Case for Starting or Joining Final Version for Online 081709

8/8/2019 Case for Starting or Joining Final Version for Online 081709

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a case for starting orjoining a registered investment

advisory (ria) firm



This Reprt was prce by Charles Schwab & C, Ic. (“Schwab”) a is itee slely

r ivestmet pressials. The Reprt is itee r geeral irmatial prpses ly

a is t itee t prvie acial, ivestmet, reglatry cmpliace, legal r tax avice,

a the irmati is t tailre t the particlar circmstaces ay reaer the Reprt

r their rm. I aiti t the srces te, the Reprt relies irmati prvie t

Schwab by the avisry rms a ivestmet pressials that participate i Schwab’s

research a iterviews. Schwab i t iepeetly veriy that irmati a Schwab

makes represetatis abt the accracy the irmati i the Reprt. I ddii, h

ri d ri h i ri d r did i h Rr

b rri hr wih iir ir r h ri r r ih bi.

Ay meti i the Reprt prcts, services r prcesses create r ere by aye

ther tha Schwab is t, a shl t, be cstre as a recmmeati, ersemet

r spsrship by Schwab. Y mst ecie whether t prchase r implemet these

prcts, services a prcesses a their apprpriateess r y r yr sitati.

This Reprt is t itee r se by ivestrs i evalatig r selectig a ivestmet

avisr r therwise. The Reprt relates slely t certai bsiess eterprise maagemet

practices the participatig iepeet ivestmet avisry rms. The Reprt a

Schwab’s research i t examie r veriy the ivestmet perrmace a cliet servicelevels thse rms. This Reprt is t a recmmeati r ersemet , reerral t,

r slicitati behal ay ivestmet avisr, whether r t ame r escribe i the

Reprt. Ivestmet avisry rms ame a escribe i this Reprt are iepeet a

t aliate with Schwab, a their emplyees a agets, iclig iivials ame i the

Reprt, are t emplyees, agets r represetatives Schwab.

Schwab Avisr Services (rmerly Schwab Istittial) is a bsiess segmet The Charles

Schwab Crprati servig iepeet ivestmet avisrs a icles the csty,

traig a spprt services Charles Schwab & C., member SIPC.

A CAse or stArting or Joining A registered investment Advisory irm

ImpoRtant DIsclosuRe



Bd dbk r hdrd dir idri ri r

jii Rird I adir (RIa) r, i dir

r ki h d qi h :

Wh’ h b dir d r i?•

Hw I “r-iiz” r rk-rd ?•

Hw wd I r wih h id d irrr i •

rr ir?

thi r r h i ib dir wh

b idri h r hir rr brkr-dr

ir. I i:

“n” i i h RIa d rd •

i hbrid r bk/brkr ir

ai hk (rib ) rd ri RIa•

th r h RIa di i rrd ri, rd,•

h, ri d ri

R w fw ri bw RIa di•

d brkr

oi ib dir/ bd ri hir w r•

Fid r r wh k

idd—d r r h wh did.

executIve summaRy

2

IntRoDuctIon

Momentum Shit to RIAs

6

aDvIsoR moDels to consIDeR

The Spectrum o Independence

Callan Capital: Taking Control o Your Destiny

What Is the Role o the RIA Custodian?

12

tHe economIcs oF InDepenDence

A Reality Check

Increased Earning Potential as an RIA

Comparing a Forgivable Loan With Starting an

RIA Firm

20

some Reasons WHy aDvIsoRs

cHoose tHe RIa moDel

Taking Control o Your SuccessManaging Conficts o Interest

RIA Firms Are Growing Faster

23

movIng FoRWaRD WItH InDepenDence

Joining an RIA Firm

Burns Wealth Management: Sharing Control o

Your Destiny

Start-Up Costs

27

ResouRces to ease tHe tRansItIon

Advisor Conversion Services

28

conclusIon

About Schwab Advisor Services

29

appenDIx: enDnotes




2

th bi ridi i di h rdi hd i r r. Wih

f i rrd b r r rid fi ir d di rk

dii,1 iri br i dir d r-r i’ r.2

a dir dir h r h ri .

