Schwab: Bulk up or pay up

Charles Schwab & Co. Inc. will levy a $1,200 quarterly charge on all advisers keeping less than $10 million with it, and Deborah D. McWhinney is braced for the fallout from her first unpopular decision.

Now entering her third year as president of services for investment managers at Schwab, Ms. McWhinney decided to risk alienating a third of the advisers she oversees by doubling the current $600 fee for those with less than $3 million and imposing the levy on those with between $3 million and $10 million. The move is effective July 1.

The charge applies only to advisers who have been with the firm for at least a year.

The move affects 1,800 of Schwab’s 5,800 advisers, but it affects “significantly less than 10%” of the $222 billion from advisers for which Schwab provides custody, according to a Schwab spokesman.

Still, Ms. McWhinney hopes her actions encourage account consolidation, not fees.

“Our hope is that no one is charged this fee,” she says. “This [$10 million] is not a high mark.”

Indeed, Joshua M. Rymer, senior vice president and head of strategy for Schwab Institutional, says that between 25% and 40% of the 1,800 advisers who are potentially affected by the price change control their own destiny.

He says his firm’s research shows that even advisers who park as little as $10 million with his firm use four to six different asset custodians. This means these advisers have the leeway to make the minimum by consolidating some of those assets at Schwab.

Many of the other 60% to 75% of advisers with less than $10 million parked at Schwab may be square pegs for round holes, according to Ms. McWhinney.

“On an institutional platform, you want people on an institutional level,” she says. “We want people serious about the business.”

She adds that she feels pressure to raise revenue from these lower-end advisers because Schwab is spending heavily on this platform. Being forced to comply with the Patriot Act and other government regulations has added to overhead, she adds.

In addition, with Schwab’s larger advisers feeling a margin squeeze in their own businesses, she says, their patience for carrying the load for the smaller ones is wearing thin.

“At $250 million, I’m the one subsidizing those guys,” says Richard D. Steinberg, president of Steinberg Global Asset Management Ltd. in Boca Raton, Fla.

Still, there are advisers with less than $10 million who say Schwab is making a naked bid for more revenue and trying to drape it in the banner of fairness and growth.

Certainly, Schwab can use all the revenue it can get. The San Francisco brokerage warned Thursday that the consensus Wall Street first-quarter profit estimate of 8 cents a share will be too high if trading levels continue at their weak pace.

Schwab’s trading level in January was off 19% from that of the same month in 2002, and February’s has been even worse, according to the company.

These dismal results are reflected in the company’s stock price, which is holding steadily at less than $8 for the first time since 1998.

One Florida-based adviser, asking not to be identified, says he doubts he is a drag on Schwab. He does all his business online and rarely speaks to anyone at Schwab.

He allows that the extra $2,400 a year in fees isn’t going to make or break his business but that the “screw you” mentality that got him to switch from cable to DIRECTV may lead him to move his assets.

He isn’t alone.

“Since the letter went out on Monday, the phone is ringing off the hook – not only from advisers but from industry associations,” says James C. Wangsness, senior vice president and head of Ameritrade Adviser Services of Omaha, Neb.

Ameritrade has no minimums for advisers and no fees.

It charges $10.99 for market or limit orders regardless of the size of the trade.

Mr. Wangsness, who works from New York, says the flames are being fanned by a massive e-mail blitz organized by advisers who are “ticked off.”

“I’ll have [new] assets by next week,” he adds.

Dan Flaherty, a spokesman for Fidelity Investments in Boston, says his firm is also receptive to assets from advisers with low balances. It has no set minimum balances and charges no extra fees to smaller advisers.

TD Waterhouse Institutional Services in New York has a $10 million minimum for new advisers. It charges a quarterly fee of $600 for existing advisers with balances of less than $3 million.

But Mr. Steinberg says that advisers who plan on moving assets ought to look before they leap to one of these cheaper alternatives. Having customers sign forms to move assets to a new custodian is a can of worms better left sealed in this economic environment, he says.

“The devil they know many be better than the devil they don’t know,” he adds. “My guess is that the smart people will stick with it.”