Schwab Putting on the Ritz

The top five wirehouses dominate the sales of fee-based managed accounts with about 70 percent of the market. But somewhat unexpectedly, and in marked contrast to other mutual fund distributors (see story on page 18), Charles Schwab has gradually — and without much fanfare — hit the charts. Schwab's managed account program, launched just three years ago, ranked tenth with $8 billion, or 2.2 percent of the market, on Sept. 30. That puts Schwab ahead of such well-established independent players as Brinker Capital, one of the oldest providers of managed accounts. Schwab has tied with First Union Securities and is within striking distance of Lockwood Financial, which has a 2.7 percent share.

Last spring, Schwab upped the ante by launching a new program, called Managed Account Select, in conjunction with investment consultant Callan Associates, which performed the due diligence on the 50 money managers offered in the program. This represents a departure from its past third-party managed account business and is designed to be better organized and easier for advisors to use. Running the show is a former executive from Salomon Smith Barney, the leader in managed accounts.

“We saw this as a necessary way to serve our high net-worth clients,” says Jeff Cusack, senior vice president in charge of separately managed accounts. When managed account service began in 1998, only 7 percent of Schwab advisors worked with these products. That has since doubled to 14 percent. And when it comes to the top 1,000 advisors in its network, 22 percent are now working with Schwab's managed account products. “The large advisors are using them more than anyone,” says Cusack.

What is striking about Schwab's assault on the managed account world is that it was achieved without the huge financial advisor workforces employed by Salomon Smith Barney and Merrill Lynch. (Schwab's totals do not include its U.S. Trust unit, purchased in 2000.) So, how did Schwab, the original do-it-yourself vendor, do it? Its thriving custody and clearing business — used by regional broker-dealers and independent registered investment advisors — played a big role.

The Moneta Group, a large St. Louis-based advisor, for example, typifies the mood among independent RIAs. Moneta, with $3 billion in assets under advisement, is currently switching over many customers to separately managed accounts because of benefits such as tax efficiency and portfolio transparency. Because Schwab has been the custodian of much of their clients' assets, it is now grabbing Moneta's managed account business, too. Lockwood Financial, the largest independent managed account platform, had been the vendor of choice for Moneta's reps. “Our clients like to get one statement,” says Gina Fabro, a product analyst at Moneta. “So, we send them through Schwab.”

Schwab's progress has been impressive. But because of the wirehouse dominance in the space, some skeptics think that Schwab will face more resistance as the business heats up. “The clout still resides with the wirehouses,” argues Jack Rabun, an analyst at Cerulli Associates.

Charles Schwab's Growing Managed Account Assets