When it comes to its standing in the fee-based advisory services business, Charles Schwab is the proverbial bull in a china shop. Every little move the behemoth makes is bound to cause some commotion.
Still, it's hard to recall an uproar like the one caused by Schwab's February announcment that its Centerpiece portfolio-management software would only be sold to advisors who are clients of Schwab Institutional in the future.
The move was controversial for a number of reasons. As the most popular portfolio-management software packages among advisors with less than $100 million in assets under management, the Centerpiece community extends well beyond Schwab's 6,000 advisor clients.
Even though Schwab stressed that the new policy applies only to new purchasers of Centerpiece, some advisors are still worried. One fear is that this may be only the first in a series of steps that ultimately will lead to them having to choose between dumping Centerpiece or opening a Schwab Institutional account. Advisors who use Schwab suddenly feared their data could be held captive if they ever decided to switch custodians.
There is also the question of whether this is a sign that competition in the advisory services business is moving into a cutthroat phase.
Although the flow of new players into the custodial and clearing business has slowed since a year ago, the market itself has softened, and Schwab and its competitors are fighting for every sliver of the pie they can get their hands on. The competition has, in many ways, been a boon to advisors-leading to more choices, better technology and additional services.
But advisors also wonder to what lengths Schwab and its competitors will go as they battle for market share. Is the Centerpiece issue a sign that Schwab is going to flex more of its muscle?
Before the Centerpiece controversy, Schwab was already hounded by complaints that, in strategic moves to target high-net-worth clients, it was gradually infringing on the business of many of its independent advisor clients. While those complaints haven't led to an exodus of advisors from Schwab, competitors are hopeful the discontent will prove to be a weak spot that will enable them to steal a chunk of Schwab's market share.
It is somewhat ironic, given that some of the same service providers attempting to market advice directly to the affluent are excoriating Schwab for the same tactic. Unconfirmed reports, however, indicate that Schwab and others are discovering that the advice game isn't so easy and are rethinking their strategies in this arena.
One Schwab competitor feels it is no coincidence that Schwab shifted gears on Centerpiece at around the same time a Cerulli Associates' research report had Schwab's market share slipping over the past year. Although Schwab's loss of market share was marginal, the onslaught of competition isn't going away.
"Clearly, I think they must be feeling the pressure. Why else would they do that?" says Tom Bradley, president of TD Waterhouse Institutional Services, where half of 2,000 advisor clients use Centerpiece software.
That view was not shared by Deborah McWhinney, Schwab's president of investment-manager services. The change in the Centerpiece sales policy, she says, grew out of expensive enhancements that Schwab is adding to the product.
"This is to make certain that I was spending the money on the clients that are helping us grow," she says. "What I didn't want to be doing is putting the energy into clients that have chosen not to do business with us."
Many advisors questioned that strategy. Why couldn't Schwab charge one price for Centerpiece to advisors who custody assets at Schwab and a higher price to Centerpiece users relying on other custodians, they ask, in effect letting one group of users subsidize the others. That way, if a Centerpiece user grew disenchanted with anoter custodian and wanted to move to Schwab, the transition would be relatively seamless, and the advisor could cut his or her software costs. "The only answer can be that Schwab is more worried about losing advisors now than it is about winning them in the future," declares one advisor who was unsettled by Schwab's action. "I'm starting to worry about what control I have over my data-and not just with Schwab."
Schwab Still King
Slippage or no slippage, Schwab is still the king of the hill when it comes to the advisory services market. In 2000 and 2001, it referred almost $40 billion in client assets to advisors, far more than all other custodians combined.
The firm currently has about 6,000 advisor clients and $235 billion in custodial assets-a total that represents a 10% increase in net new assets from last year, says McWhinney.
There's some dispute about Schwab's market share, however. A recent report by Cerulli Associates, according to industry sources, shows that over the past year, Schwab's market share has gone from 75% to 71%. This is down from a peak of 85% in 1995.
Cerulli, in a change of policy, has refused to publicly disclose its annual market-share figures. McWhinney, however, says Schwab's own internal research has her company gaining on the competition. "What I know is that we grew faster than the competition," she says. Whatever the market-share numbers, no one is disputing the fact that Schwab continues to overwhelmingly dominate the market, with Fidelity coming in a distant second, with anywhere from 18% to 20% of the market, and TD Waterhouse third, with 4% to 5%.
The independent investment advisor market is also a whole lot bigger than the segment for which the three firms are battling. "Most estimates place the total market at $2.2 trillion, and Schwab and Fidelity have about $350 billion," says Jay Lanigan, executive vice president and head of Fidelity's advisory services arm. Consequently, the biggest opportunity for these service providers may well lie outside the universe of financial planning-oriented advisors.
There continues to be a bevy of smaller players who nibble at the edges, many of them newcomers to marketplace over the last few years or revitalized advisor-service programs that had been languishing years prior. These include CSFB, Ameritrade, Merrill Lynch, Raymond James, Datalynx and Bear Stearns & Co.
A booming market and expressions of discontent within the ranks of Schwab's independent advisor clients led to a surge in the number of new entrants in the late 1990s and 2000. What many of them have found out, however, is that it's a tough market to crack, especially with the down market, says Cerulli analyst Matt McGinness.
