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More Mega-Teams Are Breaking Away: Schwab's Clark

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Here’s a mini trend with mighty implications: Some intrepid Goldman Sachs wealth advisors are chucking their jobs at the illustrious bank to launch their own independent RIAs.

The shift, about two years old and gaining steam, is part of the larger trend of big teams with ultra-high assets under management opting, increasingly, to become independent registered advisors, Bernie J. Clark, executive vice president and head of Schwab Advisor Services, tells ThinkAdvisor in an interview.

Overseeing custody, trading and support services of the industry’s leading RIA custodian, Clark calls the Goldman departures “a bellwether” denoting the importance of the independent advisory space.

Schwab custodies for more than 7,500 RIAs. Nearly three out of four teams with AUM above $1 billion custody with the firm. One Goldman team that chose Schwab last year boasts AUM in excess of $16 billion, Clark says.

Large breakaways, especially from Goldman with its restrictive exit policies, give confidence to hesitant teams industry-wide to jump off that fence and finally go RIA. So says Clark, who joined Schwab in 1998 and has been running Advisor Services since 2010. A 30-year industry veteran, he earlier held posts at Deutsche Morgan Grenfell and Salomon Bros.

With a 30% market share and $1.6 trillion in client assets under management, Advisor Services, launched in 1987, is No. 1 of the Big Four custodians. The others are Fidelity, TD Ameritrade and BNY Mellon’s Pershing, according to Clark.

With no decline in the breakaway-broker exodus in sight, Schwab saw record breakaway growth last year: $30 billion of its $109 billion in net new assets came from wirehouse and broker-dealer FAs. Its previous top NNA increase was $70 billion.

In the interview, Clark reveals that not only are bigger, more sophisticated teams now entering the RIA space, many of these are merging to create ever-larger enterprises that are likely on the way to going national.

The hub from which Advisor Services provides custody, along with ongoing support and consulting for its clients, is located not in San Francisco corporate headquarters but in Phoenix, Arizona. In fact, more people work in Phoenix than in Schwab’s offices in the City by the Bay, where the firm was founded. Phoenix employs 1,700 dedicated to Advisor Services; another 4,000 folks there are in Schwab’s data center, retail operations and servicing groups. A total of 1,200 are employed in San Francisco.

ThinkAdvisor recently interviewed Clark, on the phone from Phoenix. Apart from discussing future RIA growth, he opined on whether giants like Google and Amazon — with their vast tech capabilities — would dare plunge into the wealth advisory industry. He also discussed whether Schwab considers Betterment, Wealthfront and other robo-advisors to be its competitors.

Here are excerpts:

THINKADVISOR: What’s new in the independent advisor arena?

BERNIE CLARK: This is different from what we’ve seen: We’re starting to see much, much larger teams coming into the space. We’ve had quite a few Goldman Sachs teams joining in the last two years, which was not as common. Originally you saw more Merrill Lynch and Morgan Stanley-type teams coming in. So this is a bit of a bellwether as to the importance of this space.

What can you share about the Goldman teams?

We had a team join us last year that has in excess of $16 billion in assets [under management]. They’re retaining a relationship with Goldman by staying invested in some of their products while also moving into the independent space.

How much M&A activity is occurring among RIAs?

I would have predicted that with all the regulation — cost and complexity — more small firms would be looking for M&A opportunities with other firms. As it turns out, we’re seeing a lot more M&A happening with billion-dollar firms coming together in mergers of equals to create larger firms. That’s going to strengthen and probably create more national footprints.

How is the structure of independent advisory firms changing?

They’ve matured a lot from being practices to becoming enterprises. It’s hard to find a successful firm that doesn’t have a chief compliance officer and a chief operations officer. So they’ve begun to get very serious about delineating responsibilities as opposed to just having founder-led companies, where the founder is the rainmaker [and wears other managerial hats too]. Those models are harder and harder to find.

In what other ways are advisors building their businesses?

More firms want to be multigenerational than ever before. This can be about creating equity events for partners within the firm to help the originating partners monetize.

 Has the breakaway broker trend slowed down?

It’s actually increased. We saw record-breaking growth last year: $30 billion of our $109 billion in net new assets came from breakaways leaving institutions. It’s still a mix of those coming from hybrid independent broker-dealers and traditional wirehouses. Between 30% and 40% in any given year are coming from the broker-dealers.

Do any of those advisors retain a commission-based compensation system?

What we see is that more firms grow themselves out of the commission business because they want to have the moniker of “fiduciary.” They might come as a hybrid but may not remain one. The idea of being a fiduciary is something that’s extremely attractive to these breakaway teams.

