Schwab reorganizes Goldman out of job

When Chris Isaak, the edgy rock-and-roll star, performed at Charles Schwab Corp.’s annual gathering of financial advisers in late September, no one watched more intently than Charles G. Goldman.

Squeezed among hundreds of dancing, gesticulating advisers at the foot of the stage on the manicured grounds of Atlanta’s Centennial Olympic Park, the 47-year-old executive vice president of Schwab’s institutional business stood ready to draw his finger across his throat if he deemed the raucous music, sly lyrics and winking comments about Schwab and wealth too offensive.

As it turned out, Mr. Isaak got an all-clear and gave several encores.

Mr. Goldman wasn’t so lucky.

He left Schwab last Monday after the San Francisco-based brokerage firm merged his highly profitable adviser unit with the slower-growing corporate and retirement services group headed by James D. McCool, a protégé of Schwab’s chief executive, Walter W. Bettinger.

Schwab is characterizing the unexpected reorganization as “strategic,” saying that it will enable the company to serve registered investment advisers, corporate-benefit-plan sponsors and third-party -pension plan advisers and administrators more efficiently. Company officials were quick to point out that an increasingly large part of the assets in the retirement services unit are coming from RIAs who advise plan sponsors and administrators.

But people close to the company said Mr. Bettinger, who became CEO in October, preferred entrusting the new model to the 49-year-old Mr. McCool, whose 25-year financial career has focused on what Schwab calls the “business-to-business” services model of the RIA and retirement groups. The Schwab CEO found Mr. Goldman too independent and opinionated, they said.

Schwab spokespeople declined to comment about whether Mr. Goldman was given the choice of remaining to lead the day-to-day activities of Schwab Institutional, which has been renamed Advisor Services and placed under the umbrella of the expanded Institutional Services group.

As of late last week, Schwab hadn’t named the management teams under Mr. McCool.

Mr. Goldman, Mr. Bettinger and Mr. McCool declined through a Schwab spokeswoman to comment on the reorganization. But an internal memo offers a hard-nosed explanation for Mr. Goldman’s departure.

“When two units are combined, only one senior executive can be asked to lead the combined group,” it said, adding that the firm’s founding father — Charles R. Schwab — had blessed the new lineup. “Walt, in consultation with Chuck, asked Jim McCool to lead the new Institutional Services unit.”

Advisers, analysts and former employees were taken aback by the turn of events.

“One day Goldman was doing fine, and the next day he was mysteriously gone,” said Adam Bold, chief executive of The Mutual Fund Store, who said his Overland, Kan.-based RIA, with about $3.5 billion of client assets, ranks among Schwab’s 10 largest custodial customers. “I guess if you can keep only one of two people, you’re going to keep your bud.”

Mr. McCool joined Schwab in 1995 when it bought The Hampton Co., a retirement plan services company founded by Mr. Bettinger.

Mr. Goldman arrived in 2001 to run a venture capital unit and then shifted to strategy and corporate development as Schwab struggled to recover from the crash of the dot-com boom. He led a cost-cutting initiative in 2004 and 2005 that Mr. Bettinger has credited for aiding Schwab’s “financial turnaround.”

Mr. Goldman became chief operating officer of the adviser group in April 2005, and in March 2007 replaced Deborah McWhinney as its leader when she retired.

The adviser unit under his aegis has outpaced all Schwab’s other businesses in revenue and profit growth and maintained its market dominance — facts acknowledged last year when Schwab awarded Mr. Goldman a $2.1 million compensation package composed largely of bonuses for beating his targets.

A Schwab spokeswoman declined to comment about whether Mr. Goldman received a severance package. At the end of last year, he would have been entitled to about $2 million if he were dismissed without cause, primarily through accelerated vesting of certain stock and option awards, according to Schwab’s proxy.

During the first nine months of this year, the adviser business added $48.5 billion of net new assets to Schwab — compared with $27 billion for the discount brokerage unit and $16.2 billion for the retirement unit run by Mr. McCool.

The adviser group’s revenue soared 11% through the end of September over the year-earlier period, while expenses fell 4%, largely due to unusually high spending last year.

Mr. McCool’s corporate and retirement services group recorded a 5% revenue gain and an 8% expense gain through the first three quarters. Pretax profits in the adviser unit rose by one-third from the comparable period last year, to $454 million.

Meanwhile, pretax profit fell 6%, to $98 million, in the retirement unit.

Some advisers suspect that Mr. Goldman’s dismissal also was motivated by cost. It is easier to cut one executive making $2 million than 15 underlings who each make $150,000, Mr. Bold said, adding: “Charles Goldman was capable, so you are not trimming fat; you are starting to get to the meat and bone.”

While Schwab officials said that they have no immediate plans for heavy layoffs, the company’s internal memo made it clear that expense savings are integral to the reorganization. “Today, more than ever, we simply cannot afford to have any unnecessary duplication in our company,” the Nov. 17 memo said.

In addition to combining its RIA and retirement businesses, Schwab is centralizing support functions such as project management and web maintenance that now reside in each of its three business groups. It is doing the same with research and other strategic services groups.

“Charles was a great guy, and did a great job, but with every combination there are winners and losers.” William T. Spiropoulos, president and chief executive of CoreStates Capital Advisors LLC, a Newtown, Pa., firm with $150 million in assets. He serves on one of Schwab’s advisory councils.

Schwab ended last year with a market share of 24% in the RIA custodial business, more than twice its closest competitor. “They’re not going to kill the golden goose,” said Joel Isaacson, an RIA in New York with about $5 billion in client assets.

But not everyone agrees.

“The institutional business is big enough that it deserves its own guy,” Mr. Bold said.

E-mail Jed Horowitz at [email protected].