11 more views on RIA referrals from Schwab, Fidelity, rivals and experts

October 18, 2023 1:03 PM

RIA Leaders 2023: Competitor referral programs

The referral programs operated by the retail wealth management and custodial arms of Charles Schwab and Fidelity Investments provide tens of thousands of leads each year.

However, only certain registered investment advisory firms that meet Schwab's and Fidelity's criteria and pay sizable fees can gain access to that pool of new potential customers, according to the cover story of this year's Financial Planning RIA Leaders study. Some of those giant RIAs that receive referrals from Schwab and Fidelity also appear on FP's companion list of the 20 largest fee-only planning firms in the country.

Scroll down the slideshow below for a deeper background about how Schwab's and Fidelity's competitors say they're developing their own potential RIA referrals, along with how the two giant firms, members of their networks and other experts describe the programs.

And see other RIA Leaders 2023 coverage:

Whatever happened to Pershing and Citi’s collaboration?

Some competitors have tried to start similar programs over the years, with no evidence of success. BNY Mellon's Pershing, the third largest custodian after Schwab and Fidelity, had planned in 2010 to collaborate with Citi on referrals of high net worth banking customers to outside RIAs, according to news reports back then. It's not clear what became of that idea, and representatives for Pershing didn't respond directly to questions about it.

Pershing’s technology

BNY Mellon's Pershing views its digital arm, Pershing X, and its recently launched platform, Wove, as "an industry-defining platform that enables financial advisors to service their clients like never before, ultimately helping advisors help more people," Ben Harrison, Pershing's head of wealth solutions, said in an email.

Altruist’s idea in the works

Startup RIA custodian and technology firm Altruist intends to roll out some form of a lead or referral process next year, CEO Jason Wenk said. The process of finding lodging for a trip on Airbnb is a more "two-sided marketplace" model than the Schwab and Fidelity referrals, he said, and is more like what Altruist has in mind.

"We've built some early prototypes," Wenk said. "It should be much more fair for advisors as a whole and for consumers. … The gating mechanism in many respects should not be the size of the firm."

Axos program under development

Axos Advisor Services already sends leads to RIAs from its parent firm's online bank, Axos Financial, according to Mike Watson, a senior vice president and head of RIA custody at Axos. The company plans to create a referral program that "puts the advisor first," he said.

"We will look to offer a more formal program at some point," Watson said. "I don't want to just check the box. I think there's an opportunity to really disrupt this industry referral program and look at it through a much different lens."

SEI’s approach

Referrals from existing clients represent a much bigger source of new clients than any leads from custodians, according to Shauna Mace, a managing director and head of practice management for asset management, custodial and investment technology firm SEI. She cited research about advisory practices' organic growth compiled by SEI and InvestmentNews. Additional assets from a firm's current base are a "huge opportunity" for RIAs as well, Mace said.

"There's some really interesting low-hanging fruit," Mace said. "Certainly growing with new clients is really, really important. There may be opportunities within your existing clients, as far as new assets that you may not be managing today."

Brokerages and accounting firms have leads, too

For the advisors who are part of the Schwab or Fidelity RIA referrals, the critics are missing the amount of resources they devote to the referrals and the similarities with alternative sources of leads such as accounting firms or other brokerages, according to Brian Holmes, the CEO of Los Angeles-based Signature Estate & Investment Advisors. He compared the Schwab and Fidelity programs to a dentist sending a patient to a specialist for a root canal.

"It requires an infrastructure investment on our behalf, because you need to be able to handle the higher-end clients and the time it takes to work with the more sophisticated clients," Holmes said. "The revenue that comes in is beneficial, but there are infrastructural costs."

Returns on investment

Members of the Schwab Advisor Network, like Downers Grove, Illinois-based JMG Financial Group, invest time and resources toward converting the leads into clients, Chief Client Solutions Officer Oscar Cantu said in an email.

"An early-stage or smaller RIA may find that they just don't have the time or resources to dedicate as they focus on building out their core business," Cantu said. "You will get out of the referral programs what you put in. Results from the referral program may not also be immediate, or linear, in terms of time and effort dedicated and spent. It takes time to build relationships and processes that will help you earn referrals and ultimately gain new clients. I have seen several small firms prosper and mature into the Schwab referral program over time."

Overreliance, in some cases

Some experts warn that the referrals come at a substantial cost with other potential drawbacks. The leads "can be so incredibly powerful and helpful," but they're "not for everyone," according to John Wernz, the executive-in-residence for private equity firm Great Hill Partners.

"These programs can produce such large flows that it, at times, can drown out other opportunities for organic growth," Wernz said. "Most of the big firms have multiple channels. A firm that is growing organically only through referral programs is not ideal for either party."

History of the programs

Referral programs operated by Schwab, TD Ameritrade and Fidelity have been sending clients to RIAs for decades now.

Schwab's program, the oldest of them, started in 1995. Nine years later, the referrals displayed a close rate of 42% while bringing a net inflow of $4.6 billion to the RIA participants in a single quarter and $6 billion in 2003, according to a 2004 article in Investment Advisor magazine.

At the time, the company then called TD Waterhouse had 175 RIAs in its referral network, Schwab's program had 325 members, and Fidelity connected clients with 150 participating advisory firms. Fidelity didn't even begin charging RIAs a fee for referrals until 2012. Nearly 20 years ago, Schwab charged participating RIAs an annual fee of $10,000 plus 15% of their management fees for converted clients, with a penalty of 75 basis points on assets transferred to another custodian within five years of the referral.

Schwab’s view

"Managing the number of referral program participants helps foster quality investor referrals for those in the program and has historically been key to program success," Schwab spokeswoman Kerstin Österberg said in an email. "There are always more qualified firms than can be accommodated based on the number of quality investor referrals. That said, the program and its participants are continually evaluated and adjusted in response to market and investor needs. This program operates first and foremost to meet the needs of the investor and we want the referral process to be successful for them on every level."

Fidelity’s view

"For clients whose strategies might benefit from additional, specialized wealth management services, Fidelity's Wealth Advisor Solutions platform can match clients with third-party RIAs to fill those needs," Matt Kwartler, head of wealth advisor solutions for Fidelity Institutional, said in an email. "This can include unique investment strategies, tax compliance for individuals, families, and small businesses, and small-business advisory services, amongst others. Fidelity advisors work to understand clients' unique needs, provide solutions based on their financial goals and give guidance on how to select an advisor that best meets them. Centered around our client driven approach, Fidelity's WAS program identifies a number of firms who can provide specialized services to participate, which allows clients opportunities for growth and access to top solutions."