IntRoDuctIon

Thse wh leave a bak/brkerage rm, wirehse r iepeet brker-ealer t

becme a Registere Ivestmet Avisr (RIA) te wat t imprve the service prvie

t cliets, expa their avice a prct erigs, a icrease their earigs

ptetial. Sme may be i trasiti-plaig me tryig t etermie the best way t

maximize the sale their revee stream at a later pit i their career. Still thers may

be itereste i evlvig their ee-base practice t ee-ly ver time a believe the

best chael r this evlti is tsie the bak/brkerage chael.

Cliets avisrs are te bsiess wers wh appreciate ig bsiess with ther

bsiess wers. Base eeback rm hres avisrs wh i recet years

starte their w rms r jie existig rms cstyig their assets with Schwab

Avisr Services,3 it’s t cmm r cliets t resp “What tk y s lg?”

whe learig that their avisr starte r jie a iepeet rm. What’s mre, a

verwhelmig 98 percet iepeet RIAs say i they ha t it agai, they wl

make the same ecisi t g iepeet.4

“Ater 16 years i the wirehse evirmet, I wate trasparecy. Whe I was with my

prir rm, we se t start every cliet meetig with a explaati why we were’t the

same as the big-ame wirehse r bsiess car—we were always tryig t ieretiate

rselves rm the traitial brker. I it rereshig that tay we ca talk abt r

btiqe iepeet mel. We ca talk abt cstmizati. We ca talk abt the service

mel a why we wet w this path i the rst place.”

—John Krambeer, President and CEO, Camden Capital Management



InTRoduCTIon

m shi RIa

The recet acial crisis a massive rm

csliatis have prmpte ivestrs t

qesti avisrs abt the stability

majr Wall Street rms that are hlig

their assets.5

While this crisis cecele may previsly happy avisrs t

actively research becmig iepeet

avisrs, the stage bega t be set r this

exs early a ecae ag. Sice the

early 2000s, Schwab Avisr Services

believes, may traitial wirehses may

have itetially create a ertile

evirmet r the ext geerati

iepeet avisrs.

t bidi

T begi with, may wirehses trasitie

rm simply accmmatig avisrs wh

wate t team p, t ecragig them t

parter i rer t better serve cliets a

esre ctiity whe a team member

leaves the rm.6 I this evirmet, a lly

ctial a cmpatible team that

becmes happy with its rm wiels a

sigicat amt leverage. Avisrs wh

have brae their team withi the cstrct

the wirehse have alreay create a

btiqe atmsphere similar t iepeet

practices, a are similar i atre t the

RIA mel.7

“Certai iivials a teams have evlve

their w btiqe bsiess mel. They

ee a mre cse slti.”

—George Dunn, Managing Director

Convergent Wealth Advisors

Institutional Group

a hi -bd bi

Traitial wirehses have als ecrage

the grwth ee-base accts i the past

ecae i rer t aitize revee fws

a maage sharehler expectatis rm

qarter t qarter. Fr example, the 2007

Focus on Growth bs prgram prvie

Merrill Lych acial csltats a

icetive t grw their ee-base bsiess.8

Avisrs with 80 percet t 100 percet

ee-base cliet assets er maagemet

are icreasigly realizig that “haircts”

these assets by wirehses ca be avie

by gig iepeet. This emphasis

ee-base accts erscres a

icreasig awareess hw RIA cstias

are cmpesate (see page 11). Thse

avisrs with a mre balace mix ee

a cmmissi bsiess may te vale

the versight a spprt a iepeet

brker-ealer a gig basis.

cidi

Cmbiatis majr baks a brkerages

i 2008 a 2009 have’t ispire a sese

stability r cliets r avisrs.9 Mergig

cltres, itegratig prcts/platrms a

recig expeses may heighte certaity.



