After hearing about Charles Schwab & Co.'s latest initiative to woo affluent investors, financial advisor Thomas Grzymala was feeling somewhat perturbed-and vindicated.
The longtime Schwab Institutional client decided in the spring of last year to start using TD Waterhouse's clearing and custodial services for his new accounts. Now, 15% of his firm's assets are with Waterhouse. He expects that amount to grow, now that Schwab is going after clients with assets of $1 million and more-the same type of client Grzymala's business seeks.
"I'm going to be damned if I'm going to be toast in his cooker," fumes Grzymala, president and CEO of Alexandria Financial Associates Ltd. in Alexandria, Va. "I think it's coming to the point where our interests don't go along the same lines."
He's not the only one who's grumbling. Other advisors are expressing concern about Schwab's announcement in March that it is opening three "private-client" offices that will offer affluent investors enhanced services, including some managed-account services that typically have been handled through referrals by the company's independent-advisor clients.
It's only a pilot program, but as the news spread among the 6,000 advisors who depend on Schwab for custodial and clearing services, it gave new life to concerns that Schwab is gradually placing itself in direct competition with the same group it serves. For the 465 advisors who participate in Schwab's AdvisorSource referral program, an added fear was that referrals will decrease.
"It doesn't make sense to get in bed with a competitor," says Ron DeLyons, CEO of Greystone Investment Management in Cincinnati, which is moving its assets from Schwab to Raymond James Financial Services for a variety of reasons.
Industry observers say Schwab indeed is walking an increasingly tenuous tightrope as it tries to meet the needs of an independent-advisor community that makes up one-third of its assets and, at the same time, find ways to grow its overall business.
Schwab, which virtually created today's independent-advisory profession when it started offering custodial and clearing services 15 years ago, also is facing increased competition from companies that are trying to peck away at its 75% market share at a time when its retail online-trading business is declining dramatically. While revenues for investment advisors and retail brokerages fell in the first quarter, the decline was modest when contrasted with that of online, do-it-yourself brokerages. Whether or not competitors can exploit Schwab's pilot project to pick up market share remains to be seen, says Dennis Gallant, a consultant with Cerulli Associates Inc. in Boston.
Similar concerns have flared in the past, yet Schwab remains far and ahead the market leader, he says. While Schwab's market share has fallen from 85% in 1997, the company says asset growth remains healthy, with $45 billion in net new assets last year.
"The volume turns up every time they come up with a new initiative. The question is, 'What's going to be the breaking point?'" Gallant says. He also notes that the wealth created by the abnormally long bull market has many financial-service companies scrambling to roll out retail services for the wealthy. Fidelity, the second-largest custodial and clearing-services company, announced an affluent-client initiative of its own recently.
"Virtually every other financial supermarket out there will face the same issue," Gallant says. "(Schwab) also has a direct market, which represents the lion's share of their revenues. They have to find ways to solidify that end of the business."
In an indication of how sensitive a position Schwab is in, the company went into damage-control mode the instant it released the news about the private-client offices program. A letter went out simultaneously from Gerald J. Graves, chief operating officer of Schwab Institutional, in which he stressed the offices were only a pilot program and more office openings would depend on their success. "Please be assured that Schwab remains extremely committed to your business," he says in the letter.
Over the past year, Schwab's stock has fallen about 60%, from $40.50 a share to $15.05 a share on April 6. Analysts who listened to Schwab co-CEO David Pottruck on a conference call in late March say he conceded that Merrill Lynch had done a good job of figuring out Schwab's business, implying that Schwab would have to adjust its business model to respond.
In a recent interview, Graves says the pilot project is aimed at serving affluent investors who are seeking enhanced services, yet have chosen not to work with an independent advisor. But beyond managed accounts, the scope these services will take is still unclear, he says.
