Schwab adds $2 billion of assets from Windhaven, with RIA help, and another $2 billion of assets from 41 new RIAs

Brooke’s Note: After Lisa listened in on Schwab’s meeting with analysts last week, we discussed the best way to relay what we found to readers. We decided to start with an article about what’s happening with the franchises. See: Walt Bettinger explains to Wall Street why some prospects are balking at investing in Schwab franchises. The effort to create branches is fascinating simply as a management challenge by a company known to manage well. It also touches investors, advisors, competitors and would-be advisors alike. But Walt Bettinger also covered many other interesting topics — not the least of which was a mention of Windhaven. Like the franchises, it crosses retail and RIA lines and more now than ever with 24 new RIAs funneling assets in its direction.

Schwab’s CEO Walt Bettinger dished with industry analysts last week on topics including Windhaven’s rapid growth, the firm’s new-found traction among index funds in 401(k) plans, its tally of breakaway assets last quarter, the firm-wide initiative to move some of the brokerage assets to fee-based accounts and Schwab’s spin on the dearth of advisors queuing up to be franchisees at independent branch offices.

The occasion was Schwab’s spring interim business update webcast that included analysts and investors.

Putting the giant San Francisco-based firm’s best foot forward, Bettinger reported that in the first quarter, Schwab lured 41 breakaway teams representing more than $2 billion in client assets. These are all new RIAs to Schwab. See: Breakaway movement II is kicking in, say Schwab and Fidelity execs.

“A very consistent flow of advisors are breaking away and deciding to be independent as an RIA,” he said.

Windhaven’s assets soar

Bettinger reported that Windhaven Investment Management Inc.'s assets have grown to $10.3 billion, up from $8 billion in November. Most of these assets come directly from investors but, as of Nov. 30, there has been an uptick from RIAs. Since then, the Schwab unit has signed on an additional 24 RIAs that are set on adding the manager to client portfolios, according to Bryan Olson, senior vice president at Windhaven Investment Management. That brings the total of RIAs using Windhaven to 54. See: Windhaven misses its 12-month benchmarks again but still hits asset-gathering mark.

Bryan Olson: Since November, Windhaven has
signed on an additional 24 RIAs.

“We’ve had a lot of interest in Windhaven,” Bettinger said about the Boston-based money manager it acquired it a year ago. “It’s [seeing] fairly rapid growth.”

He remains upbeat about the firm because of the assets that are being raked in and because of growing interest in these portfolios.

Windhaven’s Diversified Conservative portfolio returned 5.19% for the one-year period ended March 31, compared with a gain of 5.64% for its peer benchmark, according to data from the company. For the first quarter, that strategy had returns of 3.18% compared with a gain of 2.84% for the benchmark.

Windhaven’s Diversified Growth strategy had results of 5.63% in the one-year period ended March 31, compared with a gain of 2.77% for its peer benchmark. For the first quarter, it returned 6.12%, slightly below the benchmark’s 6.87% gain.

Windhaven Diversified Aggressive had results of 4.80% for the one-year period ended March 31, blasting past the peer benchmark of 0.16%. For the first quarter, this fund saw returns of 8.36% compared to its peer benchmark of 8.74%.

Slow start for 401(k) index funds

Despite employers’ tendency to be in the dark about index funds, Bettinger says that they are intrigued by Schwab’s new index-based 401(k) plans, dubbed Schwab Index Advantage. But, he says, selling these plans takes more time than the typical 401(k). See: Schwab’s CEO engages in a Q&A about how his company’s deep-discount, more-advice 401(k) plan will work.

“It requires a bit of time to understand it because it’s so different than the industry norm,” he says. “You’re educating an entire community about something that is different.”

Bettinger says several hundred plan sponsors have expressed interest, but that since Schwab started offering the plans last year, just 10 to 12 of them have made the commitment. Employers are excited about these funds because they’re low-cost and offer more customization than a typical target-date fund, he says.

Despite the fact that the sales cycle is longer, Bettinger maintained that once employers understand these funds, they often are accepting of them.

“For participants, in my opinion, it simply delivers a better experience,” he said. “A target-date fund only looks at a person’s age and retirement date and treats every person the same.”

These index funds offer much more customization than target-date funds because they consider a person’s risk tolerance, outside assets as well as assets their spouse may have as well, he said.

Schwab intends to launch the ETF-only 401(k) plan later this year, and he said that many employers are eagerly awaiting that launch.

Advisory clients better diversified than online clients

When asked by analysts about asset allocations for investors, Bettinger said that, in some cases, RIAs’ clients are more diversified than self-directed clients.

He said that because RIAs have ensured their clients are well-diversified, many of those clients have caught the upswing in the market as opposed to investors who don’t have advisors.

“Advisors have done a fairly good job of getting into the markets and staying in markets. Their cash weightings have come down faster.”

Moving self-directed accounts to advisory assets.

Bettinger also discussed the firm-wide initiative to move some of the brokerage assets that can be more attractive financially because of recurring revenue, mutual funds for instance, to fee-based accounts.

“There’s hundreds of billions in assets that are not under an advisory relationship,” Bettinger said. “In some cases, clients are better off as a self-directed client. And, in some cases they are better off in our advisory business. The driving factor is what’s going to be in the client’s best interests.” See: Starting 2012 with a bang, Schwab will place its private client business under a new RIA.