4


Avisrs may eel iserachise by the

reteti packages they are ere (r t

ere), the treatmet team members i

reteti package calclatis, the chages

i leaership, a the rmre r actal

cmpesati pla chages. These avisrs

may be challegig their rms t wrk t

retai them by actively a smetimes

pely prsig ther ptis like gig

iepeet.10 ultimately, may avisrs are

t i ctrl their r their cliets’ estiies.

a rii i

The sb-prime a creit crises ctie

t be a majr srce cliet a avisr

rstrati. As sch, may avisrs a

teams have csiere a resh start byacceptig a rgivable la er rm a

cmpetig rm.11 others, wh have lke

carelly at the math a weighe the

mlti-year cmmitmet reqire as part

the la (see Exhibit 8: Cmparig a

Frgivable La With Startig a RIA Firm

p. 18), have pte t csier metizig

their revee by startig a RIA istea.

With a icrease i isgrtle avisrs a

with mre cservative bakig cltresicreasigly ifecig recritig plicy,

there is a grwig schl thght that

rgivable la amts will tre w rm

the heights reache i 2007 a 2008.12

o the ther ha, a emergig emphasis

r thse seekig iepeece is bilig

eqity i a bsiess witht epeig

clleages with ieret icetives.13

“o Agst 8, 2008, everye i The Crage

Grp let the saety et wrkig r a large,

bak-we, iteratial wealth maagemet

rm a mve several blcks w the street

t pe r rs as Crage Parters, LLC.

We let witht beig able t tiy r cliets

i avace, r ew space was t reay, the

phes were t wrkig prperly, the ritre

ha t arrive, r rmer rm was t helpl

a, a mth later, the eqity markets bega

the histric ‘waterall evet.’ We qickly leare

that a 80-hr wrkweek wl be a

vacati—a hw t srvive eergy bars

a bttle water. Five mths later, r cliets

appreciate hw we came t r ecisi a

ersta why r mve t iepeece

beets them. We have bee verwhelme by

the icreible armatis r cliets have

give s a are eve mre etermie i r

eicati t serve them. I am s please a

thakl t reprt that early all r cliets,

iclig all r majr cliets, have llwe

s t Crage Parters, which is eve larger

tha it was whe we eclare iepeece.”

—Ralph Courage, Managing Member

Courage Partners, LLC

The experiece Ralph Crage a Crage Parters

may t be represetative the experiece thers

a is t a garatee tre perrmace r sccess.



InTRoduCTIon

0

2005 2006 2007 2008

$3.3

$6.9

$9.2

$13.2

Source: Schwab Advisor Services

2

4

6

8

10

12

$14

C A G R

’ 0 5 – ’

0 8 : 5 8

p e r c e

n t

EXHIBIT 1: SCHWAB ADVISOR SERVICES NET NEW

ASSETS FROM ADVISORS TURNING INDEPENDENT

Assets under management (AUM in billions)cr i hiki

Thsas sccessl ee-base teams

a iivials are w i a psiti t

csier startig r jiig RIAs. The

Brker Prtcl create i 2004 by sme

the majr wirehses attempts t avi

cstly lawsits a Temprary Restraiig

orers (TRos) agaist epartig acial

avisrs. I a avisr resigs, takes

limite cliet irmati tlie i the

Prtcl a jis ather member rm,

the Prtcl may shiel them rm a

lawsit r TRo. Sice its icepti, may

RIAs have als jie the Prtcl,

eablig them t take avatage the

prtecti it rigially are wirehses.

shwb adir sri’ 58 r d rwh

r (cagR) i w r dir wh rb idd i hr rfi h rd

ri idd. ehibi 1 (b) rk dir/

i bk/brkr r r idd brkr-dr

r r ji RIa.




