The RIAs working with the industry's largest custodian don't manage their trillions of dollars in client assets like they're ordering off a fast food menu.
But the costs for the 16,000 registered investment advisory firm using Charles Schwab as the custodian to safeguard $5.2 trillion in client assets do have some similarity to choosing among an ice cream shop's thousands of combinations of flavors, numbers of scoops and toppings. The specific costs for each RIA come down to a negotiated formula that Jalina Kerr, the managing director of advisor services with Schwab Advisor Services, compared to "about 2,000 different flavors" of customized bills that vary from the basic rates of the
"That is because we try really hard to meet the advisors in the place that they value, while making sure that this is a win-win relationship," Kerr said in an interview. "That negotiation happens, and it is a very personalized negotiation between the advisor and our sales team."
Without going into specific numbers, Kerr noted that the fees come down to "profitability modeling" that includes factors such as the amount of assets that RIAs custody with Schwab, their mix of securities in client portfolios and which products or services they use, as well as each advisory practice's particular priorities.
And those numbers add up. With more than 35 years as a custodian to independent financial advisors, Schwab has over 3,000 professionals focused on servicing RIAs, with upwards of 120,000 active daily users in the Schwab Advisor Center and 235 third-party technology integrations aiding the handling of 2 million data files every day.
So Schwab represented an excellent subject for Financial Planning's first story in a series on the services, fees and business models of the wealth management industry's custodians.
As it and every manner of advisory firm, fund company and service provider seek to win and retain business from advisors and clients across the industry,
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Cost and relative cost
And that context adds another layer to the touchy subjects that come up on a regular basis for the biggest custodian in the business. At any time, those could include service or technology headaches, the traditional conflict between Schwab's direct retail wealth management business and its RIA services and
"It has to make sense for them, just like it does for every custodian," he said. "If I'm an advisor, I'm not overly thinking the exact cost down to a penny. Now, you need to understand the cost, but the reality is that any of the big custodians are very competitive with each other. They have to be competitive with costs. That's probably not going to be what causes advisors to choose one custodian or another."
Instead, those particular decisions come down to any number of factors among the tens of thousands of RIAs weighing a custodian's costs against its services. Representatives for Schwab broke the firm's services down into the "foundational operational and administrative functions required to hold and service client assets," along with advanced planning and wealth capabilities, business and growth resources, and advocacy for RIAs. For its clearing and custody arm, the revenue generation stems from transaction costs at base rates outlined by the price guide, shareholder servicing expenses paid by fund companies for client reporting and other data and the interest revenue on client cash.
And the reason that the costs vary for each RIA has much to do with what the firm's pricing guide calls "basic pricing" and "alternative pricing." The latter "are generally lower" rates involving "commissions; account, transaction, and service fees that clients and/or advisors pay to Schwab; and/or credits, rebates and cash payments that are made to clients and/or advisors," it said. So-called soft dollars that provide "research, software, technology, information and consulting services and other products and services" for free or at discounted costs that "may be based upon a commitment" by an advisory practice to custody a minimum level or type of assets can also enter into the mix. And the other fine print in the explanation of alternative pricing displayed the stark, specialized nature of Schwab's cost negotiations with RIAs.
"The terms of alternative pricing that apply to you can be based upon the nature and scope of business that your advisor transacts with Schwab, including the current and expected future amount of your advisor's client assets that are custodied at Schwab, the types of securities in your advisor's client accounts and/or the expected frequency of your advisor's trading," the guide states. "Alternative pricing terms also consider research and other products and services that Schwab provides to your advisor and/or whether your advisor declines to pay service fees to Schwab, such as in cases where an advisor's aggregate client assets at Schwab do not meet a certain threshold. As a result, the commissions, fees, credits, rebates and payments for your account(s) held with your advisor can be higher or lower than those of other clients of your advisor and/or those of clients of other advisors."
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Issues small and large
Advisors are required to disclose their conflicts of interest and the costs to clients from any service providers when they open their accounts, Kerr noted. Differences between "our rack rate" listed in the price guide and the negotiated price in Schwab's work for RIAs often come down to advisors telling its sales team, "'Here are the parts about it that are the most important to me that I need to maximize for my clients,'" she said.
In that vein, the company pushed back the new $5 advanced order handling fee for certain large block trades to June 1 from March 2 in response to feedback from advisors and outside turnkey asset management program (TAMP) firms that requested more time to adjust. The orders in question frequently amount to trades that are 40 times bigger than the average retail transaction — a size that "could substantially move this underlying security" in one fell swoop that entails the work of "really experienced traders" from Schwab's block desk, Kerr said.
"The complexity of these orders has continued to grow," she said. "We want to make sure that we're able to continue to deliver that experience to clients who are relying on us to use it."
On the whole, she said that Schwab has heard from advisors that they prefer its current approach to expenses and
"Advisors are very, very careful to say, 'Let's understand near-term and immediate needs, and let's understand intermediate and long-term needs,'" Kerr said. "It is a way that we generate money on our business, so that we can continue to invest in the breadth of capabilities that advisors want us to have as their custodian."
RIA owners like Kevin Thompson, the founder of Fort Worth, Texas-based 9I Capital Group, have come to understand that exchange.
Cash operations like lending enable Schwab to be "effectively, using client money for free and making a nice risk-free spread on the assets, which in turn allows us to receive free ETF trades, and no-cost custodial relationship in regard to our RIA," Thompson said in an email. "The reason there is not a ton of disclosure is because there truly aren't a ton of fees through Schwab. You may have to pay for a mutual fund trade here and there, depending on the size and liquidity, or maybe some options trades, much like TD Ameritrade did, but outside of that, there is not much to it."
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Another lens for examining fees
However, that also means that many advisors may not see "a lot of incentive to shop around" outside of Schwab, according to Bob Veres, the journalist and entrepreneur who writes "Inside Information" and runs the Insider's Forum conference. Newer and growing competitors are pitching their value to advisors based on technology, though, Veres noted in an email.
"Schwab offers the bare basics plus iRebal, which they will eventually start charging for," he said. "But SEI, TradePMR and especially Altruist offer a lot more. There's a lot of talk in the fintech world about what features should be included in the custodial platform versus what should be added on independently."
A listing of technology tools that Schwab sent to FP included a "customizable end-client portal," portfolio management tool Portfolio Connect and trading software Thinkpipes alongside the iRebal rebalancing capabilities. The latter two components came to Schwab through its 2020
Regardless, Kerr said that the competition to Schwab "keeps us sharp" and focused on "going beyond custody" to advanced planning resources, consulting and any area where the firm can add value for RIAs.
"There are so many interesting things that we at our size and scale need to make sure that we are helping to bring to the market in a responsible way," Kerr said. "We realize that our size is an advantage, yet we also need to use that size to spark some speed and advance things in the way that we know we can on behalf of the industry."
The whole conversation around fees, then, touches upon newer concepts she brought up such as artificial intelligence, cybersecurity and cryptocurrency. And it also extends into longer-term trends such as the so-called race to zero fees for trades or the larger expense compression for funds in general over recent decades, Wales noted.
Advisors and their clients must take it all into account when picking a custodian and deciding whether the costs match the benefits.
"Unfortunately, from a client's perspective, you don't always know what's going on behind the scenes," Wales said. "I don't care what you call this fee. What value am I getting, and what fees am I paying in total for that value?"
