In the land of RIA custodians, Charles Schwab is king. Last year the online-broker-turned-advice-provider extended an already massive lead over rivals Fidelity and TD Ameritrade in RIA asset gathering. Is there no challenger to Schwab's throne?
“Both of these firms [TD Ameritrade and Fidelity] have…materially improved market share, but Schwab maintains a meaningful lead,” writes Merrill Lynch analyst Patrick Pinschmidt in a Feb. 22 research note. And, “as in Prime Brokerage, we believe that a leading firm enjoys material experience-curve and scale advantages that are hard for newcomers to overcome as they try to build share.” Chip Roame, head of Tiburon Strategic Advisors, puts it another way: “Schwab dominates.”
True enough: Assets in Schwab Institutional, its RIA custodian business, were up 24 percent, to $503 billion from $406 billion in 2005. By comparison, Fidelity's Registered Investment Advisor Group (FRIAG) enjoyed asset growth of 32 percent, to $248 billion in 2006, and that's up from $189 billion in 2005. The third-largest player, TD Ameritrade's Institutional Advisor division, grew assets 26 percent, to $67 billion last year from $53 billion in 2005.
Both firms outpaced Schwab in rate of growth, but Schwab still has a powerful lead in market share. According to Cerulli data from the end of 2005, Schwab's share of the $1.8 trillion assets managed by the RIA market was 23 percent. That compares to 8.8 percent at Fidelity and 3 percent at TD Ameritrade. Cerulli analyst Joe Lamoureux would only say of 2006 that Schwab has ceded “less than a quarter of a point” in market share over the last few years. (Cerulli declined to furnish newer market-share data, claiming the firms don't want to share it with the press.)
Rivals In Pursuit
Fidelity and TD Ameritrade (as well as emerging competitor, Pershing) aren't giving up the race. “Sure, we'd love to be the largest custodian, but we're focusing on being the fastest-growing one,” says Tom Bradley, TD Ameritrade's president. They're succeeding at that:From 2001 to 2006, Ameritrade's Institutional Advisor group had a compound annual growth rate (CAGR) of 32 percent, according to UBS research. FRIAG was a close second with a 30 percent CAGR from 2001 to 2006, the firm says.
“The crucial question for these firms now is, ‘Where does the next account get opened?’” says Philip Palaveev, a Moss Adams consultant. That's because while most advisors have custodial relationships with multiple firms, they don't often switch primary custodians — the firm where they hold most of their assets. That's good news for Schwab. According to Moss Adams research, 62 percent of surveyed RIA firms with more than $1 billion in assets report Schwab as their primary custodian, compared to 21 percent for Fidelity, 9 percent for Pershing and a statistically insignificant number for TD Ameritrade.
What makes an RIA choose one custodian over another? According to Cerulli data, “value-added support” (anything that helps advisors grow their business) and “service” (technology, product platform, customer service) are the most important criteria.
All three second-tier firms are diligently building out their offerings. In February, TD Ameritrade began offering a mentoring program whereby green RIAs are paired up with more experienced veterans to help them grow their businesses. And while TD Ameritrade tends to attract smaller RIAs, it has added a separately managed account (SMA) capability and is currently developing a unified managed account (UMA) program.
Fidelity, too, has SMAs and a UMA program, as well as an alternative-investment platform. And with its Wealth Advisor Solution — a pilot customer-referral program — Fidelity customers with more than $1 million in assets who are seeking advice are directed to a pre-qualified list of the firm's top RIAs. Fidelity has also begun monitoring customer satisfaction and providing the resulting reports to its RIAs.
But Schwab isn't exactly resting on its laurels. The firm plans to invest $55 million this year — up from $23 million last year — in improvements and new initiatives within Institutional. These include GrowthPoint, a new practice consulting program to help advisors grow and benchmark their practice against peers; and a new partnership with Cambridge Investments, an Iowa-based broker/dealer, that is designed to entice dually registered brokers.
Tiburon's Chip Roame says none of the custodians attract many of these hybrid brokers, yet. “The custodian that figures that out becomes king,” he says.
In the meantime, Schwab continues to build its empire — the firm expects to reach $1 trillion in RIA assets by 2010, nearly double it's current asset number.