Schwab adviser unit roiled by turnover

Charles Schwab Corp.’s $213 billion institutional unit is wrestling with the loss of more than a third of the senior managers who serve many of the company’s biggest fee-based adviser customers.

The turnover and downsizing come at a particularly sensitive time. Schwab is trying to calm advisers agitated over the brokerage’s pending purchase of white-shoe money manager U.S. Trust Corp. — a deal that some advisers view as a competitive threat.

“It is more change than we typically experience,” says Gerald Graves, the senior vice president in charge of the Schwab Institutional sales force.

“A lot of the change is coincidental,” he adds. “It’s not employee flight based on dissatisfaction with anything that’s happened.”

Since October, six of Schwab’s 17 regional directors who have cultivated longtime sales and service relationships with financial advisers in the Midwest, Northeast and San Francisco Bay area, have either left or moved to other jobs in the company.

At the same time, Schwab has consolidated its team of regional directors, eliminating three senior posts in California and the Southeast. When two vacant posts are filled, Schwab will field 14 regional directors.

“There is no concerted effort to reduce the group for revenue purposes; the departures are completely unrelated,” says one of the former executives, ex-Minneapolis regional director Mark Drinkwater, who now works for State Street Global Advisors in Boston.

Still, some advisers are put off by the changes.

“You lose that personal relationship,” says Sheryl Garrett, president of Garrett Financial Planning Inc. in Overland Park, Kan., who used to call on Mr. Drinkwater for help to clear up custody transfer snafus.

Other advisers are less concerned: Marilyn Capelli Dimitroff of Bloomfield Hills, Mich., says former Great Lakes regional director Mary Dasilva helped her build her $80 million practice five years ago, but she expects Ms. Dasilva’s successor to offer similar support.

“Mary did a very good job in that role, but I don’t think it’s particular to one person,” she says.

Schwab’s Mr. Graves expects to expand the 89-member regionally managed sales force by 15% this year.

One solution, suggested by Mark Hurley, chief executive of Undiscovered Managers LLC, a Dallas company that markets mutual funds and separate accounts to intermediaries, is a spinoff of the institutional custody unit to avoid a conflict between retail and adviser customers.

“Schwab has historically been assiduous in avoiding conflicts with their clients,” he says.

“There are no plans for any spinoff,” responds Mr. Graves. “We are going to make the businesses more intertwined.”

Mr. Hurley says that an eventual spinoff is now conceivable because of the growth and expanding profit margins of Schwab’s retail business.

“Historically, the institutional business has paid all the bills,” he says. “But there’s also a crossover point where the retail business has gone from a loss leader to being very profitable, and it’s growing at geometric rates. That growth is creating this conflict.”

A Schwab spokesman declined to discuss the profitability of individual units.

There appears to be little support from Wall Street analysts for a spinoff.

“They are running into some areas of potential conflict, but this whole financial services industry is loaded with potential conflicts,” observes Sheldon Grodsky of boutique brokerage Grodsky Associates Inc. in South Orange, N.J. “Separating the operations would be messy.”