RIAs worried that Charles Schwab's decision to again up its asset minimum for client referrals may consider putting a little distance between themselves and the Schwab brand.
That was just one step wealth management consultants were recommending advisors take following news this week that Schwab plans to require clients to have at least $5 million in investable assets to be referred RIAs in its Schwab Advisor Network. The new asset floor, first reported by the industry publication CityWire, more than doubles the current minimum of $2 million and is set to take effect on Jan. 5. It comes after Schwab raised the minimum from $500,000 at the start of the year.
For RIAs worried that the change is intended by Schwab to keep more clients for itself rather than send them to RIAs in its referral network, there are several steps to take, according to industry consultants.
Tim Welsh, the founder of the consulting firm Nexus Strategies, and William Trout, the director of securities and investments at Datos Insights, recommended firms look at:
- How close they've aligned their brand with Schwab. Advisors whose clients tend to think of their prime relationship as being with Schwab may want to consider providing a little more distance.
- Ways to achieve more organic growth. RIAs in Schwab's network may have come to rely on it too much for referrals and should start looking for other ways to secure assets from new or existing clients. Advisors should consider building relationships with accountants, estate planners, insurance specialists and other professionals who can send them business.
- Forming partnerships with other firms with referral networks or that can safeguard client assets with custodial service offerings similar to Schwab's.
- Offering services that Schwab's in-house financial advisors can't easily compete with. These include tax planning, providing access to alternative assets and planning for different generations of the same family.
What Schwab's referral network does, who it benefits
Nearly 150 RIAs now belong to the Schwab Advisor Network. Their membership allows them to receive referrals of Schwab clients in search of more advanced financial planning services. Schwab, in return, receives not only assets it can hold in custody but also fees set as a percentage of the assets member firms have under management.
From its start, the referral network was touted as a way for Schwab to bolster its revenue while providing RIAs with clients whose needs exceeded what its own internal advisors could meet. But a series of recent changes to Schwab's policies have begun to raise concerns that the firm is more intent on competing with its RIA partners than sending them clients.
Schwab said in a statement that more than half of the clients referred to RIAs through Schwab Advisor Network have $10 million or more in assets.
"Increasing the referral minimum to $5 million aligns the program with where it is seeing the strongest growth and how clients are engaging with it today," Schwab said. "Schwab remains deeply committed to the independent advisor community and to the Schwab Advisor Network. We will continue investing in SAN as an important part of how we help connect clients with specialized advice and independent fiduciary guidance.
Besides the changes to its client asset minimums for referrals, Schwab has raised the fees it charges advisors in its network and announced that it was using AI to allow its in-house advisors to work with more clients with less than $1 million in assets. Welsh, who was at Schwab from 1999 to 2006, said the firm is clearly trying to make more money from client assets in a bid to generate more revenue or replace revenue streams that may be going away.
"They're saying: We need investment management revenues, basis points," Welsh said. "So the first order of business is: Stop giving it to advisors. And that's why they're cranking these minimums up."
AI putting billions of revenue at risk
Worries about Schwab's bottom line are being partly driven by AI. In recent earnings calls, industry analysts have raised concerns that technological advances could eat into Schwab's and other brokerages' lucrative business of handling clients' uninvested cash.
Schwab and other firms now make billions from taking this money and moving it over to banks, where it can be lent out at relatively high rates. AI threatens that revenue by raising the possibility that client cash may one day be managed by digital agents capable of automatically ensuring it's always producing the highest possible returns.
Schwab CEO Rick Wurster has also said that assets managed by financial consultants in the firm's Schwab Wealth Advisory unit generate three times the revenue as assets held by regular retail investors. Wurster has also noted that only 5% of the investors using the firms' services now pay for financial advice but nearly a third have indicated in internal polls that they are willing to.
"Our opportunity to close this gap is a win-win for clients and Schwab," he told analysts in July.
Why is Schwab raising its referral minimums?
Schwab executives have tried to assuage RIAs' competition fears by saying there is $37 trillion in household wealth for advisors to manage and suggesting that's more than enough to go around. Trout of Datos said he thinks Schwab's previous $2 million asset minimum was "too porous."
It allowed clients that Schwab could have serviced with its own in-house advisors to be referred to outside RIAs. At $5 million, it's only referring clients that large RIAs are better equipped to accept.
"Schwab gains two things," Trout said. "One, more $2 million to $5 million assets staying in-house where Schwab controls margin, deposits, and ancillary revenue. And, two, reduced brand visibility of RIAs in the sweet spot where independent advice is most threatening."
Welsh, though, sees a different message in the firm's recent changes.
Welsh said he thinks Schwab's plan is to make Schwab Advisor Network more and more restrictive until eventually it virtually ceases to exist. He noted that before Schwab raised its client asset minimum to $2 million in January, it had remained unchanged for more than two decades.
"They're going to eliminate the program in the next two to three years," Welsh said. "That's what I think. Just because, why would you go from $2 million to $5 million so fast? You do that and then see what happens. Nobody left? Okay, cool. Now it's $10 million. Still OK? Well, now it's over."
