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Schwab Launches 3rd SMA Program for RIAs


Charles Schwab Corp. of San Francisco has launched its third separately managed account program catering to the needs of registered investment advisors (RIAs), which Schwab's institutional services division primarily supports with custody and operational support services.

What makes this managed account program different from the previous two is that it will, for the first time, give the RIAs exclusive access to the investment prowess of Schwab's U.S. Trust Co. investment managers. The new offering allows Schwab to directly leverage the talents of the proprietary wealth management firm that Schwab purchased in 2000 for $2.7 billion.

The program, dubbed Schwab Managed Account Affiliates, will initially make four equity investment styles available: large-cap value, focused small-cap value, mid-cap value and focused large-cap growth. Additional equity and fixed-income styles will be added one by one as investment advisors express a desire, said John Morris, senior vice president of Schwab.

Although equity account minimums are $100,000, the target client is the investor with a portfolio of investable assets between $500,000 and $1 million, Morris noted.

As for fees, Schwab is charging a 1% asset-based fee. However, Schwab will consider other assets investors have with the firm to allow for breakpoint discounts. For example, a client with $1 million in total householded assets with the firm would pay 86 basis points. Even after the registered investment advisor adds his/her fee (typically 75 basis points), the total 1.61% all-in fee is competitively priced to what most wirehouses charge SMA clients, he added.

New Avenues

The new managed account platform is a bit of a departure for both Schwab and U.S. Trust. For Schwab, it is the first time the company has offered a narrowly defined scope of managers all from the same firm, albeit its own subsidiary, and the first time U.S. Trust has been widely available on a Schwab managed account platform. "This gives registered investment advisors easy access to U.S. Trust products that they haven't had access to before," Morris explained.

For U.S. Trust, which is used to managing much larger sums of money for wealthy individuals and institutions, this new venture brings its investment management capabilities downstream to the less-affluent investor who would not have otherwise been able to tap the U.S. Trust talent.

"Schwab is trying to leverage the U.S. Trust brand name and prestige," said Burt Greenwald, president of B.J. Greenwald Associates, a fund consulting firm in Philadelphia. Some RIAs may not want to offer clients what

is essentially a Schwab proprietary product, for fear that they could lose business to the

brokerage firm. However, others are likely to embrace this rare access to U.S. Trust and will welcome the opportunity to tell their clients, "I can give you separate account management heretofore only available to the wealthiest individuals," Greenwald added.

That is a big plus for Schwab, but may represent more of an issue for U.S. Trust, he continued. The big question will be whether U.S. Trust's upper-crust customers will be annoyed about the firm chasing after small-potato clients and potentially diverting attention away from managing their money, Greenwald said.

It can also be a testing ground for U.S. Trust, which isn't used to catering to the mass affluent.

"U.S. Trust is looking to see how they can leverage their skills," Morris said. "But they also have to look at their economics. The services we provide can make their [products] available [more broadly]," he said.

Managed Account Appetite

Schwab has seen explosive growth in its managed account assets, as they have doubled from $10 billion to $20 billion in just two years, Morris noted.

Schwab launched Managed Account Marketplace, its first managed account program for RIAs, in 1998. The platform is the broadest of all three, offering access to 700 separate account managers and an unbundled arrangement. That puts registered investment advisors in the hot seat to do their own due diligence, identify which managers are best for which investment styles, and then negotiate investment fees directly with managers. Morris said that 80% of new assets have been flowing into this program.

In 2001, Schwab launched its second managed account platform, Managed Account Select. Under this bundled program, Callan Associates provides the due diligence and tracks about 40 different managers across various styles, Morris noted. Callan is an independent, employee-owned research firm based in Schwab's San Francisco hometown. Schwab is hoping to raise the number of managers tracked to 50 by the end of 2005. The program is used by investment advisors who prefer to have an objective firm provide manager due diligence, Morris said.

For its part, U.S. Trust appears to be on a separately managed account tear. In a Dec. 23, 2004 filing with the SEC, U.S. Trust announced that the trustee for its employees' defined benefit pension plan would be shifting assets out of various Excelsior Funds into separate accounts. U.S. Trust's $15 billion Excelsior Funds diversified mutual fund family includes 26 funds, five of which are money market funds.

The shift is part of a planned reallocation of plan assets expected to take place later this month. Five of the Excelsior funds are expected to see significant asset losses due to the shift, in excess of 5% of fund assets, the filing noted. The reason for the reallocation was not disclosed. U.S. Trust officials declined to comment.

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