Snubbing Nose at Wirehouses, Schwab Flaunts Flow of Breakaway Brokers
Charles Schwab Corp. Chief Executive Officer Walt W. Bettinger II is calling into question two strategies that wirehouse firms have been deploying to help retain advisors.
A big year-to-date increase in the number of former brokers choosing Schwab as a custodian for their independent advisory businesses raises questions about the value of teaming as a retention tool, he said on a “business update” conference call with analysts and investors on Friday.
“It’s a model that was designed to diminish the move to independence, [but] the feedback we’re getting is that it is actually feeding it instead.” Bettinger said on Friday during a “business update” for analysts.
Without mentioning specific firms, he also said that wirehouses’ pressure on brokers to move customers to advisory accounts and packaged investments is promoting brokers’ confidence in their ability to run independent advisory businesses.
Many conventional firms, including Morgan Stanley, Merrill Lynch, UBS Financial Services and Wells Fargo Advisors have been promoting advisory accounts because they generate fees regardless of whether customers engage in buying and selling stocks and bonds.
They also have been pressuring brokers and trainees to work on large teams, assuming specialized roles in customer service, marketing, investment and financial planning, to inhibit their ability to move to competitors with books and clients intact.
Schwab has added 173 registered investment advisors to its “Advisor Services” custody platform in the first three quarters of 2017, up 35% from the comparable 2016 period, it said in reporting t last week. One-third of them had worked at the four big U.S. firms known as wirehouses, a Schwab spokesman said.
The average advisor joining Schwab’s Advisory Services in the first three quarters of 2017 was managing $151 million for customers, up 59% from $95 million in the first nine months of 2016, Schwab said last week.
“As the traditional firms…encourage brokers to move to a team-based structure and…toward a fee-based model, that is actually serving to lower the barriers for these teams,” Bettinger said. “[T]hese professionals…go ahead and take the step to an independent model, and that bodes well for our business.”
It may be a stretch to damn wirehouses’ retention strategies wholesale because of an uptick in breakaway brokers this year, but the trend does raise some questions about the strategies’ durability, according to industry recruiters.
“Teaming cuts both ways,” said Mark Elzweig, a New York City-based headhunter.“It makes it harder for advisors to leave because the entire team has to move, however once the team does decide, [the transition] is easier. The move to fee-based assets, where clients are using largely outside managers, also makes a move toward independence easier.”
Evaluating the effectiveness of teaming as a retention strategy is also challenging because of the difficulty of analyzing how many brokers actually remain in place because of the complexities of moving large teams. And some breakaway moves lead to broken partnerships, as illustrated in this $8 billion-asset example at UBS this summer.
Schwab also has a long history of tweaking its nose at wirehouse competitors, from ferocious ads to ongoing boasts about the company’s ability to attract assets.
But the third quarter gave Schwab more fuel.
In the three months ending September 30, net new custodial assets from customers of Schwab’s RIA clients grew 78% from the 2016 quarter to $28.2 billion. In this year’s second quarter, they were up15% from a year earlier.
Total RIA customer assets custodied at Schwab totaled $1.474 trillion as of September 30, or 46% of the $3.181 trillion held across the company’s other business units. Schwab Chief financial officer Peter Crawford said that there remains plenty of room for the company to grow its fee-based assets, given that fee-based accounts represent just 19% of all assets in the company’s retail brokerage business.
The number of fee-based accounts at wirehouses is closer to 40%, and even higher at Merrill Lynch.
“There’s a real opportunity,” Crawford said of the company’s growth prospects.
—Jed Horowitz contributed to this story.