Charles Schwab has long said that it doesn’t solicit the investor clients of the financial advisors who custody assets with the firm. It’s a stance it repeated just a month ago when discussing its upcoming franchise program. And yet, just last week, Schwab found itself apologizing for violating that very policy.
In an e-mail to advisors, Bernie Clark, executive vice president of Schwab Advisor Services, said that recently the company had inadvertently pitched portfolio products to retirement plan sponsors who were clients of retail financial advisors and turnkey asset management programs that have custodial relations with Schwab. These include BAM Advisor Services, a unit of Buckingham Financial Group, and Loring Ward.
In a mailing, Schwab offered Windhaven Portfolios, an ETF-based product, and Schwab Managed Portfolios Mutual Funds, a wrap strategy, to the retirement plan sponsors. Clark said the products were aimed at sponsors of company retirement accounts, qualified retirement plans, and simple IRAs. Schwab did not disclose how widespread the mailing was. It was up to the sponsors to decide whether to include the Schwab products in their offerings, but Schwab should have broached the offer with the advisors to the sponsors first, Clark said.
“Our intent was never to solicit clients from them. That’s the critical thing,” Clark told Registered Rep. “If they thought we were intentionally soliciting their clients, that would be a breach of our partnership.” He added that he didn’t believe Schwab had lost advisor client business as a result of the issue.
A spokesperson at Loring Ward said the company would discuss the issue with Schwab but declined further comment. At BAM Advisor Services, Joseph Goldberg, principal and director of retirement plan services, said new advisor firms that were looking for custodians might consider Schwab competitors such as TD Ameritrade or Fidelity. BAM has about $11 billion in assets and serves about 130 firms with two to three advisors each; Schwab was BAM’s first custodian, Goldberg said.
“I can say we’re not happy with it. I can’t see anything immediate that’s going to drive us away from them …We still look at what they do for us,” he said. He also thought it unlikely that the advisors would go to the trouble of moving assets over a “one-time mistake.”
He continued, “I haven’t heard any kind of major uproar” among the TAMP’s advisors. If it becomes a trend, then I think you’ve got a real problem. … The correct way is to market it to the advisors. That’s the only correct way.”
Some Schwab custody clients worry that the firm’s new franchise program would create competition for them. Schwab is recruiting advisors for a franchise branch program it expects to launch by year’s end. The company said that advisors who buy a franchise office will be obliged to abide by Schwab’s policy of not contacting the clients of other advisors who custody with Schwab. But that view has drawn some skepticism in the industry. “These guys they put in there are absolutely going to solicit those accounts. How else are they going to make a living?” says Timothy Welsh, president and founder of Nexus Strategy, a consultancy in Larkspur, Calif. and a veteran of Schwab Institutional Services. “As Schwab moves more and more into the forefront of offering advice and guidance, they’re going to increase their channel conflict.”
Clark said what was driving Schwab into guidance was a demand from investors for it. That doesn’t mean that conflicts such as the most recent one won’t recur, he added—the company is only human.
“I’d love to sit here and say that nothing will ever happen again, but that would be dishonest,” Clark said. “We’re going to do our best.”
