Schwab and Fidelity referrals give certain RIAs business, deal others out

Financial Planning's RIA Leaders 2023

In May 2021, financial advisor Keith Beverly met with Charles Schwab Head of Advisor Services Bernie Clark to discuss the company's registered investment advisory firm referral program. Beverly, the co-founder and chief investment officer of Washington, D.C.- and New York-based Re-Envision Wealth, called on Clark to launch an "emerging RIA program" consisting of "an initial cohort of five to 10 BIPOC-owned RIAs" that would get client referrals from Schwab. 

Financial advisor Keith Beverly
Financial advisor Keith Beverly is the chief investment officer of Washington, D.C. and New York-based Re-Envision Wealth.

Referral programs — in which companies give leads on potential customers — bestow new business to the firms that are able to convert the leads. Referrers can include existing clients as well as lead-generation businesses, accountants, lawyers, matchmaking services and, crucially for advisors, the direct retail wealth arms of Schwab and Fidelity Investments. Referrers often collect a fee, and their leads represent an important source of incoming clients. 

For years, Beverly has been criticizing Schwab Advisor Network and Fidelity Wealth Advisor Solutions — the referral programs run by Schwab and Fidelity — over the lack of access for Black-owned firms and smaller companies to the programs, a major boon to the giant RIAs. 

He and Clark exchanged emails a couple of weeks after their meeting, but nothing else came of the encounter, according to Beverly. Today, Beverly and other planners at RIAs that have fewer assets under management than the several hundreds of millions of dollars required to be considered for Schwab's and Fidelity's referrals remain shut out of the pool of prospective clients. The setup illuminates the disparities of a field in which Beverly and Re-Envision co-founder Anna N'Jie-Konte are aiming to build the first Black-owned RIA with $1 billion in retail client assets, he said.

Beverly believes that "several of the larger firms" would support helping more Black- and other minority-owned RIAs tap into the referral streams flowing from Schwab and Fidelity. 

"It would be great if they spoke up and supported some type of program or effort to make it more accessible and equitable," he said.

The number of RIAs getting referrals through the Schwab and Fidelity programs is shrinking, while the quantity of critics and competitors is expanding. However, the thinning group of about 150 to 200 of the largest RIAs point out that they pay significant amounts of money to Schwab and Fidelity for the influx of customers and invest time and resources into converting the prospects and collaborating with the financial consultants at a level that belies any notion that the new business is simply handed over to them.

Still, Schwab and Fidelity face more competition in an industry increasingly fragmented between large and small RIAs and obsessed with organic growth outside of M&A deals and recruiting. The firms' rivals are raising questions about the conflicts of interest that come with the rarefied access to the programs. Others wonder whether the Schwab and Fidelity brokerage and wealth units will build out their own businesses to the point that they'll no longer need to send clients to outside RIAs.

"In practice, the advisor referral programs these days are less about 'choosing to participate' and more about 'being chosen by the custodian to participate,'" said Michael Kitces, the co-founder of fee-only planner service XY Planning Network and billing and payment technology firm AdvicePay and head of planning strategy for St. Louis-based Buckingham Wealth Partners, in an email. 

Kitces doesn't work on the teams responsible for Fidelity and Schwab referrals at Buckingham, but his prior advisory firm was part of both programs, and his involvement with the custodians' marketing earlier in his career helped him become familiar with them.   

"Because they've been so successful in driving growth to RIAs on the platform, the platforms have become significantly more selective in who they choose to allow to participate," Kitces said. "It makes sense for the custodian — in the end, the firms that have the best capability to execute and generate results will be the mutual winner for all involved (it's a win for the advisor, and the custodian that economically participates as well). But it means advisory firms don't just get a choice of 'oh, I think I'd like some of those referrals now.'"

Charles Schwab location
A Charles Schwab branch in San Antonio sits in the parking lot of a shopping center. The company's RIA referral program is called the Schwab Advisor Network.

How the referrals work
Lower numbers of RIAs are paying for outside referrals — whether as a result of not making the cut or spending on the hiring of employees to handle them — according to the Securities and Exchange Commission. Only 27% of RIAs told the regulator that they compensated anyone besides a company employee for client referrals in 2020, down from almost 45% in 2009, according to numbers included in the marketing rule adopted by the SEC three years ago.

That smaller share suggests "an overall decline in client referral activity," yet the data "is also consistent with employers shifting their solicitation activities in-house," the SEC stated in the rule.

Schwab and Fidelity made only certain information available and gave no interviews in response to Financial Planning's inquiries about their referrals. Disclosures from the companies' websites and official RIA brochures, news reports from recent years, and discussions with 11 advisors, wealth management executives and other experts provide the best available picture for FP's annual RIA Leaders issue of how the programs work to dole out lucrative business opportunities for highly sought clients.

