WEALTH MANAGER-Schwab’s branch-blanket plan draws fears, sneers

* Schwab plans chain of branches with independent advisers

* Faces management challenge of quality control

* May compete in back yards of full-service competitors

NEW YORK, March 23 (Reuters) – Charles Schwab Corp’s
(SCHW.N: Quote, Profile, Research) plan to deepen its already solid imprint with
investors by opening offices run by independent brokers has
competitors worried but skeptical about its ability to execute
the complex strategy.

Schwab Chief Executive Walter Bettinger gave tantalizing
but sketchy details of the plan in February, leading analysts
to conclude that the firm is experimenting with an inexpensive
way to extend its bricks-and-mortar presence across middle
America by splitting costs with advisers.

The discount brokerage giant, which this week said it will
pay about $1 billion to buy rival optionsXpress (OXPS.O: Quote, Profile, Research)
to keep active investors within its fold, hopes to launch the
independent branch program in the third quarter but gave few
other details about its operation or targeted audience.

“It’s a bold move,” said Timothy Welsh, a former Schwab
marketing executive who owns consulting firm Nexus Strategy.
“This brings a new competitor to the marketplace.”

Analysts are having a harder time reading the tea leaves,
and some worry that Schwab could risk control of its carefully
groomed image and profits if independent affiliates operate
with too much autonomy. Schwab until now has faced the public
through about 300 employee-operated branches and client service
centers whose employees follow controlled scripts.

If it recruits independent brokers who typically gravitate
toward selling annuities and other high-commission products it
risks corrupting Chuck Schwab’s image as “the man who
reinvented the brokerage industry and has preached a set of
corporate values that place the customer first,” Sanford C.
Bernstein analyst Brad Hintz said in an e-mail.

If it hires fee-based registered investment advisers, or
RIAs, who typically eschew product sales, it risks antagonizing
some of the 6,000 RIAs it already serves through its lucrative
Advisor Services division.

“Any move into traditional retail represents a major
branding challenge,” Hintz said. “Chuck needs to tread
carefully around this action. I’m skeptical.”

CHANNEL SURFING

Mark Tibergien, the head of Bank of New York Mellon Corp.’s
(BK.N: Quote, Profile, Research) Pershing Advisor Services, sees the strategy as an
effective way for his competitor to buttress its already
formidable machine for selling mutual funds and other products
directly to individuals rather than through intermediaries.

“They’re opening up another flank in pursuing the retail
client,” said Tibergien, a former consultant to RIAs.

Schwab expects to focus on the same investors with $50,000
to $250,000 of investable assets that it currently solicits and
seed each new independent office with referrals of 25 to 50
customers from within its system, Bettinger said in his
presentation.

Still unanswered are questions about the quality of
advisers it will be able to recruit, how it will compensate
them and share costs with them, and how it will manage
conflicts between the new offices and its existing branches and
RIA clients.

A Schwab spokesman declined to comment or give further
details on the plan.

Rebecca Pomering, chief executive of Seattle-based Moss
Adams Wealth Advisors LLC, said her firm’s nine fee-based
offices tend to service wealthier clients than Schwab targets
but worries that Schwab-branded independents will make it more
difficult to distinguish her firm from the low-frills model
Schwab helped invent.

CHANNEL CONFLICTS

Independent investment advisers, who provide about half of
Schwab’s net new assets and last year fueled close to a third
of its revenue of $4.2 billion, have an image of servicing
wealthy individuals and families but many also work with the
upper end of the merely affluent clients targeted by Schwab,
said Tibergien and others.

“How can you say you are not competing when you have a
force of independent advisers under the Schwab brand,” said
Philip Palaveev president of Fusion Advisor Network, a
consultant to independent broker-dealers in Elmsford, New York,
who’s affiliated with a network of independent advisers. “The
worst wars are always the civil wars.”

Eric Schwartz, chief executive of independent
broker-dealer Cambridge Investment Research, said Schwab may
focus its recruiting on disaffected lower-tier brokers from
full-service companies such as Bank of America Corp.’s (BAC.N: Quote, Profile, Research)
Merrill Lynch and Morgan Stanley (MS.N: Quote, Profile, Research).

Those brokers may embrace the Schwab imprimatur to attract
lower-end clients their current firms eschew, said Schwartz.
Big firms like Morgan Stanley have been cutting pay for brokers
who generate less than $300,000 of annual fees and commissions.

But that recruiting strategy, too, has complications.

“The concern is the quality of the advisers,” Welsh said.
“You don’t want a little producer in there. You are giving them
the keys to the castle.”

EDWARD JONES REDUX?

Others believe Schwab’s independents will most directly
irritate smaller national firms such as Raymond James Financial
(RJF.N: Quote, Profile, Research), Stifel Financial (SF.N: Quote, Profile, Research), Ameriprise Financial (AMP.N: Quote, Profile, Research)
and Edward Jones – which has more one- and two-person offices
spread across the U.S. landscape than any other broker-dealer.

What’s certain is that no one is taking the plan lightly.

“Anytime Schwab does anything, all competitors have to look
at it carefully,” said Schwartz, who had an ill-starred venture
offering brokerage services to Schwab’s RIA clients. “They have
been masters at having multiple channels.”
(Reporting by Helen Kearney, Editing by Jed Horowitz)

WEALTH MANAGER-Schwab’s branch-blanket plan draws fears, sneers