Breakaway Broker Blasts Schwab Over Nightmare Breakup

At 7 a.m. on the day after advisor Richard M. Rosso resigned from Charles Schwab & Co., Walter Bettinger, CEO and president, phoned to invite him to lunch. He wanted to know why one of the firm’s most prominent financial consultants, employed by Schwab for 14 years, was leaving.

They made a date. Then Bettinger abruptly canceled: Instead of a meeting of minds in San Francisco, Rosso was subjected to a bruising two-year battle with Schwab in Texas State Court and Financial Industry Regulatory Authority arbitration.

Rosso, 50, had gone from golden guy, lauded and applauded by Schwab, to an alleged client poacher, a “mole” who violated his non-solicitation agreement and diverted employer clients to another firm. Schwab charged that the extroverted advisor had brainwashed folks into being exceptionally dependent so they’d follow him to Clarity Financial, a boutique RIA he joined after breaking away.

Indeed, the brokerage used Rosso’s ace client relationship-building skills as a weapon against him, the FA told ThinkAdvisor in an exclusive interview.

Though Schwab failed to win the $6.3 million in damages it was seeking from Rosso and two colleagues, the arbitration panel this past January found Rosso liable for $60,000 plus interest; his attorneys’ fees came to $203,000.

Worse than that financial hit, the grueling ordeal cost the beleaguered advisor his health: He suffered a breakdown, and stress largely contributed to the loss of a kidney. In addition, Rosso holds the strain created by the nightmare litigation responsible for the breakup of his marriage. He and his ex-wife are parents of a daughter.

For the better part of 14 years, Rosso was a high-profile financial consultant at Schwab, earning exemplary reviews and known by Charles Schwab himself and Bettinger for his loyalty, sales acumen and, especially, his top-notch client relationship skills. Schwab chief investment strategist Liz Ann Sonders sought his market opinions. He was an official Schwab source for reporters of The Wall Street Journal and The New York Times, among other publications, and appeared regularly on CNBC and Fox TV.

At his peak, Rosso was managing $300 million in fee-based client assets. Today, as an RIA at Clarity in Houston, his assets under management are down to $105 million. The independent firm’s founder, Connie Mack, has stepped up to arrange for a line of credit for Rosso, still about $100,000 in debt.

Schwab is a vengeful, abusive company whose purported brand did not jibe with Rosso’s actual job requirements, the advisor contends. His lawyer, Clinton Marrs, calls Schwab “a corporate bully” whose $6.3 million suit was excessive, to say the least. “It’s like ‘Alice in Wonderland’s’ mad queen: ‘Off with their heads!’ Cut them up in tiny little pieces!” he remarks, in an interview.

Ultimately, in addition to mandating Rosso to pay Schwab $60,000, the arbitration panel found his ex-Schwab colleague, Mark Blom, also now at Clarity, liable for $10,000 plus interest; Mack was not found liable.

For Schwab’s part, Sarah Bulgatz, public relations director, comments: “This was a case involving breach of loyalty to Schwab for personal gain, something we take very seriously. We’re pleased that the FINRA arbitration panel found two of the employees’ behavior unacceptable; but we think the damages it ordered to pay should have been higher, and we believe the third employee should have been found liable as well.”

Rosso’s creamy Schwab scenario began to curdle when the firm diminished its focus on Private Client FCs’ personal delivery of service and reduced their role to salespeople chasing challenging selling goals.

As a Private Client FC, Rosso resisted that change and wasted no time telling superiors that its new strategy was a blunder not in his clients’ best interests.

A native New Yorker with a direct approach, Rosso had survived a tumultuous childhood in a rough part of Brooklyn. He was reared by his divorced mother, an alcoholic, drug addict and, he says, a prostitute. Her boyfriends had even attempted to kill him, he says. Three times he saved his mother from suicide. A sometime-distraction from the mayhem was young Rosso’s fascination with the stock market. He particularly admired Charles Schwab & Co.

He began his career in 1989 at penny stock firm J.T. Moran in Garden City, New York, then became branch manager-vice president at Dreyfus Mutual Funds in Sarasota, Florida. By 1998, he had joined Schwab as an investment consultant in suburban Houston.

Rosso described his rise and fall at Schwab in a recent phone interview. The certified financial planner — who wrote the book, “Random Thoughts of a Money Muse” (CreateSpace 2012), while at Schwab — writes about finance in prominent publications and is a frequent guest commentator on Houston television.

ThinkAdvisor:  How would you summarize your experience as a “breakaway broker”?

Richard M. Rosso: Schwab is a corporate terrorist. This was the most stressful, scariest thing that’s ever happened to me in my entire life. Throwing the kitchen sink at me was to scare me and set me up as an example. They do that to anybody who leaves, I think. It doesn’t matter what the facts are — they will create something.

Let’s talk about the good old days at Schwab.

Initially the job was mostly order-taking. Eventually that changed, and I got promoted fairly quickly because I was recognized for my relationships with clients.

How did things progress?

Four years after I joined the firm, they started a new program, Schwab Private Client, a fee-based, nondiscretionary offer. The financial consultants were handpicked, and I was one of them. This was Schwab trying to cross the bridge from discount broker to full-service and giving advice. It was ongoing relationship-based, with a holistic approach. It was as close to being a fiduciary relationship you could have in a non-fiduciary world. You were the custodian of your clients’ dreams — that was the brand.

