Cultural Fit?

have to confess that I’m worried.  I started worrying the minute I heard that the Schwab organization was acquiring TD Ameritrade, not on the consumer side (two entities that basically encourage people to trade themselves into bankruptcy, but not nearly as bad as newer entities like Robinhood).  My worries are on the custody side, where thousands of advisors are being swept into a culture they probably know little about.  I worry that Schwab’s internal culture is not completely compatible with the idealistic mindset of the planning profession—which is why we have never invited Schwab Advisor Services to exhibit at our annual conference.

I was the first and I believe the only writer in this space to call out the Schwab retail operation for “accidentally” sending solicitation letters to the clients of advisors on the platform.  I actually wrote several articles about it, naively believing that the company would stop once the practice was exposed, and then believing that after I wrote about other instances, there would be enough outrage in the community that the company would be forced to stop the practice.

Then there was the time I called into a Schwab retail office, asking for financial planning help.  I wanted to see whether the company was, in fact, referring people to advisors if those financial consumers needed more than access to trading.  The person on the other end (as I wrote) smoothly told me that the company’s retail services could handle all my needs in-house.  I asked about financial planning.  I told this person that I wanted personal advice.  I finally said flat out that I would like to work with a financial planner.  I tried to be persuasive, but I was not persuasive enough to get a referral to an independent advisory firm on the company’s referral program.

Not long after that, Schwab introduced some modifications to its referral program where the company cut itself in on a generous share of the AUM revenues from any referred client.  This seemed to me to be a pretty big conflict of interest, and I thought the terms would make it hard for the referred client to be profitable to the advisory firm.  The advisory firm does all the work of servicing the client and maintaining the relationship, and Schwab participates in the revenues.

This leaves aside the years of attending Schwab conferences, where company principals would address the persistent rumors that the company was going to shut down its custodial business for advisors and simply try to grab their clients.  I know about those rumors (I never raised them myself) because the company would address them, directly, in the opening remarks.  We would be told that the custodial business was profitable, that it accounted for a lot of the assets on the platform, and so it would be foolish for Schwab to abandon it.  I later confronted Schwab executives, telling them that this “commitment” felt less-than-reassuring.  Does that mean that if the custodial operations ever become unprofitable, your commitment to it goes away?

More recently, the introductory remarks and keynote sessions fete and feature the very largest firms with the biggest AUM assets, firms that are acquiring other firms at a rapid rate.  I keep waiting for the opening keynote to feature small advisory firms in these lovefests from the podium, but I am not holding my breath.

And, of course, the company has created its own franchise operation for aspiring advisors, an in-house operation that competes in the most direct possible way with the advisors who custody at Schwab.

I sometimes raise these issues in after-hours conversations with advisors, and they offer some valid rebuttals.  The first is: if I can’t compete with Schwab for clients, then I shouldn’t be in the business in the first place.  The second is: I understand that Schwab is a for-profit company, and they have the right to pursue their profitability the same as me.

Granted.  I don’t argue those points.  But I worry nonetheless, about something that I think is bigger than these issues.  I worry that a lot of advisors that Schwab regards as “small” are being pulled into a culture that not only doesn’t care about them, but which believes it might be able to get away with terminating them and then directly soliciting their clients.  I believe that the decision to properly service these “small” advisors will come down to numbers on a spreadsheet, which will show that the giant consolidators are more profitable to serve at scale than the annoying “little” firms that are constantly (who do they think they are?) asking for the same service levels as the big guys. 

I worry that there will be such a disparity in service levels that the smaller firms will be disadvantaged in the eyes of consumers.  The hours-long hold times that advisors have recently experienced when contacting their service teams can put a real dent in productivity.  When paperwork is lost due to incompetence or inattention, clients are going to notice and believe that there are troubling issues with the small advisory firm that they’re working with.

The Department of Justice allowed the acquisition to go through because it found that there is plenty of competition in the discount brokerage and custodial spaces.  I happen to agree.  I hope that advisors caught up in the acquisition will look around at these alternatives, and at the very least ask to see the custodial contracts that they ask affiliated firms to sign, and compare those with the contracts they will be asked to sign at Schwab. 

I know that most of you believe that cultural fit matters; that’s why you’re careful about the kind of people you hire, and the tech firms you rely on.  If you believe Schwab’s corporate culture matches your fiduciary, client-first, service-oriented mindset, and if you’re convinced that the company is committed to providing all advisors with great service and a good home regardless of scale, then by all means take the easy route of transitioning from TDAI to Schwab Advisor Services. 

If you’re the least bit uncertain about any of that, then I can assure you there are competing custodial options that will better fit your comfort level. 

I don’t want you to think I wish Schwab ill; instead, I’m writing this because if you run a small advisory shop under $500 million in assets and decide to move your client accounts to a more welcoming custodian, it’s possible that you would be doing not only yourself, but also Schwab, a favor.