Watch out, Merrill and Morgan, discounter wants your advisers

Jeffrey P. Cusack might slay two dragons for Charles Schwab & Co.

Since his May hiring, the 41-year-old senior vice president of separate accounts for Schwab Institutional has already brought his 12 years of experience to bear.

He has created a major-league managed-accounts offering for Schwab’s 6,000 independent advisers so they can attract and retain wealthy clients.

At the same time, the former separate-accounts star for Salomon Smith Barney is dangling a very big carrot.

Once the new Schwab Consulting Services launches in April, Mr. Cusack plans to tempt financial advisers from Merrill Lynch & Co. Inc., Morgan Stanley Dean Witter & Co. and the other wirehouses to become independent.

“This is the first time something is being offered that could create an economic advantage to become an independent adviser,” Mr. Cusack says. “The math has changed dramatically. At best it was break-even” to leave a brokerage firm and become an independent adviser. “Now there’s an economic advantage.”

quality accounts

The advantage, he says, is that, thanks in part to money manager selection research provided by Callan Associates Inc., the accounts are wirehouse grade. But they also come with fees low enough to allow advisers to add in their own fee without losing that competitive pricing edge.

“It’s leadership,” says Stephen C. Winks, former head of investment management consulting for Prudential Securities in New York. He is publisher of Senior Consultant in Richmond, Va., and an occasional consultant to Schwab. “It’s the beginning of attracting higher-end investors, and they can promote this service using fees rather than commissions.”

Separate, wrap or managed accounts are funds invested by a portfolio manager. They are not combined with those of other investors, as is the case with mutual funds. That is especially attractive to rich individuals because in many cases they realize big savings on fees and taxes.

There’s also a certain cachet to such private attention.

Still, not everyone in the industry is so certain Mr. Cusack will succeed anytime soon in making his advisers into superpros by arming them with managed accounts.

“Will the market accept the product?” asks Robert J. Powell III, director of business development for FundQuest in Boston. “There have been a lot of products that Schwab offered [to its advisers] that didn’t take off. These are things that typically take years to get off the ground. These are advisers with varying levels of competency and interest.”

Indeed, at Smith Barney, more than 75% of the brokers sell the company’s separate-accounts offering, against the 9% of Schwab independent advisers who have a separate account through the company, Mr. Cusack says.

But several factors give him confidence that Schwab may hit the sweet spot in the market this time, he adds.

In 1998, Schwab introduced its first separate-accounts product, known as the MAC, or managed accounts connection. The program already has $7.5 billion in assets and experienced 150% growth during the past 12 months.

That compares with only about $40 million in the similar program offered by TD Waterhouse. J. Thomas Bradley Jr., president of San Diego-based Waterhouse Institutional Services, says his company is trying to roll out a more robust separate-accounts offering this spring.

E*Trade Group Inc. of Menlo Park, Calif., has no comparable program, but a company spokeswoman says it will introduce one during the second half of this year. The incentive is clear. Consultant wrap assets grew 20% to 30% annually during the mid- to late 1990s, according to Boston research firm Cerulli Associates Inc.

Meanwhile, Cerulli says, wrap-asset growth will accelerate in the next five years to a 30-40% growth rate.

Mr. Cusack attributes the rapid rise of Schwab’s MAC program to demand created by the explosive growth in the business of managing money for the affluent. But he believes Schwab Consulting Services is a quantum improvement over MAC because it is far simpler and more affordable for advisers to use.

For instance, the MAC’s minimum account size is $250,000 for most of its money managers, and fees range as high as 1.5%.

back-office deal

Under the new program, all fees are less than 1%, and account minimums are less than $100,000 – a schedule Schwab was able to get from the money managers by taking over a host of back-office duties.

Under the MAC program, Schwab advisers need their clients to open separate contracts with Schwab and each manager of a separate account.

Under Schwab Consulting, it is reduced to a single contract with Schwab itself.

“It’s allowing us to make asset allocations easily,” says Michael A. Yoshikami, president of Walnut Creek, Calif.-based YCMNet Advisors, which uses Schwab as its custodian and controls about $350 million in assets.

Still, what gives Schwab Consulting real stature, Mr. Cusack says, is its collaboration with Callan Associates, a San Francisco money management research and consulting firm.

“Callan’s a brand name in the field that gives them instant credibility that they would have lacked,” Mr. Powell says.

Callan allows Schwab to offer the highest grade of research to find the right managers for clients and monitor their performance.

That includes attribution analysis, which tells whether the excellent performance from a manager came about because he was lucky or because he was good.

“There’s no Morningstar for separate accounts,” Mr. Cusack says.