Schwab Institutional's assets under custody grew 4.5% in the first quarter, and the company's president said the industry's scandals and investigations played a role in some of the asset gains.
"I think the issues with scandals and the mutual fund issues have actually helped us," said Deborah D. McWhinney, president of Charles Schwab Corp.'s institutional division, which works with independent investment advisers. "Schwab has remained so independent from all of that. Our customers have wanted to get closer to Schwab through these scandals."
The investment industry is trying to regain its footing after nine months of scandal, investigations and reform measures that have cost it $2.3 billion in fines, fee reductions and disgorgement of profits, but Schwab has barely felt the turbulence.
"This past year has not been tumultuous" for Schwab, McWhinney said. "Since the middle of the first quarter of 2003, we have really gotten the sense that advisers are gaining traction in terms of defending their portfolio. Their clients are seeing that these advisers helped them weather the storm."
Enormous' First Quarter
McWhinney said the institutional unit of the San Francisco brokerage company had an "enormous" first quarter this year. It surpassed $300 billion of assets under custody on behalf of 5,000 adviser firms and their 1.2 million client accounts. Schwab Institutional holds 30% of the more than $1 trillion of assets in the custody of its parent.
The institutional division had $287 billion of assets under custody at Dec. 31, more than 29% better than the $222 billion at the end of 2002. Market appreciation in their advisers' assets accounted for more than half the asset growth in the first quarter, the company said. The remainder was net new assets.
"We have fared better than wirehouses and other firms," McWhinney said. "We have really been able to begin to gain momentum despite the environment we are in. I think this speaks reams about the business model we have and the investment managers who work here. I think they have been able to win in a marketplace in spite of the issues that are out there."
She said Schwab institutional gained assets throughout the 2001 recession and the scandals that subsequently afflicted much of the brokerage and mutual fund industries because the company was up front with investors and elevated its service and trading throughout the past nine months. Analysts, however, said they were surprised, even nine months after allegations of trading abuses surfaced, that any fund company believes it could benefit from boasting that it is scandal-free. "The smartest fund firms are keeping their heads low right now,' said Kevin Daniels, a Boston analyst.
Geoffrey Bobroff, an East Greenwich, R.I., analyst, said Schwab institutional may be scandal-free, but its parent is not untainted. In November, Charles Schwab released a statement to employees and shareholders admitting it had found instances of market timing within its Excelsior Funds involving five institutional clients. The company said new management that joined the fund family in the summer of 2002 found the instances of market timing and began to identify and terminate the arrangements before trading scandals at other fund firms became public.
The company fired two salespeople at its U.S. Trust subsidiary in November for allegedly trying to destroy documents related to the regulatory inquiries. New York Attorney General Eliot Spitzer continues to consider prosecuting some of these employees on criminal charges.
Business as usual
Bobroff said the industry has learned that most investors, other than those directly affected by abusive trading, have moved on. "No one is embracing the firms that have been implicated, but people have not stopped investing," he said. "Job security is better, and investors are just more willing to move back into the markets."
McWhinney, who worked at Bank of America for 17 years before moving to Schwab three years ago, said it is crucial for companies to be upfront with customers to illustrate that they have a handle on all their lines of business.
"Over the last couple of years, going back to Enron, we have been good about posting information for our customers," she said. "It is critical to illustrate compliance but even more critical to show that you are constantly reviewing your business." McWhinney said Schwab Institutional is not content with the results. The unit plans to spend heavily during the next year, she said, to improve its technology platform.