The Schwab network consists of about 200 "prescreened independent advisory firms nationwide" in which advisors have an average of 12 years of experience, and many are certified financial planners, chartered financial analysts or certified public accountants, according to the firm's website. The criteria for membership include tenure, amount of managed assets, professional education and a minimum $500,000 investment by the customer. Clients get "a customized referral" for "expert guidance in investment management, financial planning, insurance, tax strategies and estate planning," the website states.

Fidelity requires its "carefully selected and evaluated" RIA referral members to manage at least $500 million in client assets, charge advisory fees and be in good standing with either the SEC or state securities regulators, its website showed. As part of the program, the firm's representatives identify two or more outside RIAs that meet a client's specifications, offering customers the ability to view all of their assets in one place with "continued support" from their original broker, according to the website. The firm recommends outside RIAs for "specialized" investment advice and services. 

Outside of a Fidelity branch in New York, a pedestrian walked by one of the firm's locations. The company's RIA referral program is named Fidelity Wealth Advisor Solutions.

Each of the firms uses referrals to maintain relationships with clients whose needs in investment management, advanced planning, estates, trusts and other areas go beyond what's available in their branches nationwide, according to John Wernz, the executive-in-residence for private equity firm Great Hill Partners. He joined the company in June after spending 13 years as chief marketing officer and interim chief growth officer with Plymouth, Minnesota-based Wealth Enhancement Group, an RIA with over $70 billion in client assets that participates in both the Fidelity and Schwab referral programs.

The programs stemmed from a "realization that there were services that clients may need that were not able to be delivered at scale by Schwab and Fidelity," Wernz said in an interview, describing the referrals as "a great way to keep the client with Schwab and Fidelity" on the custodial side. "Firms that participate need to fill a gap or a resource that those clients are looking for," he added.

Those ranks have fallen in recent years at Fidelity and at Schwab, which consolidated TD Ameritrade's former AdvisorDirect referral program into the Advisor Network after its acquisition of the former rival in 2020. At Fidelity, the names of only 68 participating RIAs appeared on its website in September — down from 84 in December 2020 and 75 in June 2021, according to a report that year in CitywireRIA. Schwab cut participating RIAs to 175 from 298 that were previously part of it or TD Ameritrade's referral programs, RIA Intel reported in 2021

The network has contracted further to 152 participating firms, according to Schwab spokeswoman Kerstin Österberg. Out of that group, 89 of the firms have at least one woman among their principals, and 79 of the RIAs "have one or more minority owners (self-reported)," Österberg said in an email. 

Last year, Schwab's retail wealth unit referred 21,000 households to RIAs. About 12,000 converted into clients of the RIAs, or a rate of 57%. The referral network extends to firms ranging from more than $715 billion in assets under management to as little as $250 million, a requisite minimum that "represents the level at which Schwab can consistently expect firms to have dedicated compliance staff and other operational risk controls that we consider to be critical if we are to refer clients," Österberg said.

Schwab and Fidelity RIA referral programs by the numbers

Competitors and critics
For rivals of Schwab and Fidelity, though, the referral process casts doubt on their ability to remain the dominant custodians. Startup RIA custodian and technology firm Altruist works with more than 4,000 advisors since launching four years ago, according to CEO Jason Wenk.

The Schwab and Fidelity referrals are "really, really opaque" and revolve around the RIAs that display "the highest likelihood of closing the business" and the resources to be able to pay the "very high" prices, Wenk said in an interview. Custodial referrals represent one aspect of doing business in an industry that's ripe for disruption, he said. 

"The failure is that it's still really hard for the average person to find and work with a high-quality, fiduciary advisor," Wenk said. "You've got this industry that for the most part still caters to the top 1%. There are still a lot of problems in America with the massive wealth gap, and if you want to solve that, you have to start with the infrastructure layer."

Axos Advisor Services is another smaller custodian that was once known as Trust Company of America before Morgan Stanley acquired its then-parent, E-Trade, in 2020 and spun it off a year later. The firm now has about $25 billion in assets under custody across 250 RIA clients, according to Mike Watson, its senior vice president and head of RIA custody. Watson was formerly the director of institutional sales at TD Ameritrade, where he was involved in the firm's RIA referrals and gained familiarity with those of Schwab and Fidelity, he said in an interview. 

"They say, 'It's reserved for our best clients,' and what that really means is their biggest clients," Watson said. "The RIA clients that close the most business in the fastest period get the most referrals."