6

aDvIsoR moDelsto consIDeR

th sr Idd

I y wat t g iepeet, y have three basic mels rm which t chse:

• Pu riA: Start r ji a 100 percet ee-base RIA, sig iepeet RIA cstias.

•op hb l: Start r ji a ee-base RIA while aliatig with a iepeet

brker-ealer r trasacti bsiess, iclig -gig cmmissis a trailers.

•Cap hb l: Aliate with a brker-ealer with a crprate RIA a restrictis

RIA cstia access.

The chice mels typically epes the type revees the iepeet avisr

ears: Fee-ly avisrs may the pre RIA mel the mst attractive. Avisrs wh

chse t retai sme r all their cmmissis sally aliate with a brker-ealer i

what may escribe as a hybrid mel. Schwab Avisr Services prvies cstial services

t abt 1,500 RIAs that have pricipals r ther persel wh have liceses with

iepeet brker-ealers.

I d

Sme iepeet brker-ealers reqire assciate brker represetatives t se their

crprate RIA r therwise restrict them rm accessig iepeet csty a traig

platrms r their ee-base bsiess like thse ere by Schwab Avisr Services. other

iepeet brker-ealers, wh wrk with RIA cstias, have embrace a mlti-aliati

mel that allws their assciate brkers’ rms t set p their w RIAs a chse the

best platrm r their cliets.14

Still, it is becmig mre cmm r iivials a teams t ji as emplyees r rge

a strategic alliace with a existig iepeet RIA rather tha start their w. I act,

a icreasig mber RIAs are hgry t grw by aig avisrs a/r teams, eitherthrgh recritmet r acqisiti.15

Firms specializig i wership trasactis er a attractive pti as well r thse

seekig specic trasiti assistace a varis egrees peratial a practice

maagemet spprt. Whether as a btiqe r a hlig cmpay, a hal ivestmet

csltig cmpaies allw a avisr/team t receive p-rt cmpesati i retr r

a prti the tre revee stream.



callan capItal: taKIng contRol oF youR DestIny

“Schwab was itegral i itrcig s t vers a helpig s arrw r search r everythig

rm IT t perrmace mitrig t acial plaig stware. The Schwab cversi team was

critical i traserrig the accts cliets wh llwe s. We chse Schwab Avisr Services

becase its bra. They’ve bee i the bsiess cstyig RIA assets mch lger tha

aye else.”

—Trevor Callan, CIMA and CEO, Callan Capital , LLC

The experiece Trevr Calla a Calla Capital may t be represetative the experiece thers a is t a garatee tre

perrmace r sccess.

As Trevr Calla—CIMA a CEo Calla Capital, LLC i La Jlla, CA—stps r a mite i his ce verlkig

the Pacic ocea, he’s remie all the har wrk it tk t get here. He a his brthers, Tim a Rya,

cceive the iea jst sch a perch as early as 1994. They maage mre tha $150 milli i cliet assets

rm this chic, state--the-art ce—part Caliria mer, part ast-pace csltig rm a part yesteryear’s

Wall Street bllpe. oe ca’t help bt eel the Calla Brthers are ally where they always wate t be—i

ctrl their w estiy.

What was ce a lty gal became reality i Jaary 2007, whe the Calla team let its rmer wirehse rm t

start Calla Capital. There were may reass r this mve. Fr starters, the Callas wate t prvie tre pe

architectre r their cliets. “We spet a lt time at r rmer rm talkig abt pe architectre, bt i reality

we were ce t r rm’s platrm,” says Trevr. “Schwab es’t ce s t its platrm. Wrkig with a

cstia allws s chices we i’t have bere.”

Trevr’s team members als wate mre ctrl ver their cmpesati, which they elt shl be tie t their

iterests rather tha the iterests sharehlers the cmpay emplyig them. The iea creatig wealth by

wig the rm themselves appeale t them immesely.

