Rick Wurster walks Wall Street analysts through three-part 'custody-fee' RIA plan with one surprise -- a play on 'RIA value chain,' likely a TAMP, one analyst says

Rick Wurster is rejecting the idea of an explicit custody fee for Schwab Advisor Services RIAs, both because it has downsides for the business model – and RIAs hate it.

“We have asked RIAs if they would prefer a custody fee in lieu of, or taking a different approach,” said Wurster on today's (Oct 15) third-quarter business update. 

“And that has not been a popular idea when we’ve offered that to RIAs." See: Rick Wurster's CEO tenure begins with a big RIA question: will he honor Bernie-tenure 'pledge' to keep custody free, or will he create a new, possibly better, pricing paradigm?

 “So, we like our current model,” he said. 

The Schwab president and next CEO also promised more banking and direct-indexing fees from RIA clients.  He is “exploring” but not ready to divulge a third ‘value chain’ aspect of wealth management.

“These are all areas that we are exploring as it relates to a custody fee,” Wurster told analysts, without mentioning Schwab's pledge never to create or raise a custody fee.  See: Fidelity Investments will broaden custody fees in July, while Schwab counters with pledge: 'No custody fees and no intention to raise them'

Fee ride over?

Wurster has been the overseer of Schwab Advisor Services ever since becoming president and gaining Bernie Clark, the former RIA head, as a direct report. See: Walt Bettinger sheds 'president' title and Bernie Clark gets new boss as Schwab appoints Rick Wurster as president and No. 2 in charge

Schwab should like its model, which it uses to dominate the RIA custody market share, says Andrew Besheer, principal of Besheer Associates, a money management consulting firm. 

“I think the no custodian fee is a wonderful differentiator for Schwab, and I’d love to see them be able to maintain it.”

Keeping custody ‘free’ means generating new revenue streams from RIA clients. Wurster acknowledges the company is trying to do just that.

“Advisor services has been a growth powerhouse for us. It continues to drive really strong net new asset formation. But in terms of the RIAs coming onto our platform and the growth of the RIAs for whom we custody assets, we look at monetizing the business,” he says. 

Yet Wurster was able to assure Morgan Stanley analyst Michael Cyprys he sees a way to monetize the relationship with 15,000 RIAs who custody $4.5 trillion in assets at Schwab. 

“There’s more we can do for RIAs over time,” he said. “If you think about the value chain around the RIAs, there are a number of ways in which RIAs spend money in their business." 

Losing leverage

Wurster essentially says that RIAs are a willing, captive audience.

"And many of those ways are services that we could potentially provide and for which the RIA would prefer to work with us because it would make their life easier. Those are all areas that we are exploring.”

When asked about the services that Wurster referenced, Besheer said he suspects Schwab may be considering a TAMP [turnkey asset management program.]. 

“Just looking at the broader market, I wonder if there’s an opportunity to offer more in terms of an internalized TAMP platform we’ve seen LPL do and thereby capture some of the revenue that's been paid to third-party platforms as a way to close the gap,” Besheer says. 

A TAMP is well within reach for Schwab to piece together, says one industry executive who asked not to be named.

“They own a fixed income manager,” the person says. “They also have ETFs and it would be easy enough for them to package with their investments team into ports and sell on 55ip or Envestnet etc.”

RIA custody is less and less central to Schwab’s growth, and the company needs to make a change, Michael Kitces, co-owner of XY Planning Network with 1,800 RIAs said last week.

When Schwab announced Wurster would be CEO, Kitces thought he would look at ways for the custodian business to gain more revenues. 

One option is to simply charge basis points for custody the way Betterment, SEI, and others do, said Kitces, who also heads planning at Buckingham Co., with more than $3 billion in AUM.

Schwab has traditionally stayed in its custody channel. Not only does it prevent alienating big players in other channels – like TAMPs that might refer it assets-- it also appeals to many RIAs.   

They don't want a sprawling relationship with a single provider because they lose leverage in the vendor relationship.

Increasing options

Schwab's chief RIA custody competitor, Fidelity Custody & Clearing, is pushing aggressively into the TAMP business with FMAX – even teaming up with Envestnet. The minor 20-year Fidelity and Envestnet collaboration just got major as FMAX begins to take off and the two companies seek to press the advantage

Fidelity made the move right as Schwab announced it would swallow up TD Ameritrade. See: Fidelity's Mike Durbin unleashes FMAX as 'Schwabitrade' takes life, but if they build it, will leery advisors buy into it?

Schwab could expand its offerings around CIO models, alternatives, and fixed income SMA “to drive those investments more broadly onto their platform," Besheer says. 

Indeed, Schwab has already begun increasing its fixed-income options for RIAs, Wurster said. 

“We’re also seeing on the, on the wealth and the asset management side, where our RIAs rely upon us in a number of different ways, including our fixed income capabilities and Schwab personalized indexing capabilities and a number of other areas.”

On the opposite side of the spectrum from dreaded custody fees for RIAs are banking fees and spreads, which investors would just as soon have Schwab take as their local banker, Wurster said.

RIAs have been “almost begging” for lending services, he said. See: Charles Schwab Corp. goes back on offense in banking -- promising to pump out discount loans with RIA help -- after rapid Fed rate hikes exposed extreme vulnerability in bank's asset base

Earnings beat

On Tuesday (Oct. 15), the Westlake, Texas, custodian beat analysts’ expectations with its earnings release, and its stock price soared 6%, closing at $71.96.  Analysts predicted higher earnings in the next quarter. 

Schwab’s net income for the third quarter was $1.4 billion, and the firm drove in $95.3 billion in net new assets.

This was the first earnings call since Wurster, 51, was named CEO, and it was the last earnings call for outgoing CEO Walter Bettinger.