Schwab Pays Up to Move Reps

Schwab Institutional, the independent investment advisor arm of Charles Schwab, announced that it plans to offer start-up loans to registered reps who leave their firm to affiliate with Schwab’s independent network.

Schwab Institutional, the independent investment advisor arm of Charles Schwab, announced that it plans to offer start-up loans to registered reps who leave their firm to affiliate with Schwab’s independent network.

“The moves we are making today are the first of many we will make in 2007 to help advisors who want to become independent,” said Barnaby Grist, managing director of strategic business development for Schwab Institutional, in a press release.

Interested reps who have at least $75 million in assets under management will be eligible for a loan of at least $100,000, based on the advisor’s creditworthiness. The loan will help the advisor with the necessary costs associated with starting a business, such as renting office space, buying technology and other expenses. And, since many reps are unaccustomed to running their own business, Schwab will assign a “conversion consultant” to new hires that will help with the inevitable paperwork pile-up related to the transfer process. Grist says the deal is the result of an increasing rate of new hires from traditional brokerage firms in the past two years.

In this area, say consultants, Schwab has had success of late. “I’d estimate one-third of their registered investment advisors are from wirehouse firms,” says Philip Palaveev, a consultant with Moss Adams. Palaveev says the loan is only intended to help the advisor get on his feet and perhaps with the three to five months after start up when revenue flow is minimal as accounts are being transferred.

In addition to the start-up financing, Schwab is announcing other benefits to lure prospective new hires, including: office leasing help, courtesy of partner CB Richard Ellis, a real estate services firm; and special service and rates errors-and-omission (E&O) insurance, benefits previously only available to advisors with more than $100 million in assets under management.

Another sticky issue for reps who leave traditional firms where they are considered employees is the amount of deferred compensation they leave behind. Danny Sarch, a recruiter with Leitner Sarch Consulting in White Plains, N.Y., says reps with $75 million-plus in assets under management will have substantial deferred compensation they will have to forego. “Unless the rep is really unhappy, the change might not be enough to change his life,” says Sarch, referring to the higher payout but also higher costs of running an independent practice.

Palaveev says reps who are weighing the benefits of the two models need to evaluate three things: start-up costs (he estimates between $50,000 and $100,000 as typical); on-going expenses of the office (staff, supplies, etc.,); and how much profit will be left-over? “When you go independent you forfeit the deferred compensation, but you get—hopefully—a higher income” he says. And you build equity: “A million-dollar business that goes independent will probably be worth $2 million or more, a value you won’t get at a wirehouse,” he says.
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