Schwab webcast to address its revised alternatives plan

The Charles Schwab Corp. has scheduled a webcast Thursday to brief registered investment advisers on its revised plans to wind down custody of alternative investments.

The largest custodian of RIA assets set off a firestorm of protest in February by saying it would immediately curtail custody of offshore hedge funds, promissory notes and other stock, bond and mutual fund alternatives in response to the intensified regulation it expects in the wake of the Bernard Madoff and other scandals.

The San Francisco-based broker also said that as of May 1 it will no longer allow advisers to add to or initiate domestic alternative-investment positions.

Advisers protested the precipitous way the decisions were announced, the lack of procedures for helping them transfer assets to alternate custodians and the scare effect that the ban might have on clients invested in alternatives.

In a letter to several senior Schwab executives, a group of RIAs with billions of dollars under management said they would reluctantly consider moving all their assets to rival brokers unless Schwab worked with them to develop “a long-term in-house Schwab solution.”

In response, Schwab kept the offshore ban in place but said it would continue accepting domestic alternative investments on an interim basis until it has a “long-term AI custody solution in place” that will take into account the need for efficient account opening and data transmission between it and new custodians. A spokeswoman said that the solution will be ready by yearend.

The interim solution comes with qualifications.

Although advisers will be allowed to add to existing domestic positions on behalf of new and current clients, acceptance of new assets as of May 1 will be subject to a review process. The review will focus on “operational compatibility” and require more documentation about the securities being custodied, Schwab Advisor Services sales head Bernie Clark and chief operating officer Trish Cox wrote advisers in an April 10 message.

They also encouraged advisers planning to supplement alternative positions after April 30 to alert their service team representatives immediately. “We would like to gauge demand to ensure we support you through the interim process, and want to set the appropriate expectations regarding timing for you and your clients when planning that purchase,” they wrote.

Several advisers said they are pleased that Schwab is showing more flexibility, but remain confused by the message’s disjointedness.

“We welcome that they are not making us move right away, but why are they restricting us on assets they already accept?” said R. Jeffrey Young, who’s in charge of day-to-day management at WealthStone Inc. of Columbus, Ohio. The RIA firm has almost one-fourth of its $265 million of assets under management in funds of hedge funds and other alternatives.

He speculated that Schwab may be reviewing all alternative issues held on its platform with a view to eliminating any that might present valuation and reporting problems, but said that written information and calls from Schwab officials haven’t provided much clarity.

Some advisers said it’s difficult to comply with the request for advance information on hedge fund or fund-of-fund purchases because they usually have only a two-month advance window on such purchases, given funding and other requirements of many limited partnerships.

“We strongly encourage any advisers who have questions about the process or about the details we have shared to date to call their relationship manager at Schwab,” a Schwab spokeswoman wrote in an e-mail response to a request for comment.

Schwab, meanwhile, has set up a “formal feedback group” comprising advisers from “geographically diverse firms” with “specific knowledge of operational and transactional issues” to advise it on the transitional procedures, according to the message from Mr. Clark and Ms. Cox.

The spokeswoman declined to identify the individuals in the group.

Schwab, like many financial services firms, has been cutting staff and expenses, and does not appear willing to rescind its edict. In initially announcing the alternatives decision, it said: “Instead of building highly specialized systems that fully respond to anticipated and emerging regulatory requirements, it is more efficient and effective to rely on third-party custodians.” Since it did not want to send business to its major rivals, it recommended some small trust companies that many advisers said will not be able to provide the same levels of service they received from Schwab.

Thursday’s hour-long webcast, which will be hosted by Jim McCool, executive vice president of institutional services, will “cover a step-by-step walk-through of the new asset acceptance review process” and will include a question-and-answer period, Schwab said on its website. The webcast is scheduled for 1 p.m. PT (4 p.m. ET).

E-mail Jed Horowitz at [email protected].