Schwab dominates rivals in Citi survey of RIA custodians

Charles Schwab & Co. Inc., the pioneer of discount brokerage and the first broker to focus a business unit solely on independent investment advisers, appears to have proved once again that it pays to be first.

According to a new, though not comprehensive, survey of registered investment advisers conducted by Citigroup Inc. in late June, Schwab trounced competitors by ranking as the favored custodian in all of the survey’s categories. Just under 95% of the San Francisco-based firm’s own clients and 73% of all survey respondents designated it as having the best overall custody platform.

“Schwab earned more No. 1 rankings than all competitors combined across every single category,” wrote Prashant Bhatia, an equities analyst at New York-based Citigroup, who sent a report on the survey to clients as part of his coverage of discount brokers and other securities firms. More than half of the respondents ranked Schwab first in all six categories assessed by survey participants — with its strongest marks in service, brand and technology.

Only 14% of respondents designated the runner-up, Boston-based Fidelity Investments’ adviser unit, as having the top platform, with even fewer giving honors to TD Ameritrade Institutional and to Pershing Advisor Solutions LLC, both of Jersey City, N.J., and to LPL Financial of Boston.

Citigroup said it surveyed “over 100” registered investment advisers who manage an estimated $60 billion in client assets at large and small firms across the United States, but did not detail how the respondents were chosen. The small sampling out of a universe of some 18,000 RIAs with greatly varying characteristics, and the report’s lack of methodological detail, generated some skepticism from Schwab’s rivals.

“To be truly representative, that sampling should be closer to 400 firms that are randomly selected,” said Jim Dario, a managing director in charge of business development at Pershing, a unit of Bank of New York Mellon Corp.

Pershing came in for some rough handling in the survey. Only half of its clients said they would recommend it as a custodian, compared with an average of 98% of respondents who would recommend their primary custodian.

Then again, only 9% of survey participants said they used Pershing as a primary or secondary custodian, and only 2% used LPL, whose primary business focuses on supporting independent broker-dealer representatives.

Mr. Bhatia, the Citigroup analyst who oversaw the survey, did not respond to several calls for comment.

There was some good news broadly in the report for advisers and the custodians who generate a growing part of their revenue from RIA clients.

“Clients vote with their money, and RIAs are winning by a landslide,” the Citi report proclaimed.

RIAs funneled $215 billion of new assets to Schwab, Fidelity and TD Ameritrade over the last six quarters, almost 30% more than the assets collected by the combined sales forces of Merrill Lynch & Co. Inc., Morgan Stanley, Citigroup’s Smith Barney unit and UBS Financial Services Inc., all of New York, Mr. Bhatia wrote.

What’s more, almost two-thirds of the survey respondents said full-service brokers were their primary source of new client assets — far exceeding the 8% whose growth came primarily from managing new assets for existing clients. And they’re not picking the pockets of their former friends. About 80% of RIAs in the survey said they never worked at a full-service broker.

“[Custodians] are realizing that as their RIA clients grow they grow, so they have all put in place pretty significant programs to help advisers run more efficient practices and grow organically,” said Bing Waldert, an analyst at Cerulli Associates Inc. in Boston.

RIAs also remain upbeat about the future, with 56% of the survey respondents expecting their client assets to grow by at least 15% over the next three to five years, and not a single respondent seeing shrinkage.

Fidelity, which declined to comment on the Citigroup survey, found that RIA assets industrywide grew 55% over the past three years, while Schwab says it enjoyed median asset growth of 20% between 2003 and 2006.

Client service, an intangible factor that custodians believe reflect ease of service and knowledge of specific RIA preferences, was the top criterion for choosing Schwab as a custodian, according to the survey. Respondents who use TD Ameritrade were more likely to focus on cost. A TD Ameritrade spokesman said client satisfaction with its overall platform is rapidly gaining as it recovers from consolidation issues related to the purchase of TD Waterhouse USA and other custodians in recent years.

E-mail Jed Horowitz at [email protected].

Related Topics: E*Trade Financial Corp.