The cost of winning over the incoming clients, plus the "25 basis-point haircut on the advisory fee," should cause advisors "to begin to contemplate the profitability of participation," according to Ben Harrison, the head of wealth solutions at Pershing. At the end of the second quarter, Pershing had $2.4 trillion in assets under custody or administration, according to the latest earnings statement of its parent, BNY Mellon. 

"Scarcity premium is the fuel that ensures referral programs sustain," Harrison said in an email in response to a question about the concerns of smaller RIAs. "Increasingly the discounters are moving upmarket and providing comprehensive planning and advice. We've seen an emergence of Private Client offerings launching."

Other critics argue that Fidelity and Schwab should simply broaden their referrals to more RIAs. 

Beverly of Re-Envision Wealth has asked Schwab and Fidelity to invite more of the disproportionately small number of RIAs owned by advisors who are Black, Latino or other minorities to their referral programs. He modeled his proposal for a pilot group of minority-owned RIAs on programs to help boost diversity among the asset managers selected by asset allocators at pensions, endowments and other institutions. 

In the email to Clark and other Schwab officials, he laid out suggested criteria for the emerging RIAs to have at least two advisors with more than 10 years of experience with professional designations and clean regulatory records. In addition, the firms would agree to training and coaching sessions with Schwab. 

Fidelity and Schwab should find ways to "relax some of these inherent barriers that you have simply off of size and not due to expertise or skill set," Beverly said in an interview. He further posed the idea of pooling groups of advisors to boost their overall capacity to manage the referral process "as opposed to excluding all of us," Beverly said.

"To the extent that they're providing that support to firms that are not diverse, then they're putting us in a disadvantageous situation," he said. "They could replicate what large institutions have done around more fair representation and greater equity."

A TD Ameritrade Holding Corp. Location Ahead Of Earnings Figures
People walk by a Chicago location of TD Ameritrade. The company's RIA referral program was called AdvisorDirect.

The two firms may already be getting more queries from RIAs about how they stack up against competitor custodians. The merger of TD into Schwab "has opened the door for other custodians to come along" among some RIAs that may be "looking for a new partner who can be better aligned" with them, said Stephen Caruso, senior analyst in the wealth management practice of research and consulting firm Cerulli Associates. "There are going to be some new entrants to the custodial market trying to gain some market share," he said.

How the companies describe referrals
Representatives for Schwab and Fidelity emailed statements that partially answered some of FP's questions about their referrals and addressed criticisms that smaller firms are shut out of them. Schwab also connected FP with one of the RIA members of the Schwab Advisor Network: Downers Grove, Illinois-based JMG Financial Group

Schwab selects RIAs for participation "through a thoughtful and strategic evaluation process that includes a multifaceted review focused on investor needs and the footprint of our retail branch network," Österberg said. Schwab representatives "talk to clients about their specific needs before making a customized referral," she said. The firm combined its Advisor Network with TD's former AdvisorDirect referrals in April 2021, according to Österberg. While the transaction closed in 2020, Schwab has been folding TD into itself in waves over several years.

"Managing the number of referral program participants helps foster quality investor referrals for those in the program and has historically been key to program success," Österberg said. "There are always more qualified firms than can be accommodated based on the number of quality investor referrals. That said, the program and its participants are continually evaluated and adjusted in response to market and investor needs. This program operates first and foremost to meet the needs of the investor and we want the referral process to be successful for them on every level."

Fidelity's RIA referral network has consolidated its ranks amid industry M&A and chooses the prospective advisory firm for the client households based on their needs, regardless of the size or owner of a firm, according to the company. It didn't directly respond to Beverly's criticism of the demographics of the participating firms, beyond providing a link to the firm's annual diversity and inclusion report. Last year, 43% of Fidelity's new hires were "people of color," a survey of employees showed that 86% "believe Fidelity creates a culture of inclusion," and the company boosted its spending on diverse suppliers by 30% to $350 million, the report said. 

"For clients whose strategies might benefit from additional, specialized wealth management services, Fidelity's Wealth Advisor Solutions platform can match clients with third-party RIAs to fill those needs," said Matt Kwartler, head of wealth advisor solutions for Fidelity Institutional. "Fidelity advisors work to understand clients' unique needs, provide solutions based on their financial goals and give guidance on how to select an advisor that best meets them." 

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An exclusive, pricey group
With the number of SEC-registered RIAs setting a record at more than 15,000 in 2022 and the smaller group of around 2,800 fee-only advisory firms that meet FP's criteria for the RIA Leaders ranking, the referral members comprise a small portion of the industry. 

"It can be a pretty strong referral program for advisors who leverage it correctly," said Caruso of Cerulli Associates. "There's definitely some rarefied air there to be a part of that network."

