Schwab's 'superhighway' project could supercharge RIA business, yet fees elicit sticker shock and its leap to RIA 'support' channel may test critical alliances

The Charles Schwab Corp. is undertaking what may be its biggest initiative in decades to supercharge its already towering RIA custody business.

The goal is to create a “superhighway” that drives asset traffic from stockbrokers with up to $300 million to independence…. and hopefully Schwab to get the kind of fulsome support brokerages provide. 

The Westlake, Texas giant announced yesterday the plan to remove a barrier that keeps stockbrokers from moving to the RIA channel at a “media roundtable" manned by multiple Schwab executives.

Schwab Advisor Services, which administers about $3.5 trillion for 15,000 RIAs, is launching the new program, Advisor ProDirect, in July. 

Advisors are anxious to receive the payouts, open-architecture and downstream liquidation value of an RIA.

Yet they remain brokers without enough handholding to assure a soft landing in taking a leap to their own company, according to Brad Losson, head of enterprise solutions at Schwab Advisor Services.

“Complexity can hold them back,” he says in a release. "Schwab Advisor ProDirect is our answer: a program built to ease their journey, optimize their operations, and help them thrive over the long term.”

Schwab declined to respond to an email requesting comment for this article.

Competitors?

Still, a number of participants in the RIA business are “pissed,” said one PR executive who manages public relations for an assortment of companies.

What they see is Schwab veering out of its lane and into a swath of “supported independence” providers – networks, aggregators, rollups, TAMPs etc. – that are there to ease the pathway to owning an RIA, the executive says. 

“They are sending a message to service aggregators: We are your competitors.”

Schwab's head of RIA custody, Jon Beatty, brushed off concerns that Schwab is big-footing firms in that niche, according to a Barron's article on ProDirect.

“This is about bringing more tide into the harbor for everyone, and raising all boats,” he told the Dow Jones weekly.

Shifting dynamics

Third-party “Dynasty”-class [and trademarked] ‘supported-independence’ providers have a right to be confused about the new Schwab messaging about tidal currents, says Michael Kitces, co-founder of XY Planning Network, which has launched about 2,000 RIA firms to date.

"It's notable that in the past, Schwab made an outright strategic investment into Dynasty [in 2022] to facilitate this kind of ‘We want to see more transitions from B/D to RIA’ (and Schwab funded the players that were doing it)," he says by email.

"It is striking to me that Schwab decided NOT to keep making strategic investments into corporate RIAs/TAMPs/platforms/networks that are facilitating breakaway brokers. 

“Instead, they decided to roll out their OWN service... that may at least partially compete?”

"When the [Dynasty] deal broke, the buzz was that Schwab would make more investments into RIA service providers, particularly those doing various versions of "supported independence" models. 

"So... has something changed now that they'd rather literally be the paid consulting service provider themselves?" See: Schwab’s investment in Dynasty could be the first of many

One important change by Schwab since it took a stake in Dynasty is that the deal's two architects, Bernie Clark and Walter Bettinger, head of RIA custody and CEO respectively, have left the firm.

Beatty is beginning to make his mark, and he promises to go big with this program.

“We want to turn the path to independence into a superhighway,” he says to Barron's.

Losson made a similar remark on the press call picked up by press reports.

"We want to create not just a path but a superhighway to independence," he said.

Pay to play

The program has four phases: launch, learn, connect and grow with “high touch” consulting from Schwab staff all along the way. 

The connect portion signifies introductions to a world of pre-negotiated third-parties. Such hands-on services are expensive. Until now, Schwab has only provided these services to big brokerage teams making the transition, where it can get a return on investment.

Schwab is solving the expense problem by getting RIAs to pay for the service themselves at a rate of $5,250 per quarter, with a minimum four-quarter commitment, or $21,000.

Schwab's pay-to-play structure recognizes economic realities that had to be addressed one way or another, says Kitces. 

"By charging for the consulting advice, Schwab has the opportunity to expand consulting without eroding margins in their core custody business because otherwise, profits from cash sweep have to foot the entire bill!?, he writes by email.

"I think the real takeaway here is simply 'You can't keep giving away ever-expanding practice management consulting for free as a custodian....'

"It has a real cost, and so either your core model subsidizes it (which can erode margins or force the custodial platform to have higher asset minimums), or you charge for it," Kitces says. 

Moot point

Schwab could be tapping a rich vein of advised assets by creating this facility, says Philip Waxelbaum, principal of Masada Consulting.

“It shows a [market] sensitivity on Schwab's part,” he says. “The vast majority of advisors never go RIA. They never reach the scale to make it work. But it's the cool thing to do.”

Regardless of best-laid plans or grand rhetoric, existing providers have little to worry about because the ProDirect conversation is all but moot, says Timothy Welsh, president of Nexus Strategy.

“They have nothing to worry about because this is DOA [dead on arrival],” he says. “It always seems good on PowerPoint until reality arrives.

“Why would you want to pay for it?” he asks. “If I've got $300 million, I've been in business for 20 years. I don't need a custodian to be my consultant. I'd say this is gone in under two years."

Jason Wenk, CEO and co-founder of Altruist, an RIA that attracts many smaller RIAs, also had a blunt assessment in a LinkedIn posting.

“This is sort of hilarious as we offer loads of transition support, assistance, and ongoing training for new/breakaway RIAs,” he writes. “And, you don’t have to pay $20k+ and send us all your assets to get it!”

Bargain-basement

Not all consulting is created equal, says Waxelbaum, who says there is a scenario where this service is indeed welcomed with open arms.

For example, if Schwab can handle all the work of getting an RIA into offices and set up with payroll services and technology it could get takers – especially if its reps of independent brokers looking across the broader economics of their own world of lower payout and less of M&A valuation in succession than an RIA.

“It's cheap," he says about ProDirect's fees. “That's bargain-basement. Just the real estate aspect could be worth $20,000.”

Schwab does not specifically list real estate search and match among its services.