Schwab advisers remain positive

Harold Evensky is pumping – not dumping – Charles Schwab & Co. Inc.

The chairman of Evensky Brown & Katz, which has $450 million under management, says that the recent bad publicity about improper mutual fund trading at the San Francisco-based broker does not degrade his view of the company that keeps a significant portion of his client assets.

“We’ve had lots of battles with them, but we have absolute confidence in their integrity,” says the Coral Gables, Fla.-based adviser. “We’re more than happy to defend good people, and we have no plans to move any money.”

Mr. Evensky’s reaction typifies the support advisers are giving Schwab in the wake of one of the worst public relations nightmares in its history. Though many advisers report that they are suffering the inconvenience of having to write letters explaining Schwab’s actions, they nonetheless are doing so in a positive spirit.

For Schwab, this is very good news, considering that advisers’ client accounts represent $270 billion, or about 30% of its total assets.

Schwab admitted Nov. 14 that employees at its U.S. Trust Corp. subsidiary in New York had allowed institutional clients to engage in the market timing of its Excelsior funds.

The instances were few, and the offending employees were fired long ago.

But Schwab executives are determined not to be put in the position of making excuses again.

“Our oversight systems cannot be content with 99.99%,” David S. Pottruck, Schwab’s chief executive, wrote to his company’s employees in an e-mail. “We need perfection.”

In the end, Schwab’s adviser clients say they need something approaching perfection to keep their clients happy.

“Right now, it’s not a real helpful time,” says Gregory H. Friedman, principal with Friedman & Associates.”We’re fielding a lot of questions from clients.”

Mr. Friedman, who is based in Novato, Calif., says that he is supporting Schwab by showing his clients that the facts of the case are less damning than the headlines in the San Francisco Chronicle, which most of them read.

“I just think the facts aren’t out, but I’m not overly quick to defend Schwab either,” he says. “We can’t be blinded by the fact we have a relationship with Schwab. If we get the feeling there’s something going on, we’ll be looking around.”

Fred Siegel, president of the Siegel Group Inc. in New Orleans, which has $1 billion under management, says he is keeping an open mind about using Schwab as a custodian despite working primarily with Pershing LLC of Jersey City, N.J., which remains unscathed by scandal.

“What [Schwab’s disclosure] does is make me more cautious,” he says. “I’m going to do a little deeper due diligence. But my feeling for Charles Schwab is still pretty good.”

Lance Berg, a spokesman with Schwab, says that advisers are not taking the opportunity to berate his company or hold a gun to its head.

“I’m not aware of any adviser moving their assets because of the 10Q filing,” he says. “Advisers have specific questions. I wouldn’t characterize any communication as attacking us or as a threat to move money.”

Still, Mr. Berg allows that although he believes his company will show that its transgressions are relatively minor, the circumstances remain awkward. That’s because the timing of the Nov. 14 10Q deadline was such that his company faced a dilemma.

By revealing its findings to date in the quarterly filing with the Securities and Exchange Commission, Schwab remained true to its commitment to “transparency” of information pertinent to investors through disclosure.

But the company also left itself vulnerable to sending a confusing message because Schwab’s investigation is still continuing, Mr. Berg says.

Despite the possibility of further disclosure, even industry watchdogs are outspoken about Schwab’s chances of bringing its brand name through intact.

“I love to find a criminal under every rock,” says Max Rottersman, principal with FundExpenses.com in New York. “But I don’t think that’s Schwab’s game.

“Schwab has always treated mutual funds as a stock. It’s not their market to [aid] a large institutional client to the disadvantage of other clients.”

He adds that U. S. Trust may have more of an emphasis on pleasing larger institutional clients but that Schwab’s integrity truly is a separate issue.

“To put it on Schwab’s doorstep is a reach,” Mr. Rottersman says.

“In any organization, you’ll find a few rogue employees,” says Richard Mitchell, executive vice president with Mobile, Ala.-based T. Leavell & Associates Inc., which has $400 million of its $665 million under management with Schwab. “Given Schwab’s culture, we’d be very surprised if there was anything to this. We’ve always found Schwab to be very strict,” he says.