Firms make considerable amounts of ongoing payments in exchange for referrals that turn into clients. Fidelity collects "participation fees" of 0.10% of fixed-income holdings and 0.25% of other assets, plus an "annual program fee," according to its website. At least two participating RIAs' Form ADV filings put the amount of the latter payment at $50,000 a year. If the accounts leave either firms' custody, the RIAs must pay a termination fee that's sometimes called a "non-Schwab custody fee" of a portion of the departing assets, according to Form ADV filings. In Fidelity's program, that fee is a payment of 0.75% of the assets transferred to a different custodian, the members' Form ADV brochures stated.

Schwab collects participation fees from Advisor Network members using "a blended rate" that's an average of several tiers of pricing tied to the amount of the total referred assets in a household, according to Österberg. She shared the example of a household with $10 million in referred assets, noting that the RIA's ongoing fee to Schwab would be 18.5 basis points — 0.25% for the first $2 million, 0.20% on the next $3 million and 0.15% on the last $5 million.   

The largest RIAs are willing to pay those costs, as they derive significant business from those referrals. Wealth Enhancement Group CEO Jeff Dekko told RIA Intel that a quarter of the growth of his then $30 billion firm came from referral networks and that other firms get an even larger percentage of their expansion from them. 

In a lawsuit filed last year by former Creative Planning Director of Wealth Management Stephen A. Greco against Creative, Fidelity, Schwab and TD, Greco said that he had submitted a whistleblower complaint to the SEC asserting that TD's AdvisorDirect accounted for 60% of "all new business" at Creative before 2017 and 30% to 40% after that year. (Creative Planning and the other defendants have denied Greco's allegations and are seeking to toss the lawsuit.) 

Since the referrals come with a conflict of interest that incentivizes firms to keep the client assets in Schwab or Fidelity's custody or face the termination fees, participating RIAs like Mariner Wealth Advisors, Beacon Pointe Advisors and Creative Planning disclose their relationships in their SEC Form ADV brochures. Beacon Pointe and Mariner are part of both the Schwab and Fidelity programs, while Creative Planning is a member of only Schwab's. 

Representatives for these three RIAs declined requests for interviews about the referrals, with Beacon Pointe citing a policy against commenting on business relationships, Creative Planning saying that CEO Peter Mallouk did not have time and Mariner stating no specific reason.

They're part of a who's who of large RIAs getting referrals from Schwab and Fidelity. The group listed on Fidelity's website includes Captrust, Cerity Partners, EP Wealth Advisors, Mercer Global Advisors, NewEdge Wealth, Sequoia Financial Advisors, Invesco Managed Accounts, William Blair & Company, Spire Wealth Management and CIBC Private Wealth Management.

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How members describe the programs
Advisors with the firms that are part of the referral programs praise their effectiveness, even as they note that changing leads into clients takes a substantial investment of time and resources. Foster City, California-based Bailard, an RIA with $5.5 billion in client assets, gathered more than $1 billion through Schwab Advisor Network referrals dating back to 2010, according to Michael Faust, the firm's president of wealth management.

Sometimes RIAs are "part of the program and just expect the 'if you build it, they will come' kind of thing, and that's just not how it works," Faust said in an interview. His company has successfully converted leads by gaining more knowledge about which branches use referrals the most and how best to work with the Schwab financial consultants, Faust said.

"You have to really tighten your story because you're selling the FCs and the branch managers, but then you have to get in front of the client as well," Faust said. "You want to be known and make it easy for them to think of you, but you also don't want to be too narrowly typecast."

Oscar Cantu, JMG Financial Group
Oscar Cantu is the chief client solutions officer of Downers Grove, Illinois-based JMG Financial Group.

JMG Financial has been part of Schwab's Advisor Network since 2018, but principal and Chief Client Solutions Officer Oscar Cantu declined to say how much business has come to his firm as a result. JMG Financial has 36 advisors and $5 billion in client assets. The RIAs devoting time and resources to their referrals get "rewarded with the most success" in the programs, Cantu said in an email.

"I often find that RIAs view referral programs, such as Schwab's, as the potential main driver of their future client/AUM growth," Cantu said. "I would challenge that thinking and would argue that results that come through referral programs such as SAN should be viewed as a nice accretive addition to a firm's core organic growth but should not be the main driver of growth."  

Los Angeles-based Signature Estate & Investment Advisors receives referrals from both Schwab and Fidelity as part of a business spanning 54 advisors with $18.5 billion in client assets. Brian Holmes, the firm's CEO, declined to state any metrics on the amount of business the firm has generated through its relationships with Schwab and Fidelity.

"To be a success in the program, I can tell you that having a team approach and working with their advisors is essential," Holmes said. "It's a collaborative effort with their advisors to work with their higher-end clients. Very rarely is it a handoff."

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