A propos fiduciary, what are your thoughts about this summer’s demise of the Labor Department’s fiduciary rule for brokers?

It’s going to take the SEC quite some time to get around to crafting something that would even resemble what the DOL rule attempted to do.

What proportion of your clients are still partly compensated by commissions?

About a third have retained some form of license and a more traditional commission-type relationship. Typically it’s a third of their business. A lot of it has to do with legacy products they’ve brought: insurance, annuity-type products, for example. I think we’ll always have clients who’ll have both a legacy commission- based side and a fee side.

Why, though, is the breakaway trend still going strong?

It has a lot to do with the rules that are being created. And some firms are leaving the [Protocol for Broker Recruiting]. For example, I think that had a rather significant impact on UBS at first. They lost a number of teams, many to other firms that were retaining the protocol.

What mainly motivates an FA to leave their firm to become an independent RIA?

From surveys we’ve taken [over the years], the number one reason is that they’re tired of captive product. It’s not about economics [earning money]. It’s almost easy to be independent now — I say that in a qualified way. I mean, for instance, you used to have to piece together the technology. Now there’s virtually turnkey technology.

What’s the biggest challenge to advisors in making the transition?

Inertia. They’re in highly successful models they grew up in and know well. Their personal economics are still very strong. So it’s easy for them to stay where they are. But making a move like this is hard, and it’s a little bit scary. So they think about it for several years. But once a firm decides to go, they move very quickly.

What’s the top practical reason for their hesitating so long?

They worry about attracting clients. That’s unfounded, though, because our history in this tells us that clients follow them. The more firms that come out, the more the trend continues.

How much are larger firms going independent RIA impacting the trend?

When a big team leaves, such as a Goldman team, everybody notices. Then other teams think, “Well, why not me?” So confidence is growing more and more in those who want to be in this space.

Do you consider digital advisors much competition?

I don’t see the Wealthfronts and the Betterments as being overly competitive with us. Robo is the next generation of digital technology that we’re helping to facilitate. We have a robo offering. One thing I hear almost universally across advisors in our firm is that the technology is meant to augment the relationship — not replace it. If you look inside some of the purpose-built [designed for a particular use] robo offerings, they’re starting to add people because people want someone they can talk to.

You were quoted as saying that, because of tech advancements  you’re concerned about the “disruptors —  the Googles and the Amazons” — potentially getting into the wealth management business. Please elaborate.

It’s an interesting question should one of those providers decide to enter the financial services world. However, with that, would come a lot of regulation. I’m not sure they’re ready to embrace it. You can see things that are going on now with Amazon [eyeing entry into insurance]. So I think at some point it could be a natural that there’ll be more expansion, though it’s in the early days.

What’s the growth potential of the independent advisor space, in general, and for Schwab, in particular?

There’s a lot of market to be served right now — a lot of teams in banks and other markets that we think we can bring into independence. And we work very closely in conjunction with consolidators — for example, Focus Financial, United Capital, HighTower, Dynasty — to help their advisors. United Capital currently creates a back office for their teams and centralizes it. Focus creates equity that partners can monetize to build their practices.

Any increase in women’s moving into the RIA space? We’re working a lot on diversity. I think our efforts have been great; our results are still mixed, as they are industry [-wide].  We’re seeing formation of more purpose-built firms that are established to serve women [or ethnic groups]. I think that’s helping. And we’re very active on the university circuit trying to create more interest, not just for women but for ethnicities, too. It’s still a challenge.

How important do you consider such diversity efforts?

The industry is ripe for us [all firms] to be mirroring what the population of investors will look like in the future, and it’s going to be more ethnic. The millennial generation is [the most racially diverse in history]. Age is also a challenge: There’s an aging population of [advisors] as well as clients. Therefore, Gen Xers and millennials need to be employed in this space as well.

Do you forecast exchange-traded funds to be as popular with RIAs as they have been and remain?

ETFs are a very explainable, easy way for clients to be investing. It’s much harder to explain risk. But should the markets flatten out, I’m not certain that we won’t see some kind of [move] to alternative investing, whether that manifests in alternatives themselves or in active-type mutual fund opportunities. I think you’ll see some of that happening.

What are your plans to expand Advisor Services?

We continue to look into other adjacent markets. We think we have opportunities in the unbundled trust space within retirement. We’re seeing advisors add more and more services to their portfolios: tax planning and life coaching [etc.]

How do you work with advisors in making their big transition to entrepreneurship?

We help them with technology choices and make sure their clients are moving in an orderly way. Once they’re independent, we send people into their offices to consult with them about strategic planning. We’re their custodian, and we think [all] that is value-add. Our whole objective is that we want to be in it from the beginning through the whole life of the company.

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