"It's definitely slowed down," McGinness says of the influx of new competitors. "In this kind of environment, it's hard to budget for new initiatives like this. Unless you already have the tools, it's an expensive proposition."
Schwab has also shown itself to be a resilient and tough competitor, McGinness says. It has a loyal core of advisors, a vast array of services and mutual fund offerings, and it continues to pump money into the operation, he says. Moreover, advisors are reluctant to go through the inconvenience of switching broker-dealers. "A lot of advisors who have worked with Schwab forever feel that there's nobody who does it better," McGinness says.
McWhinney says Schwab continues to add to its services year to year. Among the additions over the past year, she says, have been enhancements to Schwab's technology platform that have made it easier for advisors to open accounts, trade and change allocations online. Schwab also started sending advisors quarterly statements in CD-ROM format and is beta testing a service that will help advisors create their own proprietary Web sites.
Taking On Goliath
To be a competitor of Schwab's in the advisory services marketplace, one needs to be a bit of a visionary. That's because, when faced with the gaudy numbers that Schwab brings to the table, a competitor is always talking about what's on the horizon.
Yet some competitors are gradually making progress, despite the overbearing presence of Schwab. Raymond James Financial Services, for example, re-introduced a revitalized version of its fee-based advisory services in January 2001. Its market share is still minute compared with Schwab's, with about $1 billion in assets and 12 advisor relationships. But Michael J. Di Girolamo, senior vice president and head of the firm's advisory services, says goals are being met.
The unit, which focuses on the high-net-worth market, expects to have 20 advisor firms by the end of the year and between $1.5 billion and $2 billion in assets. Like other Schwab competitors, Di Girolamo feels he provides an alternative to advisors who think Schwab's retail business-and its play at the high-net-worth market-place it at odds with its advisor clients.
These concerns have been well-publicized the past few years with Schwab's acquisition of U.S. Trust and the creation of nine private-client offices for serving clients with $5 million or more in assets. "We do name-recognition advertising, and that's it," Di Girolamo says of Raymond James.
Fidelity saw $10 billion in new net assets last year, for a total of $58 billion in assets, Lanigan says. The company also added 300 new advisor clients, bringing the total up to 1,200. Among the service enhancements over the past year has been the expansion of a turnkey online-marketing program. Administrative trust services are also in the works, Lanigan says.
"First and foremost, given that the advisors we work for are primarily catering to the high-net-worth client, you have to have good service," Lanigan says.
Waterhouse finished last year with $16 billion in total assets, representing $4 billion in net new assets, but its advisor clients dropped from 3,000 to 2,000 due to a refocusing of the business on the $25 million-and-up market, Bradley says.
"We want to make sure that we are doing business with full-time advisors-advisors that are in it to grow their business," he says.
The company's target is 30% growth this year, after a 2001 in which it enhanced its VeoExpress platform and made Goldman Sachs and Bear Stearns research available to its advisor clients. The company also has third-party agreements that provide advisors with a turnkey 401(k) product and trust services. A similar turnkey program for the control and administration of foundations will be offered through FoundationSource, Bradley says. Also in the works is a partnership with Financial Engines, in which that firm's planning tools will be made available to Waterhouse's advisor clients.
At Datalynx, which has about 340 advisor clients and $6 billion in assets under management, recruit targets are being surpassed, company Vice President Skip Schweiss says. The company brought in 15 new advisor firms in the first quarter, exceeding its goal by four, he says.
"Our pipeline is more exciting than it's ever been," he says. "We've got a lot of advisors we're in discussion with."
Schweiss feels Datalynx's chief advantage over Schwab is its lack of presence in the retail market-thus avoiding stepping on the toes of its advisor clients.
"The retail investor can't walk in off the street and open an account with us," he says. "That's very appealing to a lot of advisors who are watching Schwab expand to include advice and guidance."
The most significant service introduced by the company in the past year is an online-brokerage service, he says. Trust and foundation capabilities are planned for later this year.
One reason broker-dealers have to push so many new services out the door is because advisors have so many different priorities when it comes to their custodians. Depending on the advisor, the deciding factor in picking a broker-dealer could be fees, mutual fund selection, customer service or the user-friendliness of online platforms.
Sometimes the choices can be vexing. Sam Miceli, of Miceli Financial Planning in Littleton, Colo., chose Waterhouse when he started his business two years ago because of its low transaction fees. But because his business his new, he doesn't meet the company's minimum account threshold and pays a $2,000 fee per year.
He could opt to go with Ameritrade, which has no annual fee, but then he'd be hit with fees on his mutual fund transactions. Miceli is continuing with Waterhouse, which offers a few thousand mutual funds that carry no fees. "I felt in the long run that was going to be a disservice to my clients, even though it would have saved me a couple of thousand dollars this year," he says.
More and more advisors are using a mix of broker-dealers to fill their needs. Rich Chambers, principal of Investor's Capital Management in Palo Alto, Calif., has been a Schwab customer for three years, but started putting some client assets in Ameritrade a year ago.
The reason: to get the best of both their fee structures. For individual stocks, he says, he pays a transaction fee of $29.95 with Schwab and $8 with Ameritrade. But he feels Schwab has a better selection of mutual funds and lower fees on fund transactions.
So he decided to put client accounts with a heavy weighting in individual stocks with Ameritrade. Ninety percent of his customers remain with Schwab, however. "This means my clients are saving money," says Chambers.