From the February 2007 issue of Investment Advisor • Subscribe!

Schwab to Bankroll Breakaway Brokers

With advisor assets at $500 billion, custodian will offer financing to big brokers going independent

Keeping up the business momentum evident in the closing months of 2006, Charles Schwab announced January 11 that its affiliated advisors now custody more than $500 billion at Schwab Institutional, up 23% from last year. That puts it halfway to SI President Debby McWhinney's oft-repeated goal of having $1 trillion in custody by 2010.

Schwab Institutional, which is marking its 20th anniversary of serving RIAs in 2007, provided more than half of Charles Schwab & Co.'s net new assets in 2006--as of the end of November, Schwab had $1.22 trillion in total client assets.

To help achieve the growth envisioned by McWhinney, Schwab also announced January 11 an expanded program to help entice wirehouse brokers in particular to take the road to independence by providing a number of new and enhanced services, including financing, access to real estate services, and "preferred pricing" on errors and omissions insurance.

Barnaby Grist, managing director of strategic business development at Schwab Institutional, said Charles Schwab Co. will offer five-year commercial loans beginning at $100,000, priced at prime plus one, to advisors with at least $75 million in AUM. Called Schwab Advisor Business Loan, Schwab Bank will help determine the creditworthiness of applicants and will service the loan, "but we'll take the risk here," said Grist, since at Schwab Institutional, "we know advisors better than anybody else." No payments will be expected in the first year, he said, helping advisors during that crucial time of starting their own firms.

Grist said there was a 125% increase in net new assets from advisors who went independent through Schwab in 2006, and the average size firm going independent was about $100 million, which just happens to be the average size of the 5,000 firms that custody through Schwab Institutional.

Through the loan program and other services offered through one-on-one "conversion consultants" assigned by Schwab to each converting advisory firm--whom the Schwab executive noted includes "some of our most tenured people"--Grist said SI hopes to "encourage 300 to 400 advisory teams accounting for $80 billion in assets to move independent by the end of the decade."

The services include a real estate program through a partnership with real estate services firm CB Richard Ellis to help advisors get space and discounted errors and omissions insurance coverage through Marsh Affinity Services.

Schwab will support the entire effort through a new Web site, www.backingtheindependent.com, where advisors can "explore whether independence is right for them," says Grist, partly through the use of a start-up costs calculator. Schwab has also launched a national advertising campaign to run throughout 2007 in trade publications and business media such as Barron's and The Wall Street Journal. Grist notes there will be two sets of ads--one to encourage advisors to go independent; the other preaching the benefits of independent advisors to consumers.

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