“oe the tghest thigs i r rmer evirmet was stayig alige with the critical rm bjectives each

year,” Trevr recalls. “Fr example, we wate t market rselves as a team. Yet that was’t ecessarily what the

rm wate t see happe. We rselves stagatig. We’ cme p with a great marketig techiqe, bt by

the time we gt the g-ahea the pprtity ha cme a ge. S we became resistat t thikig tsie the

bx becase we were cstatly gig thrgh hps t get r iitiatives apprve.”

As a elite team cse high-et-wrth cliets, the Callas kew their ecisi t leave the rm wl’t g

tice. “The legal isses were the scariest part the whle prcess,” he explais. “There are may ecisis t

make whe leavig a wirehse. We pte t be very cservative a walke t, literally, with ly r pecils. As it

tre t, sch a exit rew zer legal implicatis.”



8


Wh I h R hRIa cdi?

RIA cstias mch mre tha hl

cliet assets. Schwab Avisr Services, r

istace, prvies varis levels prct,

bsiess maagemet, techlgy aservice spprt t cliet rms. ulike sme

iepeet brker-ealer mels, RIA

cstias view avisrs as clients—rather

tha spervise agets. As sch, avisrs

ca reely mve amg cstias a se

services as they wish.

sri

Thgh the ay-t-ay service prvie by

cstias is sally ivisible t the

avisr’s cliets, the level service a

iepeet avisry rm prvies t its

cliets is itegrally like t its cstias.

Base Schwab Avisr Services’ mre

tha 20 years experiece, the pprtity

t wrk clsely with a small grp service

represetatives is te cite as a key

avatage the cstia mel.16

“We have cme t kw a small grp

very capable service represetatives.

Schwab helpe s lear r l ti

what a service team meas. We have

may ries with Schwab wh ersta

what it meas t be best-i-class.”

—Felipe Luna, President, Wealth Management

Concert Global, LLC

The experiece Felipe La a Ccert Glbal, LLC

may t be represetative the experiece thersa is t a garatee tre perrmace r sccess.

Sice cstial services are s imprtat

t the ewly iepeet RIA, yr selecti

a cstial team is a imprtat chice.

The net Prmter Scre, geerate by a

sty i Je 2008 by Abt SRBI new Yrk

City, measres satisacti with prcts

a services ere by cstias.

The srvey reslts cite i Exhibit 2 ivlve1,000 RIAs maagig mre tha $10

milli as reprte i AdV ligs at the time

the sty. Schwab Avisr Services was

t ietie as the srvey spsr.

Hr’ hw i wrkd:

1. The 1,000 RIAs were aske hw likely

they wl be t recmme each cstia

Base (533)

Schwab

TDAmeritrade Fidelity

Pershing

(274) (219) (111)

EXHIBIT 2: NET PROMOTER® SCORE

-30

-20

-10

0

10

20

30

40

50

+47

-6-11

-30

Srce: Abt SRBI new Yrk City, Je 2008



AdVISoR ModELS To ConSIdER

they se t ther ivestmet avisrs a

scale rm 0 t 10, where 0 is “t at all

likely” a 10 is “extremely likely.”

2. The net Prmter Scre is the ierece

betwee the percetage “Prmters”

(wh respe 9 r 10) a “detractrs”

(6 r belw).17

Brd rd ri

Leaig cstias have spet ecaes

evelpig their ivestmet prct erigs

base the ees their cliets. Charles

Schwab & C., r example, is the th

largest prvier maage accts i

the u.S., with mre tha 2,300 maagers

available thrgh its platrm.18 Avisrswrkig with RIA cstias are t

cstraie by the maates a cetral

ivestmet selecti cmmittee a ths

ca mre reely select the prcts they eel

are best site r their cliets—which

meas they ca als establish aitial

cstia relatiships t access prcts

their “primary” cstia es t er.

“I was srprise t that we have accesst jst abt every brker-ealer’s research,

sice we have accts with mst the

majr rms.”

