From the September 2007 issue of Research Magazine • Subscribe!

September 1, 2007

Free and Clear

Research: What's so great about the independent advisory business?Grist: The wirehouse has done a good job keeping this little gem of the industry quiet, but it's gotten too big to keep under wraps. As you know, the RIA industry has really only been around for about 20 years but is managing about $2 trillion today and is growing very fast, at a rate of 12 percent a year. Advisors who custody with Schwab Institutional are growing even faster -- more than 22 percent a year. The wirehouses are still much, much bigger, probably closer to $8 trillion or so, but are growing at a slower rate, more like 9 percent to 10 percent a year.

The RIAs are gradually taking share away from the wirehouses. It's not like the wirehouse is in dramatic pain, just that the RIAs are gradually eating their lunch, if you like. Meanwhile, we at Schwab have recognized and honestly believe that unbiased advice is better for investors. We saw an opportunity 18 months ago to help accelerate advisors' move from the wirehouse and help them make the transition into the independent model. I have a team of 10 people right now who do nothing but focus on what we can do to make life easier for wirehouse advisors making the transition.

Go on.A good independent advisor knows how to manage investments, but we think we can do a little to help them...set up their business. The team is active in filling in pieces of that puzzle, things like finding real estate; we have a partnership that can help RIAs find appropriate real estate. Or hiring, and above all, technology. We make all that simple for them, so they don't have to spend time looking at vendors

And then they can start moving their book?We also help with the actual mechanics of transition, how you get this done, what kind of paperwork you need your clients to sign. We've built example forms and have advisor conversion teams that are 10 to 15 people doing nothing but this and doing a really good job of it. The error rate of forms that come back to us is less than 2 percent, so advisors' clients aren't going to be troubled. They're going to get one package and get it right the first time. We highlight signature fields for them so it's really easy for them to see where to sign. We do a lot of really mundane stuff like that, which would probably bore you senseless, but it's important to get it absolutely right at that micro-detailed level. An advisor in the Pacific Northwest, Bill Smead of Smead Capital Management, recently went independent with $300 million in assets, and he literally spent the day driving with one of our advisor services conversion teams from Seattle to Portland, stopping in at clients' houses and delivering the package personally.

Most advisors, because they're successful, have successful relationships with clients. They tend to bring about 90 percent of their book with them, and about 5 percent of the book are people they choose to leave behind -- sort of an opportunity to clean house.

I understand you'll also lend them money to get their new operation started.We're really pleased with how that's going. I can't share exact numbers, but we said we'd make $3 million in loans ranging from $100,000 to $500,000. We got interest at all levels of that range. People were very interested in $100,000 and very interested in $500,000, and that was very good to see. We were right; there's definitely a need for advisors to have some help with start-up financing: They're paying rent, making a real estate down payment and payroll for a couple of months before they get the income they need. We're going to expand that program very dramatically later this year by bringing it to more states and making more actual dollars available.

Are only fee-only types allowed to play?We put together a strategic partnership with a leading independent broker-dealer, Cambridge Investment Research, to help advisors manage both their fee and commission-based assets. Together, we have been helping through the transition many of these advisors who are fee-oriented, but for whatever reason have some commission business built up over time. Maybe some clients prefer to do it that way; it may be small accounts, 529 plans, variable annuities. Whatever it might be, they've got this business and Cambridge helped us meet their needs better than anyone else could. Maybe half of all of the new advisors we see have some commission business and a substantial majority of those choose to work with Cambridge. The relationship is fully integrated; even the paperwork is integrated.

Who are you looking for?The personality we see tends to be people who are reasonably self-confident. They've had success already building their business and have acquired confidence in that success, and now want to control their destiny. This isn't right for everyone. If you plan to just spend five years milking an existing book and spend half of every day on the golf course, this isn't the right move. But people who are pretty hard-charging to grow their business and really make a success out of it -- intellectually curious people, smart and driven people of all ages -- may be a good fit. We see all ages, but they all have substantial experience managing money already. We very rarely see anybody who's been in the business less than 10 years.

What does the firm get out of this, strategically?In the context of the Schwab corporation, Schwab Institutional represents about 40 percent of the overall client assets and substantially more than half the growth. Helping advisors go independent is clearly a big part of our focus. Another is helping our existing advisors grow faster. We see that when an advisor leaves the wirehouse, on average they grow their business 30 percent in that first year; the average wirehouse advisor grows 9.8 percent. Breaking the bonds of the wirehouse allows them to triple their growth that first year. We're waiting for more long-term statistics, but we think that growth rate continues to be high. A huge entrepreneurial passion is unleashed and that pays off for them.

How would you gauge your success so far?We're seeing more advisors now make the move in the first half of this year (i.e., by the end of June) than moved in the whole of last year. If that continues, we will have seen it doubling over last year. That's pretty extraordinary. This is just the beginning. For the advisors, the clients and for us as custodian, I think we're going to be beginning a very big trend over the next five years. Our objective is to bring in $100 billion in the next five years from this initiative, and we're absolutely on track to do that. That's a really large number in some ways, but with $8 trillion in the wirehouses, it's probably going to be a reasonable target to go after.

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Robert Scott Martin is a New York-based contributing editor of Research.

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