Fidelity fielding teams to serve operations needs of top RIAs

Fidelity Investments is unveiling details of the enhanced service model that Charles Goldman, head of its institutional platforms business, promised for registered investment advisers when he joined the firm from The Charles Schwab Corp. almost a year ago.

By Jan. 1, Fidelity will serve its approximately 150 “premium-tier” RIA clients through a dedicated team of operations, technology and other consultants, said Michael Durbin, president of the firm’s institutional wealth services division.

Another 500 or so preferred-tier customers will get the team service approach by the middle of next year. Ultimately, the firm plans to adopt the team approach for most of the RIA unit’s approximately 3,500 RIA firms, officials said.

Mr. Durbin, who joined Fidelity in January after a long career at Morgan Stanley, declined to elaborate on the metrics for determining tiers, other than to say they go beyond a firm’s size to also account for potential revenue that can be brought to Fidelity.

Fidelity’s RIA clients today work primarily with a single client service manager, who funnels requests for help with asset transfers, technology assistance and other needs to far corners of the Fidelity empire.

The team approach is aimed at fulfilling Mr. Goldman’s vow to bring the firm’s service levels on a par with Schwab’s while maintaining its long-held reputation as a top provider of technology, Mr. Durbin said.

Fidelity hasn’t significantly expanded its relationship management and sales teams but in recent months has been filling holes due to attrition and past layoffs, he said. Each area now has about 50 people serving independent advisers. Fidelity recently hired Timothy Stinson, a former sales executive at Fortigent LLC and SEI Investments Co., to run the institutional wealth services division’s West Coast region from Los Angeles.

On the new-business side, Mr. Durbin said that while it’s difficult to convince RIA firms to transfer all their clients’ assets from a competing firm, Fidelity has attracted “several good clients” from Schwab and other rivals since he and Mr. Goldman arrived. Michael Hecht, an analyst at JMP Securities LLC, said he has been told by Schwab officials that the firm lost a single advisory firm client to Fidelity in the past year.

Schwab, through spokeswoman Alison Wertheim, declined to comment.

Fidelity last week said it is ramping up its efforts to entice brokers to leave wirehouses and form or join RIA firms or independent-contractor brokerage firms that clear through National Financial Services LLC, or have assets under custody with the adviser custody unit. Mr. Goldman oversees both businesses.

A key part of Fidelity’s enhanced “transition solutions” program is an online calculator it calls a Financial Advisor Economic Estimator. Brokers who input personal data such as annual production, payout, deferred compensation, taxes and other expenses receive a “detailed and customized” report that compares the costs and pay benefits of remaining at a wirehouse over a 10-year period with what they would realize if they became RIAs or joined independent broker-dealers.

Fidelity is fairly straightforward about acknowledging the tilt of the program. “Regardless of the independent model a broker is evaluating, Fidelity’s resources can demonstrate the potential economic benefits of independence,” it said in a news release.

The tool appears to take close aim at fat signing bonuses that wirehouses have been dangling in front of top brokers. Morgan Stanley Smith Barney LLC and Merrill Lynch & Co. Inc., for example, have recently been offering forgivable loans — and other cash or deferred-stock incentives — of as high as 330% of some brokers’ 12 months’ annual production, according to recruiters.

Fidelity’s new calculator highlights the hidden tax and business costs of such offers, said Felipe Luna, president of Concert Wealth Management, an RIA firm. For example, it assumes that brokers who change firms will lose 30% to 35% of their production from clients left behind, suffer a consequent drop in payout and still have to pay annual taxes on the amortized part of their forgivable loans as well as on their ordinary income.

Mr. Luna said he developed the program as a recruiting tool for Concert, which specializes in setting up brokers as RIAs under its servicing umbrella, but licensed it for a small fee to Fidelity. “They took our ideas and data points, and fleshed them out to include roll-up firms and other options about which we don’t have knowledge,” said Mr. Luna, who keeps most of his custodial assets with Schwab.

Mr. Durbin acknowledged through a Fidelity spokesman that Mr. Luna “helped” the company with the calculator.

Fidelity’s initiative is the latest marketing salvo by RIA custodians and independent broker-dealers hoping to capitalize on brokers’ dissatisfaction with the mergers, losses and other disruptions that powerhouses such as Merrill, Wells Fargo Advisors LLC and Morgan Stanley Smith Barney LLC have experienced in the past year.

Consultants estimate that perhaps 500 brokers have left wirehouses for independent channels in the past 18 months. Many were lower-tier producers who were fired by wirehouses or who left after their payouts were heavily cut, according to securities industry consultants. While custodians and their RIA clients continue to aim for all tiers of producers, the vast majority will remain in the wirehouse channel, according to firm officials and outsiders.

“It has been, and will remain, a slow trickle, but the fundamentals are still in place,” said Bing Waldert, a consultant at Cerulli Associates Inc. “It’s easier than ever before to go independent, because the technology is better, and the blueprint on how to do it has been [created].”

Cerulli estimates that breakaway brokers will account for a shift of 0.5 to 1 percentage point of client assets annually from broker-dealers to independent firms annually.

Wirehouses last year lost 0.8% of private wealth market share, while RIAs gained 0.99%, according to Cerulli.

Breakaway breakdown

In the first three quarters of 2009, Fidelity attracted 110 wirehouse brokers with $6.5 billion of assets to its custodial platform, while another 60 joined independent broker-dealers that clear through NFS. Schwab, which does not have a clearing affiliate, said 126 teams of brokers from “major financial firms” had moved to its RIA custody platform during the first nine months of the year, up from 123 in all of last year.

Pershing Advisor Solutions LLC, the RIA custody affiliate of clearing giant Pershing LLC, said it attracted 22 new RIA teams year-to-date through October. Pershing has custody of about $73 billion of RIA client assets, compared with more than $500 billion at Schwab and $370 billion at Fidelity, according to the companies. TD Ameritrade Holding Corp.’s custody unit now serves RIAs with about $100 billion of assets, according to president J. Thomas Bradley Jr. The company declined to provide recent numbers on breakaway brokers it has attracted.

Fidelity also has published a white paper, “Options for Independence,” that focuses on such virtues of ndependence as increased client trust and the autonomy and control of running one’s own business but also issues numerous warnings about the difficulties of transition.

Brokers must be realistic about how many of their clients will follow them and must evaluate the portability of proprietary products in their clients’ portfolios and the tax consequences of having to liquidate them, it warns. They also should be prepared for some “short-term cash flow issues” until revenue from quarterly billing cycles comes in consistently, according to the report.

E-mail Jed Horowitz at [email protected].

Related Topics: Charles Schwab & Co., E*Trade Financial Corp., Fidelity Investments, ING Group, TD Ameritrade Institutional