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.