Candor Financial Solutions, as a consultant to individual investors, continually searches the San Francisco Bay Area for the highest quality advisors we can find. As part of our search, we review SEC filings of RIAs and record fee schedules in our proprietary database. RIAs are required to identify solicitation arrangements including participation in referral programs such as Schwab’s in their form ADV filing with the SEC. Schwab’s ADV provides disclosure of the terms of these referrals.
As of December 31, 2011 there were 124 Bay Area registered investment advisors (RIAs) in the Candor Financial Solutions database. Of those, 16 advisors identified themselves as participants in the Schwab Advisor Network (SAN). All but one of those advisors provides a detailed fee schedule. A $2 million account size was selected for our example because it is the highest minimum account size of participating advisors (3 advisors have a $2 million minimum) allowing all advisors to be included in the analysis. Of the 108 non-participating advisors, 13 are excluded from the study because their minimum account size is above $2 million and 13 are excluded because they do not charge fees based on assets under management or do not disclose their fees. An additional 18 advisors were excluded because they did not meet Schwab’s criteria* for inclusion in the program. All of the remaining 64 RIAs are included in the comparison.
The average annual fee charged by these advisors for a $2 million account is 1.09%. The average charged by the eligible advisors not participating in the program is 0.94% for the same size account. Besides the average fee premium of 0.15%, we find it noteworthy that the lowest fee among the SAN participants is only 0.04% below the average of non-participants. The next lowest fee is 0.06% above the average of non-participants indicating that the fee premium is consistent.
Beyond the averages, we found several interesting anecdotal data points. In two cases, a principal of an advisory firm left to start a new firm. In each case the new firm does not participate in the Schwab program and charges less for a $2 million account (0.20% in one case and 0.15% in the other) than the Schwab Advisor Network participant for similar services.
One of the SAN participants emphasizes Dimensional Fund Advisors’ (DFA) low cost funds in a low turnover investment strategy. The fee charged by this advisor is equal to the highest of its peer group of 12 eligible DFA centric advisors in the database and is 0.13% above the average of the group for a $2 million account. This investment strategy provides Schwab very little in revenues relative to other advisors beyond the SAN participation fee. The DFA strategy is underrepresented in the program (1 of 16) compared to the broader universe of advisors (12 of 64).
The SAN participants were more likely to emphasize individual securities (10 of 16) in their portfolios than non-participants (13 of 64). The larger number of holdings and corresponding turnover is likely an indication of greater revenue to Schwab of these recommended advisors.
*Schwab’s criteria for SAN participation includes a fee based business model, 7 years of experience, $50 million of assets under management, a professional designation or additional experience (10 years), appropriate licensing, registration and a business relationship as a client of Schwab.
The information in this study is believed to be accurate but has not been audited and cannot be guaranteed.