Despite what they say, Schwab's competitors will follow suit, says Schwab. Schwab Advisor Services (SAS), formerly Schwab Institutional, told about 900 advisors who'd dialed in for a conference call last week that it was sticking with its February 2009 decision to stop taking custody of alternative assets -- and that its rivals would probably be following suit.

SAS, the largest custody provider for independent RIAs, says that about 36% of the 5,500 or so advisories it works with use alternative strategies or structures including hedge funds, funds of funds, promissory notes, structured products, REITs and various other investment partnerships.

Surrender

But with regulatory scrutiny set to become far more intense -- and compliance more onerous -- in the aftermath of the Bernard Madoff scandal, SAS wants to cork the flow of new alternative assets as a more efficient alternative to a massive gear up for the coming onslaught, according to James McCool head of Schwab's Institutional Services division, which includes SAS.

Schwab is excluding from its ban on alternative assets those it took took charge of before a recent deadline and those derived from the 30 or so third-party hedge funds on its own Alternative Investment Source and Alternative Investment Access platforms. But it has upped its documentation requirements for these programs as well, instituting an approval process that can take several weeks and a lot more paperwork to complete.

In the call McCool and SAS's sales head Bernie Clark regretted the suddenness of the February announcement and said SAS needed to work more efficiently with custodians SAS-affiliated advisors select to custody of alternative assets.

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

Pants on fire

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.

In fact, Fidelity has reiterated its commitment to providing custody for alternatives.

"There is no doubt that risk management will play a more important role in the advisor-client relationship, especially when it comes to alternative investments," Charles Goldman, head of platform strategy for FIWS, Fidelity's National Financial broker-dealer clearing subsidiary and its Family Office Services group, said late in March 2009. "As broker-dealers and advisors re-assess how they use this asset class, we remain committed to servicing alternatives and see a tremendous opportunity to help support them in this area."

Goldman used to work at Schwab Institutional.

But McCool said on the conference call that its competitors may have little choice but to follow SAS' lead -- and that talk to contrary may be prevarication. As a result he urged advisors to question other custodians very carefully about their capacity and "end-game" strategies for alternative-asset custody.

SAS is a unit of San Francisco-based discount brokerage Charles Schwab. -FWR

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