Some advisers hopping off Schwab’s bandwagon

In the weeks since it announced it was acquiring a major investment management company, Charles Schwab Corp. has scrambled the independent adviser market like a ham and cheese omelet.

Although no overall numbers were available, some advisers are starting to think more seriously about realigning their businesses to avoid being overrun by the Schwab juggernaut.

“Here come the 18-wheelers down the road,” says Tom Grzymala. The president of Alexandria [Va.] Financial Associates Ltd., he feels Schwab’s latest plans strike too close to home. “I don’t want to be roadkill.”

In the midst of the upheaval, other firms are angling to hook independent advisers with equity-sharing arrangements that will allow them to grow.

Major players like J.P. Morgan & Co. Inc. of New York and Northern Trust Corp. of Chicago are also moving downstream, and Schwab is taking steps to keep advisers in its camp.

The San Francisco discount brokerage recently announced the start of its new Portfolio Consultation service, a more detailed, extensive investment advisory service than it has previously offered.

Under the service, which is being advertised nationally, clients pay $400 to get evaluations on asset allocation and portfolio rebalancing from “investment specialists.”

Schwab spokesman Glen Mathison says the company, which does about a third of its $725 billion asset management business through advisers, meets regularly with its adviser clients about what Schwab calls its “evolution.”

“There are different kinds of investors out there who want different kinds of services and different types of advice,” Mr. Mathison explains.

“We remain committed at Schwab to providing investors with access to independent investment advisers when they want to delegate their portfolio management to a third party,” he adds.

Meanwhile, Assante Capital Management Inc., a family office company in Winnipeg, Manitoba, is scheduled to announce in June its partnership with 20 large financial planning firms throughout the United States, and it expects to have 100 companies within its fold over the next three years.

The adviser angst was touched off in January when Schwab announced the acquisition of U.S. Trust Corp., the New York investment management company. Some advisers saw the move as an incursion into their business.

For its part, Schwab said the deal was part of an effort to recast itself as a full-service brokerage on par with Merrill Lynch & Co. Inc. At the time, Schwab executives said the move would not affect their adviser relationships.

One analyst, Steven Eisman of Cibc World Markets in New York, says it’s too early to tell the effect of buying U.S. Trust Corp., but adds “I think it’s a risk.”

Schwab has 5,800 advisers trading through it, up 400 from last year, says Mr. Mathison. By comparison, Fidelity Investments’ adviser unit has 58,000 and projects having 65,000 advisers trading through it by yearend, up from 49,000 in 1998. Schwab advisers, though, oversee $213 billion to Fidelity advisers’ $211 billion.

Several advisers contacted over the past week are looking at alternative discount brokerages, notably TD Waterhouse Group Inc. and Fidelity, to handle at least some of their assets.

Others, however, see the change as an inevitable part of competition, even if they resent Schwab’s constant moves into their market.

And a loyal contingent insists Schwab still offers the best services for their needs at the best price.

“I have yet to find a brokerage company, a custodian, that can offer as good a back-office service as Schwab,” says Michael Martin, president of Financial Advantage Inc., a Columbia, Md., firm managing $75 million.

likes nose where it is

“I’m not going to cut off my nose to spite my face. I’m getting good value; my clients are getting good value,” he adds.

Mr. Grzymala fears that Schwab, as custodian of $40 million worth of his clients’ accounts, “can turn [the data] over to U.S. Trust.”

“What I fear is when Mr. Smith dies, Mrs. Smith gets a call from her friendly U.S. Trust representative asking her, `Can we help you settle your estate?’ and color her gone,” he says.

Mr. Grzymala says he is among many financial planners who “are looking to take our new clients to perhaps other places,” such as Waterhouse or Fidelity.

He also is keeping an eye on the progress of National Advisors Trust Co. of Overland Park, Kan., which earlier this month filed a revised application with the Office of Thrift Supervision to start a trust company to be operated by and for financial advisers.

one goal: to cut costs

National Advisors’ plan is to lower trust service costs for the clients of advisers and to help advisers retain client families after the death of their initial customers.

One prominent adviser, Harold Evensky of Coral Gables, Fla., declines to say what changes he plans to make, but he says his $300 million asset management business, Evensky Brown & Katz, is studying the feasibility of getting a group of similar firms together “to have more scale and size.”

Mr. Evensky says he has talked to both Assante and National Financial Partners Inc., a New York consolidator of financial services firms that is led by Jessica Bibliowicz, daughter of Citigroup chairman Sanford I. Weill.

“The world is changing fundamentally, and at warp speed,” Mr. Evensky says.

To compete with larger nationally-recognized companies, he says, planners face the challenge of cutting fees, delivering more services and having to pay more for marketing to get new clients all at the same time.

“At the scale we are, there’s a limit to how much pressure we can stand.”