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Practice Management > Building Your Business

Five Questions for the Top Independent RIA Custodian

By Janet Levaux

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What is the current environment for financial advisors, and how is it affecting your firm?

The climate has changed a lot in the past six to nine months. There’d been a lot of discussion regarding the long-term shift to the independent model in the past two years. Beginning in the fall of 2008, the discussion stopped being academic and started becoming very real, and all too painfully real, for some advisors when the environment shifted and some firms went out of business, merged, etc.

That has really caused a lot of acceleration in the number of conversations we’ve been having with people interested in exploring the independent channel. They’ve always wanted to put their clients’ interest first and have access to a full, unconflicted range of products, but were reasonably comfortable with where they were and were making good incomes. Then suddenly they were no longer comfortable and felt that they could no longer serve their clients in the way they wanted to or trust the management and structures around them.

What trends are you seeing that are proving to be opportunities for your firm?

Clients are clamoring for objective advisors whom they can trust to put their interests first. One of the big advantages of the RIA [Registered Investment Advisor] model is that it serves this need. And clients moved with their feet to it in 2008.

The big four wirehouses in 2008 had about 60,000 advisors between them and recruited about $6 billion of net new assets. The RIA model, with about 20,000 advisors, did about $100 billion in net new assets.

That’s a testament to client decisions saying “I prefer this channel.” And that goes to the safety and security of assets, a big concern for people right now, and the open architecture of the RIA channel really suits them right now.

Schwab has a simple business model that focuses on custodial work for advisors and for individuals. We don’t run an investment bank or a trading desk, for instance. And such complex, opaque businesses have come back to bite people in ways that are even more profound than we saw with some conflicts in 2001.

Another important factor is that we are now seeing is the execution of mergers and the like. And I saw that one CFO said integration was going well with 2,000 advisors leaving his firm in one quarter. But as I think about that, this represents 200,000 or 300,000 clients who have been thrown into the void. This does not strike me as an organization that is putting clients and employees at the center of its strategy.

This is very disruptive. There are some firms selling off branches, while others are laying off advisors and support staff. This means [remaining] advisors at these firms realize that they do not control their own destiny. They are wondering who is looking out for their interests. This is a multi-year process, and advisors are thus increasingly seeing the value of being independent.

What has been your firm’s greatest success in the past year or so?

From the $100 billion of growth in the RIA channel overall in 2008, we saw $60 billion (or more than half of that $100 billion), come to Schwab.

Also, $13 billion net new business came to Schwab, which again surpasses the net new assets of the wirehouses– not a small number. This was Schwab’s best year ever. We had 134 teams go independent with $13 billion. That’s up 50 percent from 2007, and that movement is coming mainly from the wirehouses.

We have 5,500-plus RIAs that work with us today, building their business. As they also prospect to high-net-worth clients at the wirehouses or with other firms, they are finding that we are a beacon of stability to them and to clients.

How is this affecting your firm’s growth strategies in 2009?

Advisors talking to us 9-12 months ago were considering leaving their firms and start a new business. Now we are talking to different people who want different things. These are mainstream advisors who do not have to run their own business but who do want to serve their clients and look at investments without conflicts or distractions.

Many of these advisors are interested in joining existing RIA firms, so we’re able to make the introductions. We have 5,500-plus such clients and know them better than anyone else.

This allows us to bring the two parties together for conversations that often work out. Our role is to introduce them to each other in a specific market and to help them structure their discussions.

Another trend is that we are seeing is very heavy use of our team of consultants. We are increasingly seeing that as advisors hook up with an existing RIA they need our technology consultants, for instance. There’s a lot of interest in the outsourcing of technology.

And our consultants that focus on transitions are also in demand, so that change into the RIA channel can happen seamlessly.

Does your firm face any challenges in 2009?

The challenge we sometimes face is that advisors do get cold feet about making the commitment to going independent, though they know it will be a richer and fuller path. As the market is volatile, like February, some did get cold feet, though others did come in to take their place at the altar.

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