Schwab to RIA clients: Did you authorize this wire transfer?

The Charles Schwab Corp. has begun calling clients of some registered investment advisers to verify that they have authorized wire transfers of funds from accounts held in custody at the broker-dealer. The move, which follows the Securities and Exchange Commission's efforts to verify account statements with some clients of advisers in the wake of Bernard Madoff's Ponzi scheme, is the latest twist in custodians' efforts to ensure that they aren't held liable for adviser fraud. Schwab, the largest custodian of RIA client assets, last February informed advisers that it was restricting their ability to keep assets invested in private placements and other alternative investments on the firm's custody platform. Advisers, for their part, said that they understand Schwab's policy of verifying wire transfers, and think that it may offer clients a new level of confidence about the security of their assets. However, some also expressed concern that some clients — particularly those still unnerved by the disastrous markets of 2008 and the shaky economy — could misinterpret a call from an unknown third party. “My main concern is that it's planting a seed of distrust in the client's mind,” said one RIA in New York, who said that he learned of the calls from a client who had been contacted by a Schwab service representative this month. “I understand 1,000% why they are doing it. They don't want responsibility for RIAs who they didn't train,” the RIA said. The adviser, who asked that his name not be used for fear of jeopardizing his more-than-15-year relationship with Schwab, said that his sales rep told him that the calls were triggered by a recent incident in which an adviser was caught stealing money from a client. Schwab spokeswoman Alison Wertheim declined to respond to several requests for comment on the reasons for the move, the criteria used to trigger calls or the potential duration of the checks. She also declined to discuss adviser reaction to the policy. In a notice headlined “Schwab Calling Your Clients to Confirm Wires,” sent to some advisers last month and received in a modified version last week by recipients of Schwab's online Operations News bulletin for RIAs, the firm wrote: “We are adding additional measures around wire transfers to protect investors. As an additional precaution, service team representatives will begin calling certain of your clients directly to confirm that they authorized certain wires. We will send your client a letter confirming the conversation. Clients may also instruct Schwab not to contact them to confirm those specific wire instructions in the future. This will be outlined in the confirmation letter.” Several advisers said that they appreciated the effort that Schwab was making, though it reminded them of the need to inform clients directly that they might receive such calls. “It has to be worked into the client expectation set so that they don't become alarmed,” said Sean Cook, president of CDA Global Wealth Management. His concern is that a client sending funds to a hedge fund, for example, might be upset to hear that the money went to a large bank, not knowing that the bank was holding the account designated by the investment vehicle. On the other hand, Mr. Cook said that an added layer of precaution can reassure investors about the safety of their assets. “Clients don't understand Schwab's true role in helping to protect them,” he said. Dick Bellmer, managing partner of Deerfield Financial Advisors Inc., said that he doesn't authorize many wire transfers for clients and isn't worried that a call from Schwab could confound them or lead them to consider working directly with the broker. “I would think the advisers would be happy their clients were being protected,” he said. “If Schwab can steal a client from me with a simple contact, then my relationship with that client would be quite poor.”

SEC CONTROVERSY

The SEC created a stir among RIAs last year by saying that it would contact some of their clients to verify that account statements from advisers were in sync with those received from the custodian of their assets. Gene Gohlke, associate director of the agency's Office of Compliance Inspections and Examinations, said that such concerns were understandable but have proven to be overblown. “Some advisers feared that a letter from the SEC would make clients think some horrible things were happening, but we haven't seen that reaction at all,” he said, noting that the commission typically warns advisers in advance of its plans so that they can forewarn clients. Several clients, Mr. Gohlke said, have “really thanked the staff for taking that additional step of being concerned with the safety of their assets.” He declined to comment about how exhaustive the SEC's checks have been, but noted that they have focused on advisers who hold client assets in custody directly or through affiliated banks, brokers, advisers and accounting firms. “We found some instances where money has gone missing, but it's not an outpouring,” Mr. Gohlke said. The regulator praised Schwab's move as a “good additional control” against rogue advisers as well as outside hackers. Other large custodians — including Fidelity Investments and TD Ameritrade Holding Corp. — haven't formally informed advisers of any plans to contact their clients but said that they have stepped up their anti-fraud protections concerning wire transfers. “We have taken extra steps and precautions, which could include contacting an end-client directly if, for example, we see multiple third-party wire transfers or other potential red flags,” Kristin Petrick, a spokeswoman at TD Ameritrade Holding's institutional unit for RIA custody, wrote in an e-mail. “We are increasing fraud prevention activities, including sending additional communication to end-clients to validate activity in their accounts.” Ms. Petrick declined to give specifics to avoid tipping off fraudsters from seeking to circumvent the system. E-mail Jed Horowitz at jhorowitz@investmentnews.com.