Advisors scrutinize big firmsí focus on direct sales.

As the competition for client assets heats up in a tightening market, so too, it seems, does the tension between independent advisors and their custodians.

An increasing number of firms are stepping up the their direct sales operations, raising questions about whether they're intruding into the same market as their advisor clients.

Such concerns used to be considered a "Schwab thing," as market leader Charles Schwab was the one making dramatic moves in the direct sales market while serving thousands of independent advisors.

That's no longer the case, however, as other firms with both retail and custodial arms try to tangle with competition, tighter margins and demands from investors for a more diversified array of offerings.

"I wouldn't be surprised if you see more robust offerings from companies like TD Waterhouse and Fidelity," says Matt McGinness, an analyst with Cerulli Associates, a financial services research and consulting firm in Cambridge, Mass. "If they don't, they'll risk losing clients to the Merrill Lynch's of the world."

Whenever they do make moves on the retail side, however, they are straddling what many advisors feel is a blurry line-the line between serving an advisor clientele and competing against it.

This was clear three years ago when Charles Schwab bought U.S. Trust, a dramatic move that signaled the company's resolute desire to establish itself in the high-net-worth market many advisors coveted. The move, however, rankled some of the independent advisors who relied on Schwab, as did Schwab's decision a year later to unveil a "private-client office" program aimed at directly serving affluent clients.

Now Schwab isn't alone in such endeavors. Recent reports of TD Waterhouse and SEI Investments Co. stepping up their direct sales efforts came as a shock to some advisors, particularly those who signed on with the firms to avoid such conflicts.

In an indication of how sensitive the issue is among custodians, Waterhouse sent out a letter to its advisors immediately after the reports, denying it planned on competing with them. The letter stated the reports of a "full-service division" at Waterhouse were incorrectly drawn from a discussion at its national conference about plans to expand investment tools for self-directed retail customers.

J. Thomas Bradley, president of TD Waterhouse Institutional Services, could not be reached for comment, but in a written statement he asserted that there is no connection between the firm's retail efforts and the market served by its advisor clients. "TD Waterhouse Investment Centers have been in existence for five years and offer limited, non-discretionary guidance, whereas virtually all of our advisors have full-service relationships including trading authorization for client accounts," Bradley says.

He adds that Waterhouse referred more than 4,500 customers to advisors through its AdvisorDirect program over the past year. "TD Waterhouse plans to continue operating in a non-competitive manner with independent advisors, and maintains that referring appropriate customers to advisors is a key element of our business model."

Exactly how seriously advisors view the retail efforts of their custodians remains questionable. McGinness notes that despite all the controversy stirred up by Charles Schwab, the firm remains the market leader among custodians. Nor has their been an exodus of advisors from the firm since the purchase of U.S. Trust and the startup of the firm's private-client program, he adds.

"The number of advisor clients at Schwab has remained quite steady over the last few years," McGinness says. "I think Schwab has worded their advice offerings to avoid conflicts. They will not work with clients who want to delegate the management of their finances-they won't enter into a discretionary relationship."

Yet some competitors are attempting to make the most of the perceived conflicts in the battle for advisors, their clients and their assets. Datalynx, for example, added a clause to its standard advisor contract that stipulates the firm will not offer services directly to retail investors as long as the contract is in effect, says Datalynx Vice President Skip Schweiss. The firm, which has no retail operations, gained about 65 new advisors last year and now has a total of 355 after 12 years in business, he adds.

That's a tiny number compared with the big three of Schwab, Fidelity and Waterhouse, but Schweiss says the firm continues to attract advisors from those larger custodians. Among the frequent issues, he says, is advisors feeling threatened by the direct sales actions of those custodians. "That is not the only thing they need to consider, but it does seem to certainly be important for many of them," Schweiss says.

Michael J. Di Girolamo, senior vice president and head of advisory services at Raymond James Financial Services, says direct sales is among the top issues he's asked about by prospects. "There is this growing distrust that some of the firms are being forced to go direct to the clients as their main lines of business are under pressure," he says. "What we tell them is that our firm operates only one way, and that's through financial advisors."

Sam Jones, president of J-Group Advisors in Denver, joined Datalynx after breaking off his relationship with Schwab six years ago. Wayne Caldwell signed on with Datalynx after transitioning from a brokerage to a fee-based RIA business in late 1995. At the time, he was also considering Schwab's services. One reason he chose Datalynx: During the time they were considering the two firms, he lost one of his clients to Schwab's institutional pension department.

Not that he's surprised. Caldwell feels that with full-service brokerage firms moving into the fee-based market, firms such as Schwab, Fidelity and Waterhouse have to respond. At the same time, he feels custodians with retail operations are not as benign as they make themselves out to be.

"They're trying to make the case that the people they serve wouldn't be our clients anyway. But I think that's too broad of a statement," Caldwell says. "When you're talking about each individual client, you don't know."

Schwab, however, maintains its moves into the retail market have been successful without alienating advisors. The firm's private-client office program started as a pilot project two years ago, with the creation of nine offices designed to serve affluent clients with more than $500,000 in investable assets.

Since that time, the program has been deemed a success and is not a permanent offering, Schwab spokesman Lance Berg says. The original nine offices remain, while the rest of the firm's private-client consultants-there are a total of 160-are spread among Schwab's 400 branch offices, he says.

During the first year of the program, the nine pilot offices attracted about 1,000 clients and $1.5 billion in assets, Berg says. The firm feels the program does not intrude on the businesses of its advisor clients, he adds. Whether or not it intrudes, the $1.5 billion in assets pales against the $20 billion or so that advisors brought to Schwab Institutional.

"I think there has been some realization that the programs are targeted at different investors," he says. "Schwab private client really focuses on the validators who still want to push the button and remain in control of the overall portfolio."

Likewise, officials at Fidelity say their private access services program-designed for investors with more than $3 million in assets-do not overlap with the services provided by their independent advisor clients. They also describe it as a program for "validators."

"It's not a wealth management group," says Jay Lanigan, who was recently promoted to president of Fidelity Investments' RIA Group. "We're not offering them specialized products and services that focus around advice."

One advisor who is content with the private-client program at Schwab is Thomas Meyer, president of Meyer Capital in Marlton, N.J. He says he has received about four leads during the past month from Schwab's private-client offices-most of them separate account clients.

In addition to generating some business for his firm, Meyer also feels Schwab's private-client services serve a niche that he would rather not have to deal with. "This would be the $300,000 to $500,000 investor that just sits there and kicks the tires without even opening an account," he says. "They've been steered to the private-client program, which saves us a lot of time."