Schwab hit by slowing adviser assets

The Charles Schwab Corp. reported better-than-expected first-quarter earnings last week, but buried in the numbers were signs that the headlong growth of the independent-adviser community may be waning, according to some analysts. For at least four years, Schwab's Advisor Services unit has provided substantially more net new assets to the San Francisco-based company than its other main businesses — its massive discount-brokerage unit and its corporate and retirement services sector. In the three-month period through March, however, net new assets that registered investment advisers placed with Schwab plummeted by 52% from a year earlier, to $9.6 billion, and were down 18% from just three months earlier. Indeed, the asset flow was just about even with the $9.5 billion that corporations sent to Schwab's retirement plan services business, a much smaller unit. Schwab is a good proxy for measuring the health of the RIA marketplace because it is the biggest custodian of adviser assets and also breaks out more sector metrics than competitors such as Omaha, Neb.-based TD Ameritrade Inc. and privately held Fidelity Investments in Boston, consultants and analysts said. "It's inevitable that the rate of growth among RIAs is slowing," said Bing Waldert, a director at Boston-based Cerulli Associates Inc., which has estimated that RIA assets grew at an annualized rate of more than 15% between 2004 and 2007 before hitting a wall midway last year. "My guess is, assets will continue to grow — excluding market corrections — but at a slower rate, and that the number of firms will be flat to down." It's not just that assets under management with independent advisers have swooned along with those of all market participants but that investors have slowed their migration from full-service brokerage firms to independent advisers and brokers. "It's fair to say that there's not a lot of movement right now in client assets," said Mark Tibergien, chief executive of Pershing Advisor Solutions, the RIA custody affiliate of The Bank of New York Mellon Corp.'s Pershing LLC in Jersey City, N.J. "It's a trickle because clients are trying to keep their powder dry for a while." Although markets have taken a large bite out of advisers' assets under management and associated revenue, Mr. Tibergien added, the impact is probably not as great as that felt by brokers at wirehouses. Nevertheless, the first-quarter metrics reported by Schwab raised some eyebrows. Activity in Advisor Services — Schwab's most profitable business in 2008, with a 51% profit margin, compared with 38% for the retail-investor-services group and 23% for the much smaller retirement services area — slowed in the first three months of 2009. Schwab does not break out revenue and expenses by business sector in its quarterly press releases, but the gap between net new assets it gets from RIAs and those coming directly from retail investors tells a story. In 2004, RIAs poured almost $33 billion in new assets into Schwab, was more than four times the $8.4 billion placed by retail investors. The gap narrowed last year, with advisers adding $60.2 billion, versus $35.1 billion from retail investors. In the just-ended quarter, the flow from advisers tightened noticeably to $9.6 billion, one-and-one-half times the $6.2 billion added by individuals. Daily average trades by RIAs in asset-based-pricing programs in March also fell slightly below similar non-commission trades from its retail clients. That could indicate that RIAs who were actively re-balancing client portfolios late last year have slowed down. Their non-commission trades substantially outweighed those of Schwab's retail clients in the last quarter of 2008. Greg Gable, a spokesman for Schwab, confirmed that the gap between RIA and retail assets has narrowed but said it has more to do with the gradual restoration of confidence among retail investors who were stung by the dot-com crash of 2000 than with the plateauing of the RIA business. "We needed to re-establish relations with the retail clients, and it has been taking hold and is causing a faster increase in terms of the net new assets," he said. "The adviser business is also growing and healthy, but it didn't suffer the same magnitude of damage during the dot-com bubble. It is more stable." Mr. Tibergien, Mr. Waldert and others warned that it's dangerous to draw conclusions about trends from one quarter's worth of data. "I don't know that you can make a broad generalization out of a single point in time, but it's interesting, and it bears watching," said Sean Cunniff, a research director at TowerGroup's brokerage and wealth management practice in Needham, Mass. He noted that he'd be "very surprised if the RIA space does not continue to grow." Richard Repetto, an analyst at Sandler O'Neill & Partners LP in New York who follows online-brokerage firms, suggested that large RIAs with quasi-institutional clients such as endowments and family offices could have slowed down their activities with custodians in line with the trading slowdown by pension fund and other institutional investors. Some advisers, requesting anonymity, groused that Schwab, whose new chief executive and head of institutional businesses both come from its retirement services business, may be devoting fewer re-sources to their sector and could be even more disheartened by last quarter's metrics. The retirement services unit had a strong first-quarter showing, with assets growing 23% from a year earlier and net new assets in the sector soaring. But analysts and Mr. Gable noted that the first quarter of any year is traditionally strong for the retirement business since companies like to present new plans to their employees at the turn of the year. They also brushed aside the theory that Schwab — whose market share of RIA assets is about twice that of Fidelity, its nearest competitor — would back away from its long-term commitment to a still-growing business that has fueled so much of its profitability. "They are both core businesses and vary quarter to quarter," Mr. Gable said. "Advisor Services has been a very important part of our net new asset growth for some time." Schwab last Wednesday said its first-quarter earnings fell 29% to $218 million, or 19 cents a share. That beat the consensus estimate of analysts that Schwab would report earnings of 16 cents a share, as the company reported higher-than-expected trading revenue. The company ended the first quarter with $466 billion of client assets in its retail-investor-services sector, $457 billion in its RIA business and $176.7 billion in the corporate-and-retirement-services unit. E-mail Jed Horowitz at jhorowitz@investmentnews.com.