Editor’s Note: This is a corrected version of part I of the Gluck Report for June 2003. It replaces a version that was earlier posted in error.
One of Schwab Institutional’s largest RIA clients has put its relationship with the San Francisco brokerage firm on hold. It is withdrawing from Schwab’s retail referral program and is expected to transfer $200 million from Charles Schwab to its four other custodians, Merrill Lynch, Smith Barney, UBS, and Fidelity Investments.
According to an e-mail sent to employees of Fisher Investments, the Woodside, California-based manager of more than $11 billion in assets has stopped placing new assets at Schwab. An employee at the firm says Fisher Investments decided to withdraw from the Schwab Advisor Network, even though its referrals brought in $300 million of new business in 2002. The Fisher employee added that Schwab Institutional is the custodian of $3.6 billion of the assets Fisher manages.
Fisher Investments founder and CEO is Ken Fisher, who has written Forbes Magazine’s “Portfolio Strategy” column since 1984. According to the firm’s Form ADV, Fisher advised more than 10,500 clients last year; more than 75% of them were high-net-worth individuals. The employee said Fisher brought in $1.2 billion of new assets last year to Schwab. So, in deciding not to place new assets with the San Francisco brokerage firm, Schwab would be losing a significant stream of new assets. The employee said the decision to stop placing new money at Schwab will allow Fisher to review its relationship with the San Francisco discount brokerage.
The employee says that one reason Fisher Investments is cooling on Schwab is that the firm recently had been receiving fewer retail referrals through the Schwab Advisor Network. He maintains that Schwab branch em- ployees are favoring U.S. Trust Company, a money manager for wealthy individuals owned by Schwab.
The Fisher Investments employee also asks whether high-net-worth individuals who are Advisor Network prospects are being properly informed about Schwab’s ownership of U.S. Trust.
Schwab spokesman Lance Berg says, however, that “we clearly disclose to referred investors the affiliation between Schwab and U.S. Trust, and we have procedures to ensure that happens. The disclosure is made at the time of the referral.” Berg says that “No Schwab representative is personally rewarded in any way for steering a client” to U.S. Trust. According to Berg, Schwab Advisor Network’s “new assets in the first quarter of 2003 totaled $1.1 billion, compared with $203 million in the first quarter for referrals to U.S. Trust.”
Schwab Advisor Network, formerly called AdvisorSource, is a network of about 300 RIAs who clear through Schwab. They pay Schwab a percentage of revenues in exchange for referrals made by employees working in the firm’s branches. Fisher Investments, a separate account manager, is one of a few national advisory firms in Schwab’s national referral program. In the first quarter of 2003, Schwab said in a filing with the Securities & Exchange Commission that it made 4,400 referrals to RIAs and 300 to U.S. Trust.