Big custodian points to "recent events and anticipated regulatory changes". Last week Schwab's Advisor Services (SAS), formerly Schwab Institutional, told its clients that they would have to find new custodians for additional alternative assets.

"Recent events and anticipated regulatory changes in the financial markets have caused us to review our custody of alternative-investment securities and our areas of custodial focus," says a notice on SAS's website signed by its COO Trish Cox and its sales head Bernie Clark. "We have decided that instead of building highly specialized systems that can fully respond to anticipated and emerging regulatory requirements, it is more efficient and effective to rely on third-party custodians who specialize in handling these types of assets."

SAS is referring institutional clients to San Francisco-based Pensco Trust and Waco, Texas-based Sterling Trust as potential custodians for their alternative assets, but it pledges to "work with any custodian an advisor selects."

Schwab is excluding from the ban on alternative assets the 30 or so third-party hedge funds on its own Alternative Investment Source and Alternative Investment Access platforms.

In the offing

A group of SAS's clients contacted the custodian last week to complain of the move and ask it to reconsider, according to a report by Bloomberg. "This single decision by Schwab has many RIA firms, including ours, actively looking elsewhere for a long-term, supportive, full service broker-dealer partner," says the complaint, purported to have come from 22 RIAs that custody assets with SAS.

Although RIAs have grown accustomed to working with multiple custodians, they're unhappy about using more than one custodian per client -- mainly because it makes it more difficult to provide consolidated performance reporting, says John Shields of Mainstay Consulting Group, a Portsmouth, N.H.-based-based consultancy to financial-service firms.

"But you'd have to guess Schwab knew there would be some backlash," says Shields. "For a firm like Schwab to have made a determination like this, they'd have be looking at some risk or cost greater than the potential loss -- and there have to be people in boardrooms all over the country trying to figure out what [Schwab is] seeing out there."

Or it may be that SAS simply sees an influx of de novo RIAs coming its way this year, and wants a safer, more steamlined approach to alternatives in place as it busies itself boarding energetic, big-book ex-brokers and former private bankers. And it may be that it sees a few old-guard defectors as an acceptable price to pay for operational efficiency.

SAS's principal rivals -- Fidelity's Institutional Wealth Services, TD Ameritrade's Institutional unit and Bank of New York Mellon-owned Pershing's Advisor Solutions -- have yet to follow Schwab's new policy on alternative-asset custody.

Schwab declined to provide clarification of its policy on providing custody services for alternative assets.

SAS, recently amalgamated with Schwab Corporate & Retirement Services to form Schwab Institutional Services, provided custody, trading, operations and investment-product support as well as marketing, business-development and transition services to about 5,500 investment advisories at the end of 2008. SAS saw its assets in custody decline 18.3% to $477.2 billion last year. SAS accounted for about a quarter of Schwab's overall sales in 2008. -FWR

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