Schwab sends most RIAs to 1-800 custody service -- a downgrade the mass of incoming TD Ameritrade RIAs will have to swallow

Brooke's Note: Lopsided deals don't last. RIAs have long received tremendous service from custodians literally for free. Not that custodians didn't get paid. They were able to extract fees from the end investor (or spreads from that investor's cash). But with investors finally gaining an upper hand in an age of minimal-fee asset management and zero commissions, Schwab Advisor Services is declaring it will no longer float sub-$200-million RIAs in the same old grand style. See: Merrill Lynch retreats from stealth RIA custody business For now, competitors like Fidelity, Pershing and a host of smaller custodians don't plan to follow Schwab to the land of call-center service. But the temptation will be great. The other alternative to raising margins is to charge RIAs more and -- for now -- RIAs seem even less excited by that prospect. Though $200-million RIAs are the ones caught in the crossfire, RIAs with $500 million or more say they are at least mildly alarmed at all custodians. Service levels are teetering, and it's easy for them to imagine that what happens to small RIAs today will overtake them next.

Charles Schwab & Co. is downgrading the bulk of its RIA clients to 1-800 service as it adjusts to a post-zero commissions era and prepares to take on thousands more RIAs from TD Ameritrade.

The San Francisco broker-dealer quietly let the sub-$200 million RIAs who use Schwab Advisor Services know that they will no longer have teams dedicated to servicing their practices. Instead, they will be handled from call centers -- a less costly but more impersonal mode of handling RIA requests.

The news filtered out through RIAs affected by the changes when they happened in October.

RIAs with more than $200-million will continue to receive the white-glove service. The majority of Schwab RIAs have less than $200 million, and an even larger quorum of TD's RIAs fit the category. See: Walt Bettinger sugarcoats nothing to TD Ameritrade RIAs about re-papering or technology and he calls 'modest' the importance of RIA revenues to Schwab

Declining service

On its face, the service change feels like a slight considering it puts an RIA managing $200 million on a par with robo clients with $1,000, according to Cathy Bailey, vice president and director of operations and trading at $322 million AUM and $425 million AUA, 15-person, Dallas-based RIA Castleview Partners.

"It's akin to what a robo is to a small retail client," she says. "That’s exactly the model being used ... [a] 1-800 self-service and web-based interaction ... unless it’s a major issue."

Some observers countered, saying that call-centers have a stigma but that they can actually do a good enough job.

But RIAs, on and off the record in interviews for this article, say they are already seeing service levels declining in concert with this service model change.

Betterment is also seizing on its newfound messaging advantage as Schwab replaces some relationship managers with call centers.

"Every RIA firm, regardless of asset size, has a relationship manager at Betterment for Advisors," says Betterment Spokesman, Joe Ziemer.

"We have seen a spike in inbound requests" from a whip as much as a carrot, he adds. "If a firm thinks they are going to have to repaper their clients, we're seeing them start to explore alternative options."

Schwab declined to comment or confirm the change for sub-$200 million RIAs, but it promised RIAs that it is redoubling efforts to help them grow their practice to more than $200 million with "growth coaching."

But the principal of a sub-$200-million Connecticut RIA didn't like the external pressure implied by an offer of coaching toward growth.

"They made it sound like a bump; like they’re transitioning you to someone else. But when I talked to the [new] person, it was about how I’m going to grow my business ... My biggest thing in life isn’t to make as many millions of dollars as I can. It’s about quality of life … [but] they didn’t like that."

“[Before] I felt like my voice was being heard. Now I’ve no voice," the principal adds.

Dead weight

Over the past few weeks, as part of its outreach to sub-$200 million Schwab RIAs, RIABiz asked for comments on how service levels have been affected in the wake of the custodian’s decision to move them to its ‘core’ service.

Among some  of the shortcomings, RIAs said Schwab is failing to pay out monthly distributions to retirees; check processing has been inconsistent; trade errors have taken place and senior relationship managers (RM) have been laid off leading to confusion, while unsupported junior RMs have been unable to solve problems.

Moreover, when Schwab pulled the service plug, it was done with obdurate resolve, says Bailey.

"It was $200 million or nothing to get back on my [RM’s] team. There’s no wiggle room. They wouldn’t even go to $150 [million] … [and Schwab] was not a bit apologetic."

A number of mom-and-pop RIAs in the group also accused Schwab of consistently making "stupid blunders."

"There was a time when I said Schwab was great," says the Connecticut principal of an RIA who asked to remain anonymous.

