access to more than 450 money managers representing nearly 1,700 investment strategies available in a dual-contract format.

The company also provides fully integrated single-contract SMA capabilities through its Managed Account Solutions and Managed Account Resources offerings, which provide access to more than 400 managers through its relationship with Envestnet.

Growth at Envestnet

Thought not quite making the top 10 list, Envestnet of Chicago has seen dramatic growth in its managed accounts program, says John Phoenix, senior vice president of advisory services and head of RIA distribution.

Envestnet works with a number of custodians, including Schwab and Fidelity, and provides platforms for both RIAs and IBDs.

Lindenbaum says that Schwab and Envestnet generally serve different market segments and that Schwab typically handles the larger, more sophisticated RIAs.

Phoenix points out, however, that a number of the biggest breakaways have chosen his firm’s platform for separately managed accounts.

“We’re working with a lot of huge RIAs,” he says. “I think SMAs are coming back. But it’s been a huge movement.”

See: Envestnet to zero in on RIAs and family offices.

SMA customization

Envestnet has 1,000 managers on its SMA platform, and Phoenix says the industry is using sleek technology allowing advisors to customize accounts for clients.

“The beauty of centralizing your trading and incorporating Envestnet’s technology is that you can deliver on the promise of separate accounts. You’ll get great investment performance and also customize it. You can tax-loss-harvest SMA accounts all year long.”

Losses are forever

Phoenix points out that the newer SMA products appeal to advisors for their tax strategies for high-net-worth clients who want to claim losses for tax purposes.

“Those losses are hugely valuable to advisors,” he says. “The beauty of the tax code is, losses can carry forever.”

Lindenbaum also points out that the tax advantages of SMAs makes them attractive to RIAs.

“One great thing is the advisors can take the losses for the clients,” he says. “The advisor can point to their value and say maybe I didn’t pick the right one, but we got the losses. For the bigger clients, taxes are very important.”

Lindenbaum adds that, unlike at wirehouses, the majority of the users of SMAs through Schwab take advantage of the ability to harvest losses. The ability to take these losses is a big way that SMAs are different from mutual funds.