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Technology > Investment Platforms > Turnkey Asset Management

Separate Accounts Biz Brisk at Schwab

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Separately managed accounts (SMAs) are growing fast at Charles Schwab as fee-based advisors seek to outsource money management for clients and concentrate on other aspects of wealth management, such as tax or estate planning.

Why are SMA assets growing so fast? “It’s darned hard to pick stocks,” says John Morris, senior vice president of asset management products and services at Charles Schwab, in San Francisco. “I think it’s starting to resonate with people: outsourcing makes sense–do you really want to compete with the pros?” There is a lot of money in play, he says, because people are selling businesses, homes, and wealth is being transferred from parents to their children. Schwab’s advisors and their SMA clients like the fact that they can customize accounts for clients by restricting certain industries or individual companies, and harvest losses to offset gains to better-manage taxes; Morris says 30% to 40% of Schwab’s customers in SMAs use the tax-management feature.

Schwab has $30 billion in SMA assets; of that, $23 billion is through fee-based advisors, and the other $7 billion is via Schwab’s retail financial consultants. That’s considerable when you realize that Schwab only started allowing its in-house investment consultants to have real relationships with retail customers last year; before that, Schwab’s representatives were only allowed to take orders from customers. The SMA business at Schwab grew at 34% in 2005, while the industry average was 15%, according to Morris, who says it’s the fastest-growing business at Schwab. That looks likely to continue because at this point only 15% of Schwab’s advisors are using SMAs for clients, leaving tremendous potential for that business to grow as SMAs grow more widely used. Because minimum investments for SMAs typically are high, in the $500,000 or $1 million range, advisors use them for wealthier clients rather than the average investor, and it is advisors who are driving the SMA-market, not retail do-it-yourself investors.

There are three ways advisors can access SMAs at Schwab: advisors who are, “just starting to get into managed accounts,” says Morris, and looking for a turnkey platform, can choose from 42 managers that have pre-negotiated fees and streamlined contract administration, and been vetted by Callan Associates, Inc., for Schwab Managed Account Select. Advisors who want to perform their own due diligence can choose from hundreds of managers in Schwab’s Managed Account Marketplace.

Schwab has been adding SMA managers to its third platform, Managed Account Access, in response to demand from advisors who left wirehouse firms to go independent. “A number of those brokers were traditionally using separate accounts in a big way,” according to Morris. “Many of these brokers want the products they used to have at the wirehouses,” where they had already-vetted SMAs to choose from. The accounts they used before, however, were not necessarily the ones in Schwab’s turnkey program (Select, above). The breakaway brokers want SMAs that are bundled, with “simple paperwork, common minimums, common fees,” argues Morris, and they don’t want the tax issues that would undoubtedly crop up if they had to sell clients out of one SMA and put them into another, so Schwab has been adding the SMAs that brokers request to the “Access” platform. There are 34 managers with 101 styles on the Access platform now and Morris expects that number to grow rapidly.


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