"[Now] I wish there was a better option, because I don’t like them anymore. I really don’t."

Nor are these sources alone in finding themselves on the outside, looking in, says Dan Skiles, president of San Diego, Calif. custodian, SSG Institutional Group, via email. SSG serves 1,600 advisors.

Skiles is the former head of technology at Schwab Advisor Services and his firm errs on the side of taking on smaller RIAs. See: Schwab's reported TD Ameritrade deal leaves 10,000 RIAs in twilight zone as weekend begins with an unconfirmed, undenied merger report causing many to weigh options.

"We’ve heard a number of stories from advisors about the decline in service standards … [and it’s] definitely much louder over the past couple of months ... many advisors simply feel like a number in a mammoth spreadsheet."

Load lightening

Indeed, Schwab is on a tear, cleaning up its corporate spreadsheets -- cutting people, programs, policies and products that look like a drag on profits. 

It dumped PortfolioCenter in February. Schwab axed Andy Gill and Terri Kallsen in July. It downgraded service to small mutual funds in September. Then Schwab went to zero on commissions in October. Also in October it cut service levels to sub-$200-million RIAs.

With all those loose ends tied down, Schwab was set to buy TD Ameritrade in November and will now move its headquarters to Texas in 2020. 

The spreadsheet trimming did its trick. Since the beginning of the fourth quarter, Schwab's shares are up 38.9%, from $35.67 at the close on Sept. 30 to $49.57 today (Monday Dec. 2).

But such corporate load-lightening goes over like a lead balloon to the sub-$200 million RIA in Connecticut.

"I’m deadweight for Schwab. I know that. But I was big enough deadweight where it made a difference," says the principal.

The way Schwab is weighing priorities is apparent, says Robb Baldwin, founder and CEO of Gainesville, Fla. custodian, TradePMR, via email. The firm is a competitor, particularly for RIAs with smaller AUM.

"Many of these advisors may feel lost in the crowd… I think it’s pretty clear, if an RIA is not a behemoth, they may not be valued by these larger custodians. [They’ve] forgotten their roots."

Collective horror

Unpleasant changes were inevitable, says Will Trout, senior analyst at Boston-based consultancy Celent, via email.

"Custodians will want to charge for trade order flow and other services and smaller RIA’s will have little leverage to push back. That’s why Schwab raised their RM [relationship manager] minimum, of course."

More change is coming, says Nick Richtsmeier, on LinkedIn.

"Prepare for average account size to play an increasing role in RIA valuations, and [a] race to high-net-worth [clients]," writes the founder and president of Des Moines, Iowa marketing consultancy, CultureCraft, and a former member of TD's national advisory council.

"Seven thousand TD RIA’s may [also now] react with collective horror," Trout adds.

Economics are important, but so is a firm's brand, says Douglas Gill, Castleview founder, partner and CEO. Castleview custodies $34 million at Schwab, and $224 million at TD Ameritrade Institutional.

"If everyone’s at zero, and there’s no competition on pricing, then all you have to differentiate is your level of service, so it would stand to reason that maybe the last thing you want to begin slipping is your [service] reputation." 

The overall sentiment is that Schwab is making mistakes that have begun to impact the end-client's of its smallest RIAs.

This wouldn't be happening if I was five times the size, says the Connecticut principal. "[It's] stupid stuff, you know ... wires not going out when they’re supposed to go out, for example. It’s just endless, and it’s all the time now. It’s not like a fleeting thing; it’s all the time."

"It’s embarrassing," the principal adds. "How do you explain to a client your money’s not there? Do we have to verify [with Schwab] every month before it goes out? I can’t do that!"

Staying put

That said, none of the RIAs who spoke to RIABiz in connection with this article were keen to swap their custodian.

Each RIA cited long-standing relationships, the difficulty of repapering and the fact that it’s hard to trust a lesser-known brand with a client's life savings.

There is a limit, however, says one RIA executive, speaking anonymously, via email. "If they continue to just keep mucking things up, I may be forced do something."

Now that Schwab CEO Walter Bettinger has admitted that TD RIAs may have to repaper anyway, they have one less incentive to stay. See: Walt Bettinger sugarcoats nothing to TD Ameritrade RIAs about re-papering or technology and he calls 'modest' the importance of RIA revenues to Schwab.

"The bet Schwab’s making is [it] can really pare back the amount of humans on the payroll and let the advisors do more self-service," says Gill.

