Charles Schwab Outlines Fundamentals for Investment Advisor Independence

Thursday, August 27, 2009 11:00 am PDT



Public Company Information:


SAN FRANCISCO--(BUSINESS WIRE)--A persistent undercurrent of uncertainty at the full-service wirehouse brokerage firms has been a game-changer for many financial advisors this year, prompting record moves to the independent registered investment advisor (RIA) channel. To help these advisors successfully transition to independence, Charles Schwab today announced its latest whitepaper, A Case for Starting or Joining a Registered Investment Advisory (RIA) Firm.

The shift in momentum is palpable: as of June 30, 2009, 74 advisor teams transitioned to independence this year with Charles Schwab as their custodian, up 54 percent from the 48 teams who made the change in the first six months of 2008.

“Advisors overwhelmingly have told us they believe the independent RIA channel is the best way to provide better service to their clients as well as achieve the potential for greater long-term financial success for themselves,” said Barnaby Grist, managing director of strategic business development for Schwab Advisor Services. “In fact, 98 percent of recently independent advisors surveyed tell us they would do it again. We want to help advisors who are considering a transition to determine whether a move makes sense for them.”

Drawing on case studies, industry research, financial modeling, and Schwab’s deep experience with transitions, the report examines the economics of independence, the advisor’s options for moving forward, as well as the role of the custodian. Schwab also reports on the new level of interest from advisors in joining established RIAs, as well as the steady pace of mergers and acquisition activity among RIA firms.

Economics of Independence

Inside the report, a worksheet allows advisors to compare the financials of starting an independent advisory firm versus accepting a forgivable loan from a wirehouse, bank or similar institution. The report notes that owners of top RIA firms can earn 69 to 73 percent net compensation, or owner’s income plus profit, less expenses for non-owner professional salaries. The average RIA owner typically earns 60 to 65 percent net compensation. The high net compensation and equity for the independent firm owner compares favorably to the payout structure offered by traditional wirehouses, banks and independent broker dealers, particularly over the long-term. According to Schwab and industry data, buyers of RIAs typically value such firms between six and 10 times cash flow, or between 1.8 and 3.5 times revenues, with the largest multiples typically applied to firms with at least $500 million of fee-based assets.

Moving Forward with Independence

The report examines the primary reasons advisors are choosing the independent channel, highlighting that control and reducing perceived and actual conflicts of interest are key drivers. In 2008, recently independent advisors surveyed by Schwab said that providing more personalized service and the opportunity for greater long-term financial success were two motivators for starting their own firm. Seventy-five percent said the ability to work for oneself was a main reason to go independent.

Today’s advisors can choose the path to independence that best fits their business goals, risk tolerance and practice. The report outlines the considerations of joining an existing RIA for advisors who do not want to create a new firm. It also breaks out key start-up expenses for those who believe that forming their own firm is the best option.

“Advisors have several routes to consider as they chart a course to independence, and these options can be overwhelming without a guide,” says Grist. “Our goal is to help advisors successfully capitalize on the dynamic nature of the independent channel and provide them with information so that they can select a path that they feel is best suited for them and best supports the interests of their clients.”

Custodial Support

For advisors who are uncertain about their partners in the independent channel, the report explains that the custodian’s role in supporting the RIA extends well beyond simply holding and protecting investors’ assets. To help advisors better grasp the services that can be available to them, the report reviews the many types of support that Charles Schwab provides in the areas of products, business management, technology and service.

About Charles Schwab

The Charles Schwab Corporation (Nasdaq:SCHW) is a leading provider of financial services, with more than 300 offices and 7.6 million client brokerage accounts, 1.5 million corporate retirement plan participants, 619,000 banking accounts, and $1.3 trillion in client assets. Through its operating subsidiaries, the company provides a full range of securities brokerage, banking, money management and financial advisory services to individual investors and independent investment advisors. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC,, and affiliates offer a complete range of investment services and products including an extensive selection of mutual funds; financial planning and investment advice; retirement plan and equity compensation plan services; referrals to independent fee-based investment advisors; and custodial, operational and trading support for independent, fee-based investment advisors through its Advisor Services business segment. The Charles Schwab Bank (member FDIC) provides banking and mortgage services and products. More information is available at (0909-10522)


Charles Schwab
Alison Wertheim, 415-667-0475
Makovsky & Company
Alyson Nikulicz, 212-508-9616

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