Many details about Charles Schwab’s folding in of competitor TD Ameritrade remain undetermined or undisclosed, but another part of the plan for their custody businesses has been finalized.
On Monday, Schwab began notifying RIAs if they were selected to participate in its new advisor referral program, a combination of Schwab’s existing one and another that came with the purchase of TD Ameritrade. Most RIAs received good news that they made the cut. Many did not.
Out of 298 RIAs that participated in the old referral programs, 175, or a little more than half of the firms, have been invited to participate in the new one called the Schwab Advisor Network, Nicole Bonar, the program’s director, told RIA Intel.
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Relationship managers began reaching out to RIAs that custody with Schwab and/or TD Ameritrade on Monday. The outreach continued Tuesday and could possibly extend into Wednesday, the company said.
“It was a challenging body of work because we had way more qualified advisers than we really had space or opportunity to support and to service our branch network,” Bonar said.
Schwab acquired TD Ameritrade for $26 billion in a deal that closed last fall and changes began shortly after, only weeks into potentially a years-long merger. Schwab laid off employees and said it planned to close roughly 200 TD Ameritrade branches, leaving it with a total of about 400 branches between the companies (many just a few miles from each other).
At those branches, financial consultants introduce investors with additional needs (such as more complex investment management, tax planning or trust services) to independent RIAs that are part of a referral network. But fewer branches, overlapping territories, and a dedication to maintaining the quality of the referral program for investors, Schwab, and RIAs, meant the opportunities for referral relationships needed to nearly halve.
“I think it was very fair to say it was a difficult process,” Brad Losson, national managing director of Relationship Management at Schwab, said.
Schwab’s referral program began in 1995 and had between 168 and about 180 firms since Bonar began leading it five years ago. To better serve clients, Schwab’s branch managers request help finding local RIAs to work with. Bonar’s group then seeks out local candidates to pair with the branch.
To qualify, an RIA must be managing a total of at least $250 million custodied at Schwab and/or other companies. It must also have licensed or designated professionals based on the services it offers (for example, if it does financial planning, the RIA needs to at least have a CFP overseeing others).
Once an RIA is identified as a potential fit, it interviews with the local branch manager and consultants. They might meet once or 10 times over the course of months — however long it takes to determine they understand the RIA and build a rapport. If an RIA wins the approval of the branch, they submit a formal application and begin a thorough due diligence process.
RIAs approved to join the network then effectively share the clients with the financial consultants who refer them. Both wealth managers maintain relationships with the client and communicate with them, as well as each other. In exchange for the referral, advisors pay a fee to Schwab that is an average of 25% of whatever fee they charge the client. (For example, if an advisor charges a 1% fee on assets they manage, they pay 25 basis points for that referral.)
Why would any advisor jump through hoops and pay a fee to do this? It’s proved to be a powerful way to grow a wealth management business.
In 2020, Schwab referred 14,000 households to its network of RIAs and 7,000 of them became clients. An effort in recent years to improve the quality of the network and the referral process has helped the conversion rate grow 15% year-over-year, Bonar said.
Wealth Enhancement Group is a fast-growing, Minneapolis-based firm with $30 billion in assets and often associated with its prolific acquisition of other wealth managers. But 25% of the company’s growth stems from investors sent from a referral network. The company was part of both Schwab’s old program and TD Ameritrade’s AdvisorDirect, and it is part of the new referral program. (About 35 RIAs were part of both old programs like Wealth Enhancement Group.)
Jeff Dekko, the chief executive of Wealth Enhancement Group, said he has heard of referral programs contributing much higher percentages of growth at other RIAs, which have built themselves specifically to leverage those potential client relationships.
He said it is unclear what impact the absence of TD Ameritrade’s separate referral network will have on the volume of clients introduced to Wealth Enhancement Group. Some RIAs seem to feel entitled to referrals, Dekko said, but he has a different approach. In the case of referrals, Dekko views Schwab as a client of Wealth Enhancement Group, which is helping the company take better care of its clients. “I don’t think all firms have that approach.”
Entitled or not, some RIAs whose growth depends on referrals to any degree were disappointed this week.
Losson said reactions to Schwab’s new referral program have been mixed from RIAs who were and weren’t invited. Some were disappointed, he acknowledged.
But RIAs have always come and gone from the programs and Schwab has made it a point to help those departing find other ways to grow.
The program itself is always evolving, too. The Schwab Advisor Network doesn’t change overnight, but it’s materially different than it was five years ago when Bonar took it over, according to Losson. “We always have an eye to the future,” he said. “The program will look different five years from now than it does today.”
Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.