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Schwab Quietly Provides a Welcome Mat for Smaller Advisors

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Advisors have multiple options when it comes to their custodian, or as is often the case, custodians, of choice. For smaller RIA firms it may seem like their options are limited, since the larger, more sophisticated custodians might be out of reach until those firms can accumulate more assets to meet those larger custodians’ AUM minimums.

But Jalina Kerr of Schwab Advisor Services begs to differ on that point when it comes to smaller firms using Schwab as their custodian.

Kerr, senior VP of Integrated Solutions & Core Custody Services at Charles Schwab, said her team “focuses on CX,” the advisor customer experience, when it comes to these smaller firms. The team’s priority is on smartly using technology to deliver services to those firms, including guidance on how the firms can adopt technology solutions to deliver more scale and efficiency to their operations and how best to work with Core Custody’s service team through what it calls its Center of Excellence.

While in an interview with ThinkAdvisor, Kerr declined to say how many of Schwab Advisor Services’ 7,500-plus RIAs are in that smaller cohort of less than $100 million in AUM, she did say that 200 attended Schwab’s annual Impact conference in Washington last month, and that 500 firms attended a recent Schwab videoconference that focused on cybersecurity.

“These firms,” Kerr said, “are very concerned” about that topic, partly because they tend to be more digital in their operations and less paper-based than larger firms. Schwab’s web-based and video support resources are particularly appealing to these smaller firms, since they can’t always afford to travel to in-person workshops or conferences as much as larger firms, she said.

(Related: Schwab: Many Workers Hold Too Much Company Stock)

Why would Schwab focus on these smaller firms, and devote 70 “seasoned” staffers to specifically serve them? “The base is profitable,” Kerr said, and yields more revenue as a percentage of client assets under management than larger firms.

These firms are also growing slightly faster than even the largest firms, Schwab’s 2018 RIA benchmarking data shows, with an 11.7% five-year CAGR in AUM. The largest RIAs in the 2018 benchmarking study—with more than $1 billion in AUM—grew at an 11.6% rate from 2013-2017.

The benchmarking study showed that smaller firms’ revenue increased at a 9.5% CAGR clip in those same five years, compared to 11.1% for the $1B-plus firms, and that average assets per client increased from $690,000 in 2013 to $900,000 in 2017. Profitability for smaller firms was also impressive: they reported a median 23.2% in operating income margins in 2017.

One other benchmarking data point points to smaller firms’ growth prospects (and appeal to Schwab’s custody business): they’re signing up new clients at a faster rate than the larger firms. The under-$100M in AUM firms showed a median 5.8% increase in assets from new clients in 2017, the largest of all the cohorts in the benchmarking study (firms with $750 million to $1 billion in AUM came in second, at 5.2%, in asset growth from new clients).

Despite their growth and financial health, these firms need help, as shown by the benchmarking study’s finding that 51% of them planned to add support and administrative staff this year (the survey was fielded from January to March 2018). The smaller firms tend not to be “lifestyle” practices: Kerr points out that 90% of the firms surveyed said they wanted want to continue to grow.

But since they tend to be one-to-two-person firms, “they’re stretched,” Kerr said, requiring more external support through both “human capital and technology” than larger firms that likely have greater—and more specialized—internal resources. Those smaller firms are “faster adopters” of the technology Schwab can offer them, though part of Kerr’s charter is to inform these firms that they have access to more services from Schwab, including technology, than they might otherwise believe.

The customer service staffers in the Center of Excellence brings together sales, support and relationship managers “in a single vertical,” Kerr said, who follow a “Test and Learn” model in working with smaller RIA firms “to create a better feedback loop” that can benefit all firms with better services.

The services include providing help to firms in areas like digital marketing and business consulting through a “one to many” approach that uses web-based events and video to provide education and support.

Since the principals of these firms tend to be younger, and since they are growing faster than larger firms, especially by gaining new clients, does this mean that this cohort of smaller firms are a good M&A target for RIA consolidators or other RIAs looking to jumpstart their own growth by acquisition? Kerr admits “we get a lot of questions” about the topic, but since these firm owners are typical entrepreneurs who want to continue to grow their own firms, Schwab suggests to its clients that they be sure to be “thoughtful about M&A.”

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