After six years of covering Charles Schwab and its Services for Investment Managers (SIM) division, and after interviews with hundreds of advisors, I have finally realized there are actually two Schwab SIM divisions. There’s the division that Schwab executives tell me about, the one that advisors love and shower with accolades for making them prosper. And then there’s the other SIM division, which advisors distrust, fear as a competitor, and resist becoming more dependent on.
I come into contact with many more advisors who are suspicious of Schwab SIM than adore it. In fact, it’s rare that I come across an advisor who praises SIM and who does not voice reservations about being part of the Schwab Advisory Network’s referral program or about relying on Schwab’s proprietary technology platform. Maybe a Schwab SIM executive who I’m friendly with was right when he recently told me that Schwab supporters are not likely to call me–a reporter who is viewed as a clearinghouse for criticism of SIM–to sing Schwab’s praises. The facts belie this notion, however.
Recent numbers on advisor assets coming into SIM versus its competitors indicate that Schwab’s share of the market in providing custodial services to independent advisors has been dramatically reduced recently. Schwab brought in net new assets of $18 billion from January 1, 2002, through October 31. Fidelity Institutional Brokerage Services says it brought in net new assets of $10.5 billion during that same time. Meanwhile, TD Waterhouse Institutional says it lured about $3 billion in net new assets. And Raymond James Investment Advisor Division lured $750 million.
Based on these numbers, we’re seeing a significant shift in advisor custodian preferences. Schwab has $220 billion in assets and relationships with 6,000 RIAs. Fidelity has $70 billion in advisor money and relationships with 1,250 RIAs. Even though Schwab had a base from which to lure new assets that at the beginning of 2002 was four times larger than Fidelity’s, Fidelity attracted 60% of the amount of net new assets that SIM did. The drop in repeat business from SIM’s much larger base of existing advisors is notable. Advisors are not transferring assets out of Schwab, but they appear to be increasingly willing to place new money elsewhere.
It was only three years ago that 75% of advisor assets going to custodial firms went to SIM. Now, with Fidelity and Waterhouse being joined by new entrants like Raymond James, Ameritrade, Bear Stearns, and Merrill Lynch, my guess is that SIM is getting about half the new inflows into the market. Schwab still dominates the market but its grip is much weaker.
Part of the problem SIM faces is undoubtedly the perception that it competes directly with advisors for business. SIM’s perception problem surfaced publicly on November 15, when I moderated a panel discussion entitled, “The Future of The Advisor-Custodian Relationship,” at the northeast regional meeting of the National Association of Personal Financial Advisors. Executives from Schwab, Waterhouse, Fidelity, and Raymond James appeared on the NAPFA panel.
I opened the session by asking how many of the 85 or so attendees did business with Schwab, Waterhouse, Fidelity, and then Raymond James. Then I asked how many of them doing business with Fidelity did not like the fact that Fidelity had a retail presence that competes with advisors. A few hands went up. Then, I asked whether the advisors doing business with Waterhouse were concerned about its retail presence, and only a couple of hands went up. But when I asked how many Schwab advisors were concerned with competition from Schwab’s retail presence, a bunch of hands rose.
Schwab is judged by a different standard than the other custodians. Maybe it’s because Schwab is much bigger in the retail market. Maybe it’s because Schwab is perceived by some to have double-crossed advisors by saying in the mid-1990s it would not compete directly with them only to do exactly that in the late 1990s. Maybe it’s because of the corporate swagger that Schwab projects as the industry leader. Or maybe it’s Schwab’s construction of a proprietary technology platform that is widely perceived as a way to make it harder for independent advisors to ever leave SIM. It’s probably a combination of all these things.
These negative perceptions also affect SIM’s market share. Schwab’s competitive position is hurt by these perceptions combined with the fact that technology has made it much easier for advisors to have multiple custodial relationships.
Use of the Internet has freed advisors to get more downloads into their portfolio management software. Advent Custodial Data Service from Advent Software, TechFi’s AdvisorMart, and other service bureaus, as well as direct downloads from Depository Trust Company, DST Systems, and others, have allowed RIAs to trade through multiple custodians. And this trend is accelerating. More independent technology companies are gearing up to support multiple custodial relationships for RIAs.
The result will be that custodial services will become more like a commodity. Custodians will have to find new ways to market themselves, new ways to add value to their relationships with RIAs, new ways to differentiate themselves. Schwab sees this trend and, as the market leader, it stands to lose the most from it. It’s not standing still.
SIM is about to unveil several new technology initiatives designed to differentiate itself and compete in this new multicustodian market. The most overt attempt to compete in the new environment is the introduction of its own service bureau.
Performance Technologies Inc., which makes Centerpiece performance management software and is owned by Schwab, designed the new outsourcing system and is responsible for its administration. (Schwab, incidentally, has changed the name of PTI to Schwab Performance Technologies, and has changed the name of Centerpiece to PortfolioCenter.) The new service bureau is called PortfolioCenter Outsource, and it will take downloads not just of accounts at Schwab but of accounts at Fidelity, Waterhouse, Vanguard, and Pershing as well as the fund shareholder accounting giant, DST.