Schwab to waive fees for its RIAs' new clients

The Charles Schwab Corp. is dipping into its deep pockets to help independent advisers capture business from full-service brokers. At its Explore conference for top registered investment adviser clients last week, Schwab said it will waive commissions on electronic equity trades for new clients whom advisers attract between July 1 and the end of the year. Additionally, the firm will reimburse account transfer fees that clients have to pay their former brokers. The commission waiver will apply to trades made by advisers' new clients through June 30, 2010. San Francisco-based Schwab also is waiving annual maintenance fees over the next 12 months for advisers who license its portfolio management software, PortfolioCenter, which more than 2,200 of its almost 6,000 RIA clients use. Jim McCool, executive vice president in charge of institutional services, declined to discuss how much revenue Schwab expects to forgo through the moves. But he said it makes good strategic sense to help advisers prospect for new accounts and seize opportunities at a time when they are struggling to manage current clients and their practices.
“Advisers have gone through a period where markets have eroded a tremendous amount of revenue from their base,” Mr. McCool said during a phone interview. “We can leverage our cost advantages as a company to help them get through their trough.” In an e-mail notice to RIAs, Mr. McCool was more explicit. “We believe that independent advisers are uniquely positioned to gain share, while major wirehouse firms may still be suffering,” he wrote. “For prospective clients to your firm, pricing benefits are designed to remove obstacles they may have to transitioning to your practice.” Advisers who used to be able to convert customers after two to three visits now are finding that it can take three to four times as much work to win over prospects, Mr. McCool said. Competitors said that it is too early to tell how attractive the pricing waivers will be to independent advisers, who for the most part don't encourage active stock trading, already enjoy reduced commissions at Schwab of $8.95 to $19.95 per trade and, in many cases, focus more on wealth management than stock trading. (The pricing waivers don't apply to mutual funds, bonds or stock trades made through Schwab's capital markets desks.) Other custodians said that accommodations such as those Schwab is offering have long been made on an individual basis to select advisers and as promotions to investors who trade directly through Schwab. However, some competitors said that they are watching closely since many advisers use multiple custodians and could easily transfer new client assets to Schwab. “We've tested programs like this for years and found that they don't work that great,” said J. Thomas Bradley, president of TD Ameritrade Holding Corp.'s institutional businesses in Jersey City, N.J. “Most of our clients are dealing with high-net-worth people who are kind of ho-hum about these programs, but we're open to discussing it.” Schwab's move nevertheless could trigger a pricing war as rivals try to protect their bases. Pershing LLC, a Jersey City-based subsidiary of The Bank of New York Mellon Corp., has kept its pricing “competitive with the other custodians, and it will continue to,” said Jim Dario, managing director of business development at Pershing Advisor Solutions. Casting some doubt on the long-term effectiveness of the Schwab initiatives, he also noted that pricing depends on the nature of the individual relationship with each customer. “Eventually, advisers and their clients will have to pay to get the value they expect,” Mr. Dario wrote in an e-mail. “We are in a very competitive industry, and clearly the competition is reacting to the multimillion-dollar investments Fidelity has been making,” company spokesman Adam Banker said. The Boston-based firm is the second-largest custodian of RIA assets, after Schwab. Fidelity will continue to offer “highly competitive pricing and services within an overall strategic relationship,” Mr. Banker said. Brad Hintz, an analyst at New York-based Sanford C. Bernstein & Co. LLC who follows the broker-dealer industry, said that he isn't surprised to see Schwab — which has generated its fattest profit margins from its RIA business — trade off some commission revenue for asset growth through its RIA channel. “It's a marketing gimmick: "Free trades at Engulf and Devour Advisors,'” he wrote in an e-mail. “I think this is more smoke than fire.” Mr. McCool, who ran Schwab's corporate-retirement-plan businesses before adding the RIA unit to his realm last November, said that within minutes of announcing the pricing changes, he received numerous e-mails from clients thanking Schwab for using its strength to help them “re-engage” with prospects. He upset some of Schwab's largest RIA clients this year when the firm said that it was backing away from taking custody of most hedge funds and other alternative assets, but he has since modified the schedule for the transition. “This isn't about creating pricing wars,” Mr. McCool said, though he acknowledged that competitors may respond that way. “Implicit in this is that if it's right by the client, the client will reward us in the long run.” In his e-mail to clients, Mr. McCool wrote that Schwab also has begun a “multimillion-dollar effort to develop a next-generation custodial and servicing platform that is designed to dramatically improve RIA firm operating efficiency.” The initiatives include a technology platform centralizing and integrating features of the firm's website and desktop applications, and a new secure e-mail functionality between certain advisers and Schwab service representatives. The investments are a necessity for any firm in the custody arena, Mr. McCool said, contending that Schwab's attempts to help RIAs redefine their operations are unmatched by its competitors. Pershing, Fidelity and TD Ameritrade each recently unveiled significant technology upgrades. Schwab is by far the leading custodian for independent advisers, with about 25% of market share measured by assets. E-mail Jed Horowitz at jhorowitz@investmentnews.com.