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Schwab Re-Org Combines RIAs With Retirement Biz

Schwab Institutional had an awesome year in 2008, stealing clients and assets from wirehouse advisors and expanding its lead in the RIA custodian business.

Schwab Institutional had an awesome year in 2008, stealing clients and assets from wirehouse advisors and expanding its lead in the RIA custodian business. But it isn’t resting on its laurels. Schwab is reorganizing, removing a well-respected executive, and combining the RIA unit with the retirement and corporate services unit.

The move is meant, in part, to give financial advisors more access to retirement business. Schwab’s biggest rival in the RIA custody business, Fidelity, is a distant number two, but it runs an enormous retirement business machine with $787 billion in retirement assets under management, whereas Schwab has about a quarter of that.

The two divisions—Schwab Institutional and Schwab Corporate and Retirement Services—will now be combined in a single business unit called Institutional Services, which will serve independent investment advisors, corporate benefit plan sponsors and third party retirement plan record keepers.

“It’s safe to say we would have done this in any [economic] environment,” says Schwab spokesperson Lindsay Tiles. “We’re seeing more crossovers of RIAs becoming TPAs and vice versa. There’s a fair amount of overlap. [Both divisions] are business to business.” Schwab works with a nationwide network of 300 TPAs, or third-party administrators, who manage retirement plans for businesses.

The surprise is that Charles Goldman, 47—the uncontroversial and (once presumed to be) fast-rising executive vice president of Schwab Institutional—is the one who is packing his bags amid the corporate restructuring.

Walter W. Bettinger II, chief executive of Schwab, will presumably save a few bucks on redundant salaries and services by folding the two units together and letting James D. McCool, who is 49, from Cleveland, Ohio, oversee the combined entity. (McCool is moving to Schwab’s San Francisco headquarters as part of the change.)

But Mr. Goldman headed Schwab Institutional during a golden time for his division: The 5,500 independent RIAs he oversaw brought in $100 billion in net new assets from January 1, 2007 to June 30, 2008. For perspective, the 48,000 financial advisers at Merrill Lynch, Smith Barney, UBS and Morgan Stanley combined gathered $168 billion during the same period, according to a Citi Investment Research report published on October 7.

“I was surprised [to hear of Goldman’s departure]. [His group] always gets an AAA-plus rating,” says Kevin Timmerman, president of Steele Capital Management Inc., which manages $650 million from Dubuque, Iowa. Steele Capital Management is both an RIA and a third-party administrator and has had accounts with both of the merging Schwab divisions.

Many industry observers believe the combination of the two business units is a good idea. Though the RIAs have proven themselves adept at raising non-pension assets, far fewer of them have won much 401(k) business from baby boomers. “This [merger of the RIA unit into the retirement unit] is a truly brilliant idea,” said Steve Winks, managing principal of of Richmond, Va. “This looks like the beginning of Charles Schwab circumventing a product support infrastructure and going to an elegant, streamlined process-architecture,” he added. “An RIA looking for a solution in defined benefit or defined contribution can use Schwab instead of, for instance, a Vanguard [401(k) product] and strip out cost.”

The same reasoning was behind TD Ameritrade’s move to merge its own RIA custody and corporate services divisions last year, said Brian Stimpl, managing director of TD Ameritrade Institutional of Jersey City, N.J. “That’s how we’re set up,” he said. “”You’re trying to help advisers capture 401(k) business and to capture rollovers.”

McCool has been with Bettinger for over 10 years. He joined Schwab in 1995 when his company, The Hampton Co., a provider of corporate retirement plan services, was acquired by Schwab. Mr. Bettinger was the founder of The Hampton Co. Mr. Goldman joined Schwab in 2001 and took leadership of Schwab Institutional in May of 2007.

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