Silicon Valley News

Sunday, February 15, 2009

iGriot: Solutions to financial crisis: Go west young man

Charles Schwab (SCHW) gained $22 billion in new client assets during the fourth quarter. The online broker got over 200,000 new 401(K) plan participants and brought in an unprecedented $13 billion in assets from disgruntled investment advisors who left other firms. This is probably an ongoing trend given the disillusionment with Wall Street wire houses. Over the past five years, assests transferred to Schwab from other companies has quadrupled.

Registered Investment Advisors (RIA) are "the fastest growth channel in the wealth management business today," said Fred Tomczyk, the new TD Ameritrade CEO, at a recent conference for bank investors in New York.  The disaffected brokers mostly come from the large wire house firms such as  Morgan Stanley (MS), Merrill Lynch, UBS (UBS) and Smith Barney.  Schwab now supports some 5,500 RIAs, more than any other firm.  The San Francisco broker is talking with about 400 prospects who manage some $35 billion, according to Bernie Clark, senior vice president of sales at the firm's advisor services unit. Clark says that about $600 billion of assets controlled by brokers moves from one firm to another each year - mostly between wire houses. Schwab anticipates gaining $50 billion of this traffic.

Two  UBS brokers, Paul Weinstein and Nadine Wilkes, left the outfit in 2008 because of the way it handled the controversy over auction rate securities, reports the Financial Advisor.  The investments were promoted as cash equivalents, but turned out to be frozen assets.  The two said they left the wire house business altogether because their  clients were defecting, unhappy with UBS and its handling of the auction securities. "Certainly there are plenty of advisors who feel incredibly frustrated, sold out if you will, and really lost confidence in the senior management at their firms, particularly Merrill Lynch and Smith Barney," says Mindy Diamond, a headhunter with Diamond Consultants in Chester, New Jersey. "Those would be the top two, particularly because (the advisors there have) seen their entire deferred compensation, which is their wealth accumulation, blow up. They've lost confidence in senior leadership and they felt people were asleep at the wheel. That's a common complaint."

In 2009, Schwab will be offering exchange-traded funds (ETF) for the first time.  They will be competing against other big ETF firms, including Barclays, State Street and Vanguard. The only ETF mentioned specifically in Schwab's Securities and Exchange Commission filing will be similar to State Street's Dow Jones Wilshire 5000 Index. 

CEO Charles Schwab, in a 2007 interview with Money Magazine, was asked what financial advise he would give to young people. "Buy index funds and ETFs. That might not seem like enough action to a 25-year-old, but its the smartest thing to do." Schwab's conservative strategy prevented it from getting involved in risky investment banking and has not received any TARP bailout funds. Schwab pioneered discount online stock trading. Its more expensive full service Wall Street brokerage competition is in disarray.

Today  many big Wall Street brokerages are under the big tent of the still solvent large banks. New York bankers and brokers do not seem to have learned from history. The failure of New York's Bank of the United States in 1930 is seen by many historians to have started the collapse of the banking industry during the Great Depression. The Bank of the U.S. had heavily invested in real estate, which helped lead to its downfall. Milton Freedman and Anna Jacobson Schwartz called it the biggest failure in American banking up to that time.
"Go west, you man" is a quote made famous in an 1865 editorial by Horace Greeley.  In 1841, he launched the New York Tribune, which he used to espouse his political views including western settlement. Perhaps we should look to the west for ideas about solving todays financial crisis!