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Schwab: Franchisees Can’t Poach RIA Clients

Financial advisors who are considering Charles Schwab’s new independent branch program are being told they will have to abide by the company’s contact policy, a Schwab (Ticker: SCHW) spokesman says. The policy bars Schwab employees at the firm’s 300 branches from reaching out to investor clients of registered investment advisors with sales or business development pitches or advice interactions, spokesman Michael Cianfrocca says. “It’s pretty much that straightforward,” he says. “The independent branch leaders and their staff will have the same policy that our co-managed branches have.”

Client poaching is a sore subject with RIAs. Shortly after Schwab bought U.S. Trust 11 years ago it sent a letter to its independent fee-based advisors that the new acquisition would not be targeting their clients. Cianfrocca says complaints are rare; a copy of the policy was not released. The requirement to abide by the contact policy will be part of the franchise contract between Schwab and the advisors who participate, he says.

Brian S. Hamburger, founder and managing director of the regulatory consulting firm MarketCounsel in Englewood, N.J., says that industrywide, poaching doesn’t occur nearly as often as it once did. The practice isn’t illegal, but it generates “an awful lot of bad press,” Hamburger says.

“I think it has been a real sensitive spot, particularly for individual RIAs,” he says. “It makes advisors question their selection of service providers.” At the same time, advisors who are managing their practices with an eye on client service feel less threatened. “Some of it comes down to the confidence in the client’s relationship,” he says. “If the advisor is really differentiating himself and providing an overwhelming amount of value to their client relations, they’re really not scared by that type of stuff.”

Schwab has said that its RIA clients don’t have anything to fear from the new program; RIAs typically aim at higher-net-worth investors. Schwab will provide 25 to 50 clients to financial advisors who sign up for the independent branch program. The company announced the program in February; Cianfrocca says about 500 advisors have contacted Schwab to learn more, although no contracts have been signed yet. The advisors come from a range of channels: wirehouses, independent broker/dealers, insurance firms and banks. Schwab expects to have a handful of deals signed by the end of the year.

It is looking for advisors to set up practices in locations where Schwab doesn’t have company offices. In the early years of the independent branches, the advisor keeps 100 percent of the revenues plus a premium paid by Schwab, with the revenue share falling to 50-50 by the fifth or sixth year. “It’s a recognition of the economics of it. It will take them some time to scale up,” Cianfrocca says. Advisors will have to pay for staffing and rent (Schwab will lease the offices and sublease to the advisors), while Schwab will cover corporate expenses such as computer hardware/software, national advertising, and a share of local marketing costs.

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