(Dow Jones) Schwab Advisor Services is once again accepting custody of new
alternative investments such as shares in hedge funds and private
The company had stopped accepting custody of such investments last year amid liability and regulatory concerns raised by the Madoff scandal and other events. It told advisors of the decision to change course this week.
The move follows client complaints, including a letter sent last year by two dozen RIAs which threatened to move billions of dollars in assets from the company. For advisors, being unable to list these investments on Schwab's quarterly client statements creates both administrative headaches for them and confusion for clients.
"The resolution is very important to us. Their initial decision was really contrary to what we wanted," says Jason Thomas, chief investment officer at Aspiriant, a $4-billion registered investment advisor and one of the letter's signatories.
Schwab is holding about $6 billion in alternatives and expects that number to grow after May 3, when new policies are implemented allowing advisers to hold most of these assets.
Bernie Clark, head of Schwab Advisor Services, says the company spent a year reviewing the process, working with new technology providers, talking with hundreds of advisers on its platform and building in more safeguards.
"Although it was a painful process, we believe we are pushing the entire industry on this," Clark says.
For assets the company still can't accommodate, such as promissory notes, Schwab has formed referral arrangements with trust services which will house the assets and then feed the data back through the Schwab platform.
Alternative investments have become an increasingly large part of client portfolios, prompting advisers to demand more sophistication from the firms they use to safeguard client assets. These assets tend to be fairly opaque and hard to value, creating tracking issues as well as potential reputational and legal risks for custodians.
"Schwab's decision has a huge impact on us, 30% to 40% of our asset base consists of such investments," says Sean Figuero, principal of Cypress Wealth Advisors, a $450-million multifamily office that houses the majority of client assets at Schwab.
Advisors say a custodian's ability to handle sophisticated assets can make it stand out in a space where it is hard to draw a difference between the four big players: Fidelity's Institutional Wealth Services, Schwab Advisor Services, Bank of New York Mellon Corp.'s (BK) Pershing Advisor Solutions and TD Ameritrade Institutional.
Meanwhile, competitors Pershing and TD Ameritrade say they've been able to benefit from the lag time in Schwab's response to alternative investments.
"It was absolutely a selling point, the fact that we support advisors in all of their business is essential," says Natalie Wolfsen, a managing director at Pershing, which uses the same technology provider as Schwab to process these investments.
"For competitive reasons advisors need to be in this space, and so we need to be in this space," says Tom Bradley, president of TD Ameritrade Institutional, who did not provide details on how the firm processes these investments.
Bradley says almost a quarter of its adviser's use alternatives as an important component of client portfolios and that the firm made some tweaks to the way it handles these investments, but not any major changes.
A Fidelity spokesman said the company understands that alternatives are an important part of many of our clients' businesses but could not provide any details about Fidelity's approach to alternative investments.
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