How did the firm view your performance?

Schwab loved the relationships that I built. I became a thought leader at seminar workshops about how to build relationships and how to discuss things outside the portfolio.

To what extent did you like the Private Client program?

I thought it was paradise. I thought Schwab had figured it out and would take over the marketplace.

Did you grow more successful?

In 2003, I really started to get recognized and was writing for the Schwab Report that went out to reporters. I got exposure through interviews in The New York Times, USA Today and other outlets. I was on television. I did my own radio show for two years. I mentored [FCs] across the country. My career was very strong. Frankly, I thought I would retire from Schwab.

Did you have your own book of clients?

No, they were Schwab clients. They had a huge database, and you were told to go in and cultivate those clients for Schwab. I was the face of Schwab but also there to help monetize the clients.

Were you part of a team?

Yes, but not for every client. Typically Connie Mack, Mark Blom and I [teamed up] for economies of scale when we wanted to have uniformity across the advice. We didn’t share the revenue. I was the big-picture guy. Mark was the portfolio consultant, located in Phoenix. Connie Mack had the same [job] as I but in another [geographic] area.

When did things start to go south?

Private Client was like a pretty statue that was getting chipped away every day. First Schwab spread the Private Client offer to everybody; therefore, I had to compete with everybody for those clients. I had been exclusively Private Client, and then I became a financial consultant handling clients outside the Private Client group. When did the situation worsen?

Things started to really accelerate downward during the financial crisis. We weren’t getting guidance from the firm. When everything was starting to crumble, especially in fixed-income, it was almost as if these problems didn’t exist [to Schwab]. The whole world was collapsing, but it was like we were in a trench with a gun but no bullets.

Walter Bettinger was named president-CEO of The Charles Schwab Corp. in October 2008. What effect did that have?

When he came in, the whole climate of the firm changed. But more than that, it was the financial and the interest rate climate that put Schwab under pressure to monetize business. I understood that. But I had a pretty good revenue-based practice that I had put blood into over the years.

How did you help clients deal with the meltdown?

Mark, Connie and I would meet at night to try to figure out what to do. We shared best practices, industry marketing knowledge, nothing proprietary to Schwab. Clients were calling us, and we weren’t getting guidance from management. So we decided to call the clients proactively.

Was there another sign that Schwab was changing?

Our group had $30 million to $40 million in a Schwab proprietary product, Yield Plus, in 2007. The firm marketed it almost like a cash substitute, and the share price was supposed to stay relatively stable. It always had; but during the crisis, it really started to move, especially downward. The objective of Yield Plus was stability of principal. So obviously something had changed.

How did you react when it came to clients’ investments in Yield Plus?

Our team sold it. None of the clients lost money. But through the years after we sold, there weren’t many redemptions. I wondered how that could possibly be when the share price was collapsing. Schwab was saying, “Nothing’s wrong; everything’s fine.” It turned out that many lawsuits were brought over Yield Plus. Schwab isn’t unethical, but it holds itself out as being above — and it’s not.

What was the firm’s marketing strategy during the meltdown?

Its solution was to offer Private Client for free. From a marketing perspective, that was genius. From a practice management perspective, it was: How am I going to take on clients who aren’t paying a fee, when I’m not getting guidance to help my existing clients?

As the crisis subsided, what happened?

That’s when things really started to change: We were getting a lot more pressure to sell proprietary product. I couldn’t understand why every client would need [managed portfolio solution] Windhaven, for instance. It seemed that every client was being sold that same product. Before the crisis, Schwab on the surface was what Schwab was underneath. But then it became: underneath it was pretty much Merrill Lynch.

How did all this affect your client relationships?

Because of regulatory pressure, Schwab was now starting to deeply divide the roles: They split Private Client and made [part of it] an RIA. I wasn’t a fiduciary, but I always felt I had a fiduciary responsibility and got lauded for it. Now I was on the sales side under a Series 7. So I was getting cut out of the equation. If clients wanted information about a particular investment, I was no longer able to talk about it. It was more about selling product, especially Schwab proprietary product. Before, I could sell whatever I wanted.

How did that change sit with you?

I began to think maybe I was more custodian of [the firm’s] shareholders’ dreams than custodian of clients’ dreams. My CFP didn’t really mean anything anymore. It was just me selling product and moving on. Did you voice dissatisfaction?

I was very vocal. I tried to take a stand, and it made me a target. In meetings, I said, “Why don’t you make the face-person part of the RIA?” But I think Schwab no longer wanted close relationships between branch representatives and clients because it felt that was a danger since some private clients had left when their representatives left. It seemed Schwab was trying to drive a wedge into the relationships to make sure that couldn’t happen again.

How did the focus on sales affect your performance?

I was behind the 8-ball. I felt conflicted because I couldn’t give clients the level of service as before because now I had these incredible sales goals. But I couldn’t hit the sales goals. I had been very successful, and now I was no longer successful. There was no way I could meet with the clients and still meet those ambitious sales goals.

Did the firm call you on your failure to hit the goals?

 My manager said, “You’ve got to pick it up!” There was a lot of pressure for me to produce. My issue became: How do I work with the clients I have when I’ve got this intense selling pressure?