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Tuesday, July 11, 2000

Advisor Anxiety

Reported by Paul Braverman

The faint grumbling you may have heard on the street are members of the Schwab AdvisorSource program kvetching about the inclusion of U.S. Trust in the program. Why give a referral to them when it can be made to U.S. Trust, which essentially means keeping it in-house?

Call it coincidence, but the grumbling comes even as Schwab has released a new policy, promising a "level playing field" between U.S. Trust and independant advisors. Schwab says that their will be no incentives for branches to refer clients to U.S. Trust, and that client information from existing AdvisorSource members will be kept confidential from U.S. Trust. But that's not enough to reassure many AdvisorSource members.

"There's no way to possibly deny that the acquisition of U.S. Trust brings into the Schwab organization many of the same services that the members of AdvisorSource provide," says one advisor intimately familiar with AdvisorSource.

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Ron Rutherford of Rutherford Asset Planning agrees. He's a member of an advisory committee to AdvisorSource, a group of advisors that meets every month to give Schwab feedback from the advisor community. "It seems like a conflict to me," he says. Although Schwab never put the issue on the agenda at one of the meetings, he raised it anyway. The response: "There was no answer," he said.

But John Coghlan, vice-chairman and president of the Schwab institutional group, says he hasn't heard much grousing from the membership. "I've had a lot of discussions with a lot of advisors," he says. He also denies that the policy was issued to quell discontent in the ranks. "We just want to tell the advisors what we're going to do and how we're going to do it," he says.

But referring an investor to U.S. Trust means keeping the advisory fee in-house. And isn't Schwab, a public company, in the business of maximizing profit to it's shareholders?

"That's not true," says Coghlan, who says that Schwab is trying to achieve a "balance between its stakeholders," of whom the shareholders are only one group. He insists that referrals will continue to be made solely on the basis of matching the investor with the most appropriate advisor.

To those advisors who believe Schwab has a fundamental interest in favoring U.S. Trust, Coghlan counters that Schwab has an even stronger interest in protecting the integrity of the program. "We've spent 25 years and billions of dollars building the reputation," he says. "It would be really stupid for us to give some sort of advantage to U.S. Trust that is not squarely aligned with the interests of the investor."

He added that Schwab has been careful to structure the compensation of its representatives so the receive the same compensation whether they refer a client to an advisor or to U.S. Trust.

But that isn't stopping the complaining. An additional source of discontent is that while many Schwab branches have a waiting list to join AdvisorSource, U.S. Trust has jumped the queue and is now included on the list at every branch. Coghlan explains the are a few "national" members of AdvisorSource, who are on the list of eligible advisors in every branch by default, and that U.S. Trust is now a member of that select group.

Other advisors believe that the program is under attack both from above and below. While U.S. Trust is stealing high-end clients, the Schwab Portfolio Consultation program is nipping at the lower-value accounts.

Portfolio consultations are done in Schwab branches and consist of two meetings with a Schwab representitive, where the investor is advised about investments and asset allocation. "AdvisorSource is supposed to be a portal from the branch to Advisors. All of a sudden, the branch is doing many of the same things that the advisors do," says Rutherford.

Not so, says Coghlan, explaining that a portfolio consultation doesn't provide the long-term, personalized service that an advisor does.

At the same time, he made it clear that advisors had better watch their back. The advisory space is becoming increasingly competitive, he says, and firms like Schwab, E*Group, Fidelity and Vanguard are usurping some of the functions formerly performed by advisors. He added that advisors had better "find new ways to add value to their service."


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