—Trevor Callan, CIMA, CEO

Callan Capital, LLC

The experiece Trevr Calla a Calla Capital, LLC



exHIBIt 3: tecHnology RelatIonsHIp

ehibi 3 hw rwrk r whih dir

r r. siir rd ibii, RIa r h

h rd hir w h hrh

rhir ir. adir r h

d ihr ir r hrh hd i d b

hird r.

m RIa di rid rdi r d rbi

ii hrh rrir r h ir wih

ri d r rihi

. adir ir i

i, rrh/wwir d hr i w.

CustodialSystem

Advisor

CustomerRelationshipManagement

PortfolioManagement



0


exHIBIt 4: scHWaB peRFoRmance tecHnologIes

I h w r, RIa di h iid h

r w idd dir b ri ird i.

shwb w prr thi’ pricr,

h w di ridr ri

ri—whih rir h ir wrki hrh

rhir r.19 shwb prisri™

i -ri bk- ri h h r

rii bi iii, idi ri ri

rr d bii i. ehibi 4 (b) riz h

prisri ri.

PrtliCeter a PrtliServices are prcts Schwab Perrmace

Techlgies (“SPT”), a part Schwab Avisr Services. Schwab Avisr

Services is a bsiess segmet The Charles Schwab Crprati a

icles the csty, traig a spprt services Charles Schwab a

C., Ic., a registere brker-ealer a member SIPC, as well as the pr tli

maagemet a acctig sltis SPT. CS&C a SPT are separate

sbsiiaries The Charles Schwab Crprati.

Portfolio Data

Management

Get consolidated

client data from

thousands of nancial

institutions, along

with management

of reconciliations,

nightly backupsand maintenance.

Performance

Reporting

Receive professional

quarterly presentations

to share with

your clients that

demonstrate the

value you provide.

Client Billing

Generate client billing statements electronically

and get help with uploading fees for

Schwab accounts and calculating

management fees.

PortfolioServices

Fr may avisrs, techlgy cstmizati

is key. Cstia platrms are te set p

t be cgrable t ay mber tsie

techlgy sltis. Iepeet avisrs

chse the best sltis base their

iqe ees.

pri r

h dir’ r

A avisr r team that rms r jis a

iepeet RIA rm that csties assets

with a RIA cstia are t emplyees r

represetatives , a ’t wrk r, the

cstia. That meas that they ’t receive

a “payout” rm the cstia.20 S there are

brach maagers impsig prcti a

grwth emas. Bt grwth is te still a

pririty r the RIA. As rms grw larger, their

ees te becme mre cmplex. Sme RIA

cstias er eicate teams t prvie

bsiess maagemet giace r cliet

rms, which avisrs ca chse t access.

Schwab’s Bsiess Csltig Services grp

has sigicat experiece helpig rms all

sizes, iclig mst the 55 rms with

mre tha $1 billi hel the Schwab

csty platrm as december 2008.



AdVISoR ModELS To ConSIdER

“I r pii, the techlgy, spprt a

me ivestmet chices available r

r cliets are vastly sperir i almst every

way t r l brkerage rm platrm. Bt

mst imprtatly, we have bee impresse

aily with the cltre a cmmitmet t

excellece.”

—Ralph Courage, Managing Member

Courage Partners, LLC

The experience o Ralph Courage and Courage Partners,

LLC may not be representative o the experience o others

and is not a guarantee o uture perormance or success.

Hw d h di k ?

S hw is a cstia cmpesate

r prviig the brkerage, csty,

techlgy a practice maagemet

spprt jst escribe? Geerally, the

cstia, which is als a brker-ealer,

is cmpesate thrgh brkerage

cmmissis, r asset-base ees i lie

cmmissis, a ther ees pai by

the RIA’s cliets whse accts are hel

by the cstia. As we iscss i the ext

secti, wers what was previsly

escribe as a pre RIA rm set their w

ees a their w ee strctre.

