Schwab is changing — what it means for RIAs in its referral network

If advisors in Charles Schwab’s vast network of outside RIAs ever feel they’re in competition with the firm’s in-house wealth management business, Jonathan Beatty wants to hear about it.

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In the last 12 months, the head of Schwab’s advisor services unit has received one email expressing concern.

“And we resolved it in about 15 minutes,” Beatty told reporters Thursday in a meda roundtable call.

For years, Schwab has contended with the perception that its in-house wealth management business competes surreptitiously with the outside RIAs that pay for various services through its Schwab Advisor Network. Along with providing custody, trade-clearing and other services for $5.5 trillion in client assets, Schwab also provides client referrals to a portion of the more than 16,000 RIAs in Schwab’s network.

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Concerns that those outside RIAs could be in competition for advisory clients with Schwab’s internal wealth business have grown in recent years amid internal changes at the Westlake, Texas-based brokerage giant. Last year, for instance, Schwab increased the total amount of assets a client needed to have to be referred to a third-party RIA from $500,000 to $2 million from the $500,000. Some saw the change as a bid by Schwab to retain more investors in-house.

Schwab also announced last year that it was allowing its own wealth managers to engage in “discretionary trading” — or buying or selling investments without first getting clients’ permission. Before that change, investors who wanted discretionary-trading services were usually referred to RIAs in the Schwab Advisor Network.

And CEO Rick Wurster told Bloomberg in an interview in March that the firm was seeking to use artificial intelligence to allow in-house advisors to work with less-affluent investors. Before, clients usually had to have at least $1 million in investable assets to have a “direct relationship” with a Schwab advisor. 

Beatty said on the media call Thursday the anxieties about competition are ill-founded. Quoting a figure cited by other Schwab executives on other occasions, he said there’s $37 trillion in client assets being held outside the RIA industry. Schwab and its partner RIAs can all grab a piece of that without stepping on each other’s toes, he said.

“I go back to the opportunity story, which is that there’s $37 trillion in the marketplace, more than enough for everyone to have success,” Beatty said.

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Yet, many say there’s little doubt Schwab is seeking to retain clients it formerly would have referred to outside RIAs. Tim Welsh, the president and founder of the wealth management consultant Nexus Strategy, said Schwab and other custodians with large RIA referral networks have an incentive to maintain direct relationships with investors simply because keeping them in-house often means they can sell them more services.

The only clients Schwab and other referrers tend to send to outside RIAs are those whose demands exceed what Schwab is able to provide. Often those were investors seeking advanced tax planning or — in the past, at least — discretionary trading.

“I think it’s really that the flow that used to go to the independent space is being sopped up by Schwab directly,” Welsh said. “Before they would say, ‘Yeah, go there, fine, here’s our referrals all day long.’ But now they’re saying, ‘Hey, we can do all this in-house.’ So that is a form of competition.”

Welsh, who was at Schwab from 1999 to 2006, said Schwab is already by far the largest custodian of RIA assets and would struggle to take more market share from its custodial rivals. Building its internal advisory business is a far more obvious way to achieve growth, he said.

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Welsh also noted that Schwab’s stock has been under pressure in recent months from fears that AI and similar technologies could eat into its immensely profitable business managing client cash. Like many large wealth managers, Schwab has “cash sweeps” policies allowing it to move uninvested cash lying in clients’ brokerage accounts over to banks to be lent out for a healthy return. A series of lawsuits over the past two years have accused firms of profiting unduly by keeping the lion’s share of the cash sweeps revenue for themselves and allowing too little to flow back to investors. 

Industry analysts have warned that AI could eat into those returns by devising automated systems designed to ensure investors are always getting the most from their cash. Responding to such concerns, Wurster said earlier this month at the firm’s annual institutional investor day that Schwab already ensures clients have many ways to move money into higher-yielding investments.

“We couldn’t make it easier,” Wurster said. “We couldn’t promote cash options more.”  

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At the same event, Schwab executives said they plan to have wealth advisors in 30 of its office locations by the end of the year, up from four previously. Schwab Head of Wealth and Advice Solutions Neesha Hathi said the advisors’ physical presence will help build “that local relationship with clients in all the affluent markets that we want to be in.” 

Welsh said Schwab appears to be seeking to relieve investor anxieties about its stock price by touting its in-house wealth management business. But in doing so, he said, the firm has also drawn attention to the competition it’s posing to RIAs in its referral network.

“They talked out one side of their mouth, so they could flatter the analysts who are covering them, wanting them to prop up the stock,” Welsh said. “But they were probably thinking, ‘I hope no RIAs heard this, because they would definitely take offense.”

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On Thursday’s call, Beatty and his colleagues laid emphasis on ways Schwab continues to provide support to RIAs through Schwab Advisor Network. Beatty and his colleagues highlighted the many ways they’re using AI to make data easier for advisors to transfer across technological systems, automate various tasks and receive quick and concise answers to questions they may have about Schwab’s policies and operational procedures. 

Beatty also noted Schwab has added a team of ultrahigh net worth ambassadors who help RIAs meet the banking, trading, investing and other needs of wealthy clients. 

And he called particular attention to the firm’s Advisor ProDirect, an offering for small to medium-size advisors who pay a fee to go beyond Schwab’s custody services and obtain back-office support. Participants also receive directions from a dedicated coach who helps their businesses grow through “organic” means, such as by bringing in new clients or more assets from existing clients.

Beatty said about 20 firms are now in Advisor ProDirect, which was launched last year. He said there is now a backlog of advisors who want to join.

He said Advisor ProDirect is good both for RIAs that are just getting started in the industry and those that are seeking to grow through “their existing clients, retaining and gaining share of wallet from them, also building marketing and growth plans to bring in more new clients year over year.”