Schwab's alternatives decision mobilizes State Street, Broadcort

Units of State Street Corp. and Bank of America Corp.'s Broadcort clearing division are working to capture alternative assets from registered investment advisers who are being forced to remove them from The Charles Schwab Corp.'s custody platform. "There are a lot of conversations going on," said Marty Sullivan, a senior vice president at State Street Wealth Manager Services in Boston, which has about $230 billion of assets under administration on its trust platform from multifamily offices and other high-net-worth investment advisers. "We are getting some requests from Schwab clients, and reaching out to wealth managers." Several advisers said that they have been solicited recently by Broadcort, the securities clearing arm of New York-based Merrill Lynch & Co. Inc., and its new parent BofA of Charlotte, N.C., about assuming custody of their alternative assets. The advisers said that they were impressed by Broadcort's revamped "advisor solutions" platform (formerly known as money-management services). A spokeswoman for Broadcort declined to comment. The new activity was triggered by the decision by San Francisco-based Schwab, the largest custodian of RIA assets, to stop holding investments in hedge funds, private equity, private placements and other alternatives to conventional stocks, bonds and packaged products out of concern about potential liability and new regulations in the wake of the Bernard Madoff and other scandals. Schwab has stopped accepting any assets from offshore alternative vehicles, and is toughening guidelines on accepting additional domestic alternative assets from advisers in already established accounts. The company is building systems to help advisers transfer all alternative assets by yearend. Some advisers said that they aren't comfortable with the small trust banks specializing in retirement assets that Schwab has been recommending. That leaves an opening for firms such as Broadcort, which traditionally focused on clearing for small broker-dealers, but last summer said it was making a new commitment to the RIA channel by hiring John Tyers, a former clearing executive at The Bear Stearns Cos. Inc. of New York, as its president. RIAs said that until recently they had heard little from Broadcort, a probable consequence of the billions of dollars of losses at Merrill that caused its sale to BofA at the end of last year and the subsequent departure of Robert McCann, the former chairman and president of Merrill's global wealth management unit. "I was impressed by what they showed me," said one adviser in the Southeast, who said he was contacted by Broadcort days after Schwab's announcement. He asked not to be identified for fear of alienating Schwab, which still holds most of his clients' assets. Steve Disenhof, a partner at Litman Gregory Asset Management in Larkspur, Calif., who spearheaded a letter-writing campaign from Schwab clients protesting the decision, said that out of respect for his firm's longtime relationship with Schwab, he didn't want to comment further. But he did say that far more than the 22 RIAs who signed the letter are "exploring options" with State Street and Fidelity Investments, both of Boston, and "others that have processes in place." Schwab's decision "certainly was a catalyst for a lot of firms that are deeply entrenched with alternatives to consider a trust company custody alternative," said State Street's Mr. Sullivan, whose firm has been contacting signers of the letter. The bank, a leader in global custody for institutional investors, is trying to differentiate itself to wealth managers by emphasizing its expertise in handling complex investment instruments, he said. Its wealth manager services unit, set up about seven years ago to focus on multifamily offices, has a different pay model than broker-dealer custodians, basing fees on volume of business, as well as trading and other services used by advisers. To date, State Street hasn't won any new business as a result of the Schwab decision. "There's a lot of conversation going on right now, but I'm not aware of anyone who is made an all-out move anywhere," Mr. Sullivan said. All custodians with fiduciary responsibilities, whether broker-dealers, trust companies or banks, are evaluating their processes in light of the new regulatory light on gatekeepers for alternative assets, and are reviewing funds they are asked to receive, he said. In a recent regulatory filing, Schwab said that it may be subject to more legal claims as a result of enhancing the services that it provides to advisers and noted that regulation is becoming "increasingly extensive and complex." Although it is still accepting assets from RIAs on existing domestic alternative accounts, it will impose new acceptance standards as of May 1, a spokeswoman said. The standards are likely to include indemnifications from advisers and third-party verifications regarding funds' assets, Schwab representatives have told advisers. E-mail Jed Horowitz at jhorowitz@investmentnews.com.