Schwab Avisr Services’ primary revee

srces are trasacti revee (e.g.

cmmissis r traes) rm cliet

brkerage accts, asset-base ees (e.g.

ees rm mtal cmpaies base

shares hel i cstmer brkerage

accts) a asset maagemet ees rm

ivestmet prcts sch as Schwab

prprietary mtal s a maage

accts. Sme cstias prvie vale-

ae services t the avisry rm r a

ee, typically prtli acctig systems

a certai back-ce ctis.

May ew RIAs charge their cliets asset-

base wrap ees—similar t the wirehse

mel, i which the cliet pays a sigle ee

r bth ivestmet avice a trae

execti. I this mel, the RIA typically

pays the cstia r its brkerage a

ther services a asset-base schele.21

RIA rms that pass trasacti csts t

cliets keep 100 percet the revee

eare rm cliet ees.




2

tHe economIcsoF InDepenDence

a Ri chk

T help y evalate the acial

implicatis gig iepeet, csier

that prir t the creati Mrga Staley

Smith Barey it was pssible, thgh

likely, r a wirehse t reach a payt 58 percet.22 Mre cmmly, the traitial

wirehse avisr ears 25 percet t 45

percet the ees pai by cliets.23 Baks,

meawhile, te pay avisrs a salary pls

30 percet t 40 percet the base salary

as a bs.24

gr Dr ci

– Wirehse Spprt Cstsgr p

– ot--pcket Avisr Expeses

n p

Captive iepeet brker-ealers may

capitalize the “payt” veraclar by

prmtig payts as high as 98 percet25

r tp prcers, bt the term “payt” ca

be misleaig. I practice, a istribti

88 percet t 90 percet bere acctig

r verhea expeses is mre cmm,

with bses smetimes ere as a

icetive t grw.26 By cmbiig the bs

icetive a the 88 percet t 90 percet,

a avisr/team ca theretically reach the

healie istribti 98 percet

revees, agai bere acctig r

amiistrative ees a verhea expeses.

Yet these aitial amiistrative ees

create a eve lwer eective payt.

Tiere amiistrative ees base

acct size ca pealize avisrs withsmaller cliet accts, resltig i a

eective payout betwee 70 a 90

percet. A typical icme statemet r a

avisr assciate with a iepeet

brker-ealer (IBd) breaks w as llws:

eiib R

– IBd Spprt Cst

– Amiistrative Feesei p

– overhea Expeses

IBD adir’ I + pr (l)

Ater payig the iepeet brker-ealer

r share spprt services, the verhea

expeses are te higher tha i the RIA

mel, largely e t payig r spprt

services whether they are eee r t.27



THE EConoMICS oF IndEPEndEnCE

Ird eripi RIa

Avisrs participatig i the Schwab Advisor

Services 2007 RIA Benchmarking Study

reprte that tp rms ear 69 percet t

73 percet net compensation, r owers’Icme + Prt, i the RIA mel.28 I ther

wrs, by maagig expeses aggressively,

a RIA rm ca maitai a 27 percet t

31 percet verhea expese rate, leavig

the remaier r pricipal raws, -

amiistrative pressial salaries a

ivestmet i the rm. This cmpares qite

avrably t ther cmpesati mels.

A simplie icme statemet r a pre

RIA rm llws. nte that maage

acct maager ees are ette t

Grss Revees.

gr R

– overhea Expeses

RIa owr’ I + pr (l)

mizi h RIa

I aiti t ptetially earig mre et

icme, iepeet avisrs ca bil

eqity a create a traserable asset with

sigicat eterprise vale. Byers typically

vale RIAs at betwee 6 a 10 times

cash fw,29 r betwee 1.8 a 3.5 times

revees, with the largest mltiples sally

applie t teams with $500 milli r mre

ee-base assets.30

exHIBIt 5: scHWaB 2007 RIa BencHmaRKIng

stuDy Results—oveRHeaD expense—top FIRms*

a udr m($mm)