Graves acknowledges this leaves the door open for some overlap between Schwab and its independent advisors. But he stresses that private-client offices will make referrals to advisors in cases in which "customized" financial-planning help is sought. "This is not a test to compete for the clients of investment advisors," he says. "We also know there are many types of advisors out there and many types of investors, and that in this whole process there could be overlap, and some advisors could find this competitive."
How strongly this will motivate advisors to move away from Schwab assuredly will be tested by competitors-at a time when the number of companies trying to muscle in on Schwab's advisory business is on the rise.
Late last year, five brokerage firms-Raymond James, DLJdirect (now CSFBdirect), Bear Stearns & Co., Ameritrade Holdings Corp. and E*Trade-launched advisory-service units. Meanwhile, established competitors Fidelity and TD Waterhouse say their advisory businesses are growing as well.
Michael J. Di Girolamo, a Raymond James Financial senior vice president and head of the company's advisory services, acknowledged competitors expect to benefit from discontent at Schwab. "It is something we expect to capitalize on," he says. But that, he says, is not the only strategy for growing the fledgling unit, which was officially launched in January.
The firm also is providing incentives for affiliated advisors to refer other advisors to the firm, he says. The incentives include a $1,500 payment after the referral has been with the company for a year.
Raymond James also is unbundling services to give clients an "a la carte" selection, ranging from basic custodial services to turnkey asset management, Di Girolamo says. Raymond James currently has eight client offices with a total of $800 million to $900 million in assets, he says.
CSFBdirect, which also rolled out its advisor platform in January, has signed up 12 client offices since then, says Richard Kancor, director of CSFB Institutional. Advisors are matched with a service team consisting of 10 to 15 representatives, with whom they can deal on a regular basis, he says. "We've heard clearly that people don't want to have multitiered, multilayered service organizations," he says.
Some firms, such as TD Waterhouse and Fidelity, recently launched referral programs for selected advisors. TD Waterhouse, which had a 5% share of the advisory-services market in 2000, expects to refer 4,000 to 5,000 customers to advisors this year, with the average lead having assets between $500,000 and $600,000, says Tom Bradley, president of TD Waterhouse Institutional Services.
Fidelity, with a market share of about 18% last year, has set up referral programs at its Boston, New York, Washington, Atlanta, Dallas and Millburn, N.J., branches, says Jay Lanigan, division executive of client services for Fidelity's Institutional Brokerage Group. Rollouts are planned soon for San Francisco and Chicago, he says.
He expects new market-share data this year to show a gain for Fidelity. Since the end of 1999, according to the company, advisory clients have grown from 724 to 1,100. "We've been in the business since 1993, so I think people know Fidelity clearly is a long-term player in this marketplace," Lanigan says.
But the fact remains that Schwab has all the other players beat in technology, longevity and bulk. It also has a stable of advisors that has shown itself reluctant to switch custodians. Although new entrants in the market may be able to court advisors successfully with personalized services and extra perks, they don't have a track record yet, says Gallant of Cerulli Associates. "Even if you hate Schwab, you still have that wait-and-see attitude about how long that new provider is going to be in the marketplace," he says.
That's why observers say more advisors, like Grzymala of Alexandria Financial Associates, are testing the waters by placing their assets in the hands of more than one custodian. And even Gryzmala concedes that Schwab had the courtesy to notify him before it announced the pilot program. There are also those advisors who feel the need for advisors is so great nowadays that they don't feel threatened by Schwab's initiatives.
That's because advisors with experience in the business should be able to thrive on referrals originating from their own client bases, says Don Rembert, president of Rembert, D'Orazio & Fox in Falls Church, Va. The firm has been a client of Schwab's since its advisory-services unit started in 1987.
"The guys that are good in this business have more business than they can say grace over," he says. "It's the ones just entering the business who are the ones scrambling for marketing exposure."
Schwab's aggressive moves to court affluent clients is a sign that its independent advisor-referral program isn't enough to keep some clients from going elsewhere, he says. "When you look around, they have competitors like Merrill Lynch and Vanguard who are getting into the business," he says. "From their standpoint, they feel compelled to do it."