Schwab’s mea culpa and promises to advisers

The Charles Schwab Corp. ended its annual conference for independent advisers last week with a flourish and a confession.

The high note came not so much from big thoughts that such influential speakers as Pacific Investment Management Co. LLC chief executive Mohamed El-Erian, former House Speaker Newt Gingrich and former Labor Secretary Robert Reich shared with advisers but from the market itself. The Dow Jones Industrial Average closed at a 2009 high Wednesday, when the two-and-a-half-day Impact conference in San Diego ended, underscoring a cautious sense of new optimism among many of the 1,200 advisers who Schwab said attended.

The confession came from Jim McCool, Schwab’s executive vice president for institutional services, in his maiden appearance as host of the Impact conference. He took the helm of the combined registered-investment-adviser and retirement services businesses at Schwab at the end of last year.

VETTING PROCESS

“Yes, we stumbled earlier in the year,” Mr. McCool said in his summary remarks, referring to the company’s unexpected announcement in February that it would stop accepting alternative investments for custody. The decision, made without the firm’s customary vetting with financial advisers, led to a threat from some of its biggest clients to move assets to rival custodians and a compromise under which the firm is letting existing domestic alternative assets remain until it works out a transfer process.

Mr. McCool, who said in late June that Schwab was weeks away from a final arrangement with some banks on transferring alternatives and is working with the Depository Trust and Clearing Corp. on another solution, offered no new timetables. But the firm well understands that hedge funds, private placements and other sometimes-hard-to-value alternatives to stocks, bonds and managed-money products are vital to many advisers and their clients, he said.

Some advisers at the meeting had said that they were expecting formal discussions about the issue.

Mr. McCool told the diminished closing-hour crowd Wednesday that alternatives represent one of several new “challenges” that weren’t on the conference agenda, but that Schwab is addressing “behind the scenes.” Another, he said, is the issue of regulation.

Mr. McCool didn’t elaborate, but like other large discount brokers that also glean substantial revenue from providing trading and custody services to independent advisers, Schwab has to navigate a wobbly line in lobbying for the sometimes-competing interests of its businesses.

For example, the independent adviser community has long sought to have brokers subjected to the same put-the-customer-interest-first fiduciary standard of care that Securities and Exchange Commission-registered RIAs must meet. But Charles R. Schwab himself, who didn’t make an appearance at the Impact conference, has publicly argued that such a standard of liability could put the entire discount brokerage model he helped design at risk. It would require brokers to disclose conflicts and potential conflicts that they have in suggesting, or even commenting, on investment choices, and possibly make the firm liable for investments that lose value, he wrote recently.

Schwab’s lobbyists are joining with other members of the securities industry to carve out exceptions to the fiduciary standard, which under the Obama administration’s regulatory-reform proposals is expected to be adopted in some form for anyone giving investment advice. Mr. McCool said that Schwab’s chief lobbyist, Jeff Brown, met Wednesday with some advisers at Impact to get their views.

Mr. McCool offered no summation of the discussions, but twice in his closing remarks assured his audience that his two top lieutenants who oversee Schwab Advisor Services — sales and relationship management head Bernie Clark and chief operating officer Trish Cox — are “fully empowered” to make decisions on behalf of the firm’s almost 6,000 adviser clients. Both are senior vice presidents.

The empowerment reference may have been aimed at assuaging a feeling among some advisers that they had lost clout with senior management when Schwab last November merged its RIA business with the corporate and retirement services unit run by Mr. McCool. The RIA unit, which remains by far the largest custodian of RIA assets and the most profitable business sector for Schwab as measured by profit margin, had previously been run by its own executive vice president.

Mr. McCool opened the conference last Monday by assuring advisers that they are “key to Schwab’s long-term growth,” as indicated by the firm’s budgeting “nearly $1 billion” in people and resources to the business, including a sales force of almost 200 people. Neither he nor company spokeswoman Alison Wertheim would comment on how the dollar or personnel figures compare with earlier budgets.

Mr. McCool also cited a promotional campaign begun in July that waives some technology and transactional fees for brokers and their clients. As of Sept. 9, advisers using the offer had opened 37,700 new client ac-counts, resulting in fee-transfer and transaction savings of $2.1 million, Schwab said.

The firm also is waiving its annual portfolio management software fee next year, which will save the more than 2,200 users of PortfolioCenter at least $1,500 apiece.

Schwab continues to win high marks for the quality of its service and operational support, and many advisers at Impact sung the firm’s praises. Some, for example, said that their relationship managers at the conference volunteered to negotiate discounts on software packages for them.

But advisers also appeared taken aback by one change at the Impact conference.

HONORING ALL

In the past three years, Schwab singled out an individual adviser who has elevated the profession through “vision, leadership, client commitment and community engagement” with the Charles R. Schwab Impact Award, which carries a $25,000 donation to the winner’s favorite charity. This year, Schwab dodged, giving the award to “all independent investment advisers in recognition of the industry’s outstanding support of clients during a tumultuous year.”

At a time when it was easy to get caught up in the headlines, “you made a difference,” Schwab chief executive Walt Bettinger told advisers.

Some attendees applauded the choice, even if it recalled Time magazine’s gimmicky choice of “You” as its 2006 Person of the Year, in recognition of the anonymous contributors to a host of user-generated websites. Schwab also may be trying to deflect attention from the fact that two of the three previous winners of the award, Aspiriant LLC chief executive Tim Kochis and Trillium Asset Management Corp. CEO Joan Bavaria, were instrumental in the February revolt over the firm’s alternatives decision.

“I think it was a nice gesture, but I wonder if they just had a hard time deciding,” said William Beamer, a partner at Dowling & Yahnke LLC, which has about $1.3 billion under management. “And they do have the alternatives issue.”

Schwab also honored the following firms:

• Wetherby Asset Management, an RIA with about $2.4 billion of assets under management and almost 50 employees, won the Best in Business honor for creating “a culture of collaboration” by broadening employee ownership in order to develop high client service;

• Bristlecone Advisors won the Best in Tech award for its home-grown practice management system, called Aristata, which combines a customer relationship management system and five other core applications to serve its family and multifamily office business specialty. Bristlecore has about $437 million in client assets;

• Heritage Wealth Advisors, an RIA, won the Pacesetter honor for more than tripling its size, measured in both assets under management and revenue, since its founding in 2005. Heritage has $138.7 million of assets, according to RIA Database.

E-mail Jed Horowitz at [email protected].