In an interview with AdvisorOne on Friday, Bernie Clark, executive vice president of Schwab Advisor Services, admitted it was a mistake to send a letter from Schwab Retirement Plan Sponsor Services directly to plan sponsors without first informing the company's RIA affiliates. Clark explained the communication was sent before it could be fully discussed with advisors.
"We have policies in place to ensure we respect the primacy of the relationship that advisors have with their clients," Clark said. "As you can imagine, at a firm of this size we do many, many mailings and we have the necessary safeguards in place within our system designed to prevent this from happening."
When asked if the letter fed the perception voiced by critics and competitors that Schwab competes with its affiliated RIAs, Clark said it's something the firm talks about openly and honestly.
"We're really in two markets," he said. "Our affiliated RIAs serve higher-net-worth clients with more customized and specialized service, while our own internal advisors deal more with the mass affluent on the retail side. Do we compete? Every once in a while we have a situation where that might occur, but we're completely honest and transparent about it."
The letter, sent Aug. 9 and signed by Director Ann Insley, sparked an outcry from RIAs with whom the company works and forced an emailed apology on Aug. 17 from Clark.
Entitled “Important information about investment products now available for your retirement plan,” the letter appears to solicit clients on behalf of two fee-based investments the company provides.
Referring to Schwab Managed Portfolios Mutual Funds as well as Windhaven Portfolios, the letter takes an opt-out approach, telling plan sponsors, “If we don’t hear from you, we’ll consider this your direction and consent to make these Investment Advisory Products available to your eligible plan participants.”
The letter makes clear that the information it includes does not apply to plan participants currently working with advisors. However, it goes on to say “the information does apply to current or future eligible plan participants who do not work with an investment advisor, as well as eligible plan participants who discontinue working with an investment advisor in the future.”
The letter then provides steps for plan sponsors that are interested in including the Schwab products in their plan, before repeating the opt-out language it previously provided.
Clark apologized in the follow-up email and said he regrets “any inconvenience this communication may have caused you and your plan sponsor(s).” Clark said the original letter was sent as part of the company’s “fiduciary duty” to the plan sponsors with whom it works.
“Schwab, which has a contractual agreement with the sponsor, notified each plan sponsor about these changes as the overall fiduciary for their plan,” Clark wrote. “It is the plan sponsors’ decision whether or not to elect to use these investment products. If the plan sponsor does not want these products to be included, they must simply return the form provided in the mailing.”
A Schwab-affiliated RIA who asked not to be identified for fear of reprisal said the company’s purchase of Windward Investment Management (now Windhaven) in November 2010 likely drove the original letter’s release.
“Bottom line, the Windhaven purchase was expensive,” he said. “With interest rates at zero in money market accounts, Schwab is getting squeezed and they want to put people into Windhaven so they can make money.”
Noting the size of the company, the advisor said the letter was probably a mistake that was not vetted through the proper channels.
“They probably didn’t think it was an issue until people like me stood up and said, ‘Hey, wait a minute,’ ” he said. “They’ve got to be careful not to bite the hand that feeds them. Their investment advisor business is one of the fastest growing and most profitable lines of business they’ve got. It was a mistake, and they’ve got egg on their face.”
Clark disputed the advisor's contention that the Windhaven acquisition and deployment had something to do with the original letter.
"I don't want to come across as anything other than completely apologetic for what happened, and it's something I regret," he said. "As far as Windhaven; it's growing very rapidly. Do we need to do [what the advisor claims]? No. But there are instances when the type of solution Windhaven offers would do well for a mass affluent-type client. If that's the case we want to be sure we explain that fully to the advisor and the client."