A merger of Schwab and TD Waterhouse would have a dramatic impact on advisors because many of Waterhouse's clients are advisors who, for various reasons, have migrated from Schwab in recent years. Roy Diliberto, for example, is a Schwab client who started placing assets from his firm, RTD Financial Advisors of Philadelphia, with TD Waterhouse two years ago. His clients' assets are now split about equally between the two firms, he says. "Pretty much most of the new clients are put into TD Waterhouse."

Among the reasons he switched was that TD Waterhouse has lower costs, what he considers to be a cutting-edge technology platform, and their philosophy of partnering with, rather than owning, companies that service advisors. "I don't need to worry about moving from TD Waterhouse because I'd still be able to have a relationship with the vendor," he says.

Diliberto says he's not sure what to think about the possible sale of TD Waterhouse. The correspondence he received from Waterhouse maintained the stories were just rumors and Toronto-Dominion "has no plans to sell TD Waterhouse." Yet he doubts that the Wall Street Journal "made it up."

As for what he would do in the event of a sale, he says, "It would really depend on who bought them and what they intended. If it's Schwab, I'm right back where I was two years ago and I'd have to start making those decisions again."

Under the leadership of division president Tom Bradley, TD Waterhouse Institutional has gained the favor of many advisors. But their patience is now being tried.

McGinness notes that the reports of a sale come just a few months after TD Waterhouse denied news reports that it was planning to launch a retail, full-service brokerage operation that could potentially compete with its own advisor clients. "TD Waterhouse does need to be careful about retaining its current clients and continuing to reassure them that they'll continue to provide them with a high level of service," McGinness says.

Small Firms Get Squeezed

While advisors have reason to be concerned about what will happen to the custodial service marketplace, they're also coping with some immediate changes. On July 1, Schwab Institutional will put into effect a quarterly $1,200 fee on advisors whose assets are less than $10 million. The previous fee was $600 on assets less than $3 million, which became effective in 1999.

Schwab spokesman Lance Berg says the firm will not know how many advisors will be impacted by the change until July 1. Schwab, however, has previously stated that about 1,800 of its 6,000 advisor clients could potentially be facing the new fees, he adds. "We do expect that the majority will not be affected by this," he says.

Many advisors who do face the fee have been spending the past four months looking for a new custodian. Jean Shamo, co-owner of ShaMont Financial Services in Hilton Head, S.C., says the fee will force her to move her clients' assets to Ameritrade. The firm has about $5 million in assets with Schwab, and has been using the firm's custodial services for ten years. "That's too much cost for us," she says of the quarterly $1,200 fee. "It's obvious they are trying to cut out the low-end advisor."

Scott Dauenhauer, president of Meridian Wealth Management, is moving his $1.5 million in assets to Ameritrade as a result of the change in fees. Dauenhauer says he's unable to understand how Ameritrade can view him as a profitable client, while Charles Schwab does not.