Editor’s Note: This column was originally published without linking to the author’s bio, which has been updated and appended to this article. The column also originally made reference to Morningstar Office, where Rowling’s column appears regularly; that reference has been updated for context. Rowling’s perspective as a practitioner in the independent advisor space and her commercial relationship with Schwab has also been clarified. Rowling comments on subjects of interest to the independent advisor, which include technology, software, and other industry services, along with investment topics such as taxes and asset-allocation strategies. The opinions expressed in her work are her own and do not necessarily reflect the views of Morningstar.
Schwab’s announced deal to purchase TD Ameritrade is the talk of the advisor world. From my perspective as a registered independent financial advisor whose firm custodies at Schwab, I don’t believe this deal will be a good one for my firm or for the RIA industry in general.
Our clients may not notice much of a difference on a day-to-day basis. But with what many observers say is Schwab’s increasing focus on vacuuming up retail investor dollars and reducing focus on RIAs, it’s not hard for me to see the purchase becoming a negative when it comes to efficiently servicing our clients.
Morningstar's analysis of the Schwab-TD merger indicates it is likely a net positive for investors, as part of the long-term trend toward investors demanding more value from advice among ever-increasing choices.
For some time, Schwab has also been a company that both profits from and competes with its RIA clients. But to my mind, this deal cements its focus on bringing in retail money while cutting back on the level of service it provides firms like mine. Do I want to keep cutting checks to a company that is both competing with me and appearing to value me less as a client? Or, do I want to work with a company whose core business is providing services to advisors?
I’ve been working with Schwab for 25 years, and for most of that time, it was a positive experience. Schwab had all the systems. It had PortfolioCenter (which it sold); it had personal reps who would come to my office and offer business advice; it had low fees, professional conferences, and tech support. It was all around well equipped to help advisors. Realistically, the choice for RIAs like my practice was between Schwab and Fidelity if you wanted comprehensive service.
But even before this deal was announced, I had already seen some trends that disturbed me. As part of a wave of cost-cutting announced in September, our highly experienced, skilled account representative was laid off. In her place, we have her much less-experienced assistant. And, according to our new rep, the number of firms she covers is about 50% greater than that of our former rep.
We also used to have a dedicated service team that was available at the touch of a button whenever we needed specific assistance on a client transaction. Now, we call an 800 number and get whoever answers the phone.
When we raised our concerns, our new Schwab rep told us these moves were made to provide us with better service by "consolidating" our needs with firms of "similar" size. It's hard for me to see how any of these changes will bring us better service. So from where I sit, smaller firms, like the type served by TDA, need to worry about Schwab's growing focus on larger firms. I agree with the concerns voiced in a recent Wealthmanagement.com article, among many others, that the deal could lead not only to less support for smaller advisors but also to less innovation benefiting smaller advisors and their clients.
- The "Race to Zero" in commissions means that custodians (like Schwab and TDA) must make further advances to efficiency. This seems likely to translate into decreased service levels, which will impact advisors more than end clients. Yet, if advisors cannot get responses in a timely manner or transaction assistance is delayed, the trickle down could eventually create issues for clients.
- Fee structures could change. The same Wealthmanagement.com article included predictions that fee compression could push custodians toward pricing models that include charging RIAs an all-in basis-point fee for custodial services, rather than the traditional fees for a specific service model. Whether Schwab ends up charging like a turnkey asset-management platform or simply charges an annual fee, given the competitiveness of the advisory business, the additional costs would likely need to be absorbed by the advisor.
- Banking services could become more of a focus, with many observers arguing a prime catalyst for the deal was a desire by Schwab to boost profits on sweep deposits. That's the immediate benefit to Schwab for doing this deal. Longer term, the elimination of duplicate offices and Schwab's largest competitor will lead to more profitable and robust retail business.
No matter what, the transition will likely create stress on the operations of both firms as they go through the changeover, as is usually the case in any deal.
Advisors might feel confident that their clients will not leave them to work directly with Schwab. But what about potential clients? We have a hard-enough time getting the word out on the difference between fiduciary and nonfiduciary. A potential client can look at going to “Smith & Company RIA” or Schwab--which is offering the “same” index-based asset-allocation management, rebalancing, financial planning, and access to an advisor--without paying the “middleman.”
For these potential clients, how can we advisors differentiate ourselves when Schwab claims to provide what we do? Advisors are kidding themselves to think the new mega-firm will not pose an even bigger threat to their growth.
So, what should a "small firm" like mine do? I’ve covered my firm’s transition from Schwab’s PortfolioCenter to Morningstar Office in depth, as well as how RIA’s can compete against robo-advisors on tax-efficiency.
One question to ask is whether you feel comfortable with just one custodian. I've never felt comfortable relying solely on one custodian for my clients. Thus, several years ago, I added SSG as a supplemental custodian. As Schwab seemingly became more focused on its retail side (which in turn means they are effectively competing with us), we became more cognizant of the difference between an advisor-only custodian and a custodian with many competing lines of business. Our service from SSG has been stellar, and I plan to move more business there.
Beside SSG, there are other independent custodial options such as Pershing and SEI, as well as many corporate RIAs such as Cambridge. Advisors can also find many fine independent software solutions. As long as there is innovation and opportunity, advisors should be able to work with trusted, independent partners who share their vision.
Sheryl Rowling, CPA, is head of rebalancing solutions for Morningstar and principal of Rowling & Associates, an investment advisory firm. She is a part-time columnist and consultant on advisor-focused products for Morningstar, and she continues to actively run her advisory business, from which Morningstar acquired the Total Rebalance Expert software platform in 2015. The opinions expressed in her work are her own and do not necessarily reflect the views of Morningstar.