"It’s a bet they can treat small RIAs almost like [some] RIAs treat small retail clients … you let the computer do all the work, and maybe you talk to them once a year, at Christmas."

Expressing frustrations

But it can't be Christmas everyday, says Jason Wenk, CEO of start-up digital custodian, Altruist, via email.

"It reminds me a bit of how the airline industry has been making seats smaller and smaller, and service worse and worse, yet consumers don't really have many choices, so we all gripe but mostly just for the sake of expressing our frustrations."

Yet, airlines contend that their efforts to upgrade service often go unrewarded. Consumers merely go to online travel sites and, reflexively, choose the cheapest fare.

But paying little and getting little after paying little and getting much is a hard transition.

"I can see it feeling a bit disrespectful," Wenk continues. "'We've been loyal to our custodian for [so many] years, and they treat us like this?'"

Custody rivals respond

Custody rivals like Boston-based Fidelity Investments, and New Jersey-based BNY Mellon affiliate Pershing are, for now, promising to keep dedicated relationship managers for smaller RIAs.

“Fidelity’s client experience for smaller firms is differentiated from other custodians because each firm we work with has a dedicated team consisting of relationship management, client service and technology support,” says a Fidelity spokesperson, via email.

“Even though our typical client does make a commitment of $150M, or greater, to the relationship, BNY Mellon’s Pershing does not have a minimum for advisors looking to join our platform,” says Ben Harrison, Pershing's head of business development and relationship management, via email.

“[We] evaluate each relationship based on its individual attributes. For example, one of the main things we look at is a firm’s commitment to driving growth.”

Smaller firms are also chomping at the bit.

"We've heard Schwab is kicking out smaller advisors with less than $200 million ... [it] competes against its advisors ... we're happy to help small RIAs," says Steve Sanders, executive vice president for marketing and business development for $36.6 billion AUM Greenwich, Conn., custodian, Interactive Brokers, via email.

Bettinger's cold water

Schwab did not return a request for comment on its service levels when RIABiz began investigating this story. When news of the TD Ameritrade merger first broke on Nov. 22, Schwab failed to return a further request to discuss the impact on TD Ameritrade Institutional-custodied RIAs.

Bettinger has, however, warned RIAs that their impact on the combined firm's revenues would be a "modest" concern relative to direct-to-consumer retail. See: Walt Bettinger sugarcoats nothing to TD Ameritrade RIAs about re-papering or technology and he calls 'modest' the importance of RIA revenues to Schwab.

Game on, writes Mike Durbin, president of Fidelity Institutional, which includes Fidelity Investment's RIA custody arm, on LinkedIn.

"In the face of continuous change and increased consolidation in our industry, it’s more important than ever that advisors work with a firm that not only has the capabilities to deliver on their needs, but one that does so with a dedication to providing exceptional customer service" he says.

"Today’s [Nov. 25] news [of a TD Ameritrade-Schwab merger] will prompt many advisors to consider whether they want to remain with a firm distracted by a long and complex integration, or to work with one that has a singular focus and passion for helping them succeed."

Robo-peril or little-choice?

But there really is no such thing as a free lunch, says Roger Hewins, president and founder of $2.1 billion Redwood City, Calif. RIA, Team Hewins, via email. He advises against criticizing Schwab too strenuously.

"Schwab and some of the other firms like them have a challenged economic model. Cash has always been a big source of revenue, and, as we know, that is way down now. Revenue from funds, both in-house and no-transaction-fee, is still good, and Fidelity still has its stable of in-house, fairly expensive active funds. But maybe that is not enough,” he explains.

"These firms should probably be paid for what they do, which is custody accounts and manage related activity and data. But their model evolved from NTF, cash, and commissions, so how would they shift gears now?"

In fact, Schwab might be at the vanguard of a trend -- again, says Trout. He lists three areas of change RIAs will have to accept: self-service, shared-tools, where everyone uses similar software and consolidation for sufficient scale to stay relevant with vendors.

"It’s all about the cost to serve, i.e. the economics," he explains. "RIA’s feel they aren’t getting more than nibbles (or pennies) using robo advice tech, so why bother? My thought is that the big custodians will feel the same about them!"

With feeling

But nobody doubts that as Schwab makes changes, a shift to more 'give and take' from 'I'm-the-big-dog-do-what-I-say' would make all the difference, says Bailey.

"For us to grow at Schwab, we need to be incentivized to do that, not just because they’re Schwab and everybody should have a relationship with Schwab."