Charles Schwab Kicking Ass(ets)

Wall Street Brokerage Giants like Merrill Lynch may not see Charles Schwab as a big threat, but the firm has come a very long way from its scrappy upstart days. In fact, some analysts say it's on track to becoming the biggest brokerage firm in the U.S., as measured by client assets. Yes, Schwab has become an ass-kicking, asset-gathering machine. It is also getting better at luring wirehouse advisors

Wall Street Brokerage Giants like Merrill Lynch may not see Charles Schwab as a big threat, but the firm has come a very long way from its scrappy upstart days. In fact, some analysts say it's on track to becoming the biggest brokerage firm in the U.S., as measured by client assets. Yes, Schwab has become an ass-kicking, asset-gathering machine. It is also getting better at luring wirehouse advisors to its ranks, though the actual numbers are only in the high double digits.

Schwab is already just a hair behind Merrill Lynch in total client assets today — at $1.4 trillion versus Merrill's $1.7 trillion, according to Citibank analyst Prashant Bhatia. He predicts that Schwab will overtake Merrill as the largest broker/dealer (in terms of client assets) in just three short years. After all, over the past four years, Schwab has raked in more net new assets than three of the largest wirehouses combined. In the third quarter alone, Schwab brought in $37 billion in net new client assets, says Bhatia — an estimated $17 billion of that from Schwab Institutional, the firm's RIA custodian business, and another $10 billion each from core brokerage, and corporate and retirement services. That's compared to Merrill ($26 billion), Morgan Stanley ($15 billion) and Smith Barney ($8 billion).

Schwab is certainly way out in front of its rivals in the custodian space. According to the most recent information from Cerulli Associates (provided by Schwab), the firm has approximately 24 percent of the more than $2 trillion of assets in the RIA space ($581 billion as of Q3). Fidelity, which also had an impressive quarter, pulling in $28 billion in net new assets, has just over 10 percent ($324 billion). TD Ameritrade ($70 billion) and Pershing ($73 billion) each have around 3 percent.

In fact, Schwab seems to be taking market share from everywhere. “Over the past five years, Schwab has taken 3.2-percent market share [from its] retail brokerage peers (a $7 trillion asset pool), and almost 1-percent market share [from] all financial services firms (a $42 trillion asset pool),” Bhatia writes in a July research report. That means Schwab is gaining market share at a pace that is “eight times faster than the competition,” he writes. Not too shabby.

Breaking Away

Schwab makes much of the fact that it is stealing talent from the wirehouse channel, what the firm calls “breakaway” brokers. And it continues to add fancy new buttons and levers to its wirehouse-advisor mousetrap to facilitate (and step up) that migration. It seems to be working. According to Barnaby Grist, managing director of Strategic Business Development for Schwab Institutional, the firm brought in 50 such advisors in the first six months of this year, with assets averaging between $100 million and $200 million. That's the same number Schwab converted in all of last year, he says.

Sure, 50 advisors, or even a couple of hundred, is not going to hobble any of the wirehouse firms. “Merrill Lynch isn't worried about 100 advisors,” says Chip Roame, managing principal with Tiburon Strategic Advisors. That said, Roame concedes that the advisors leaving the wirehouses to go to Schwab, and other custodians, seem to be taking more and more assets with them every year. Philip Palaveev, a consultant with Moss Adams, echoes that thought: “Even if they bring 100 to 150 advisors over, the size of the assets those advisors bring with them continues to go up,” he says.

The very biggest individual advisors — the guys managing several billion dollars — still do work for wirehouses, and might never be tempted to leave. For one thing, the wirehouses have powerhouse brands, and seemingly endless resources with which to support their retail ranks. Plus, there are a lot of guys who have no interest in starting up and running a business, or dealing with things like hiring, payroll, 401(k)s, office furniture and rent.

A Leg Up

But Schwab is doing its best to make all the hassles of running a business disappear. One such attempt is the firm's new partnership with TriNet, a national human resources outsourcing company, announced in October. “It's a pretty big deal for a custodian,” says Palaveev of Schwab's new benefits offering. “Large advisory firms typically have 30 to 40 employees, so they're still very small employers. They can't get the cost-effective access to benefits that large corporations can,” he says. Compared to going out and getting benefits on their own, Grist says the partnership should save advisors 15 to 20 percent on rates. Schwab also offers five-year loans of $100,000 to $500,000 to advisors who are just setting up their own RIAs — a program it expanded to 40 states from 11 earlier this year.

TD Ameritrade and Fidelity, of course, have their own initiatives for new arrivals from the large firms. TD Ameritrade president Tom Bradley says the firm recently rolled out cost-basis reporting on client statements. Fidelity, meanwhile, is launching an entirely new platform for its RIAs that will combine financial planning, portfolio management and customer relationship management software all in one place. But these guys might need to do some catching up.

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