25–100

100–250

250–500

500+

gr R (%) 100% 100% 100% 100%

– overhea Expese (%) 30.5% 28.8% 29.4% 26.7%

owr’ I + pr 69.5% 71.2% 70.6% 73.3%

*The tp 20th percetile reslts are shw r participatig rms with the lwest

“overhea Expeses,” which csist all expeses ther tha pricipal raws

a -wer pressial salaries (als calle -amiistrative pressial

salaries). This irmati is geeral i atre a limite. It is prvie r

illstrative prpses ly a may t be represetative the experiece thers.

It is t a garatee tre perrmace r sccess.31 The reslts the 2009

RIA Benchmarking Study were t available at the time pritig.

exHIBIt 6: scHWaB 2007 RIa BencHmaRKIng

stuDy Results—oveRHeaD expense—meDIans*

a udr m($mm)

25–100

100–250

250–500

500+

gr R (%) 100% 100% 100% 100%

– overhea Expese (%) 39.0% 36.3% 37.0% 34.5%

owr’ I + pr 61.0% 63.7% 63.0% 65.5%

*The meia reslts are shw r “overhea Expeses,” which csist all

expeses ther tha pricipal raws a -wer pressial salaries (als

calle -amiistrative pressial salaries). This irmati is geeral

i atre a limite. It is prvie r illstrative prpses ly a may t

be represetative the experiece thers. It is t a garatee tre

perrmace r sccess.31 The reslts the 2009 RIA Benchmarking Study were

t available at the time pritig.



4


EXHIBIT 7: MERGERS & ACQUISITIONS OF RIA FIRMS

Total assets under management (AUM) acquired, in billions

Source: Schwab Advisor Services Strategy Group

2004 2005 2006 2007 2008

0

20

40

60

80

100

120

$140

$23

$56

$101

$54

$134

CA G R

’ 0 4 – ’ 0 8

: 5 5. 4

p e r c e

n t

May actrs ctribte t valati

melig, iclig, bt t limite t,

assets er maagemet, revees,

grwth, bk cmpsiti, percetage

assets that are ee-base, et peratig

prts, prt margi a ivlvemet

raimakers i the tre. I 2008, $134

billi i istry-wie RIA assets chage

has, p rm $101 billi i 2007.32

Bk/Brkr Fir cii prr

Wirehse rms te wat t ecrage

sccessl avisrs t stay with the rm

til retiremet. Fr this reas, sme have

create retiremet ctiity plas that

allw a avisr t ear aitial icme

i retiremet by passig his bk

bsiess t a teammate i his/her

rm.33 These sset prgrams may restrict

avisrs t sharig cliets with a limite

pl ther avisrs. Frther, tre

revee streams geerate by the retirig

avisr may be taxe as riary icme.

Fially, ctiity paymets are te

remitte ver ve years, imiishig the

real retrs.34

pi bi- d

As a iepeet bsiess wer, y r

bsiess expeses thrgh yr practice.

I y typically pay r semiars, meals r

cliet-appreciati evets sig ater-taxllars, settig p a iepeet bsiess

may have pre-tax beets.35

ardi ii rkd b shwb adir sri,

h d rwh r dr

qird r 2004 – 2008 w 55.4%.



FoRgIvaBle loans FRom WIReHouses oR captIveBRoKeR-DealeR FIRms

—By Tm Giachetti a Hery Va Blk, parters with the legal rm Stark & Stark

At rst blsh, a rgivable la rm a wirehse r iepeet brker-ealer rm ca lk

attractive. Fr avisrs csierig mvig t ather large acial istitti, csier the

wsie t rgivable las:

•Thetransitioningadvisor/teamoftenfacespenaltiesintermsoflostdeferredcompensationand/oroption

vestig i asset r revee gals are t reache withi strict ealies. With market vlatility beig what it is,

reachig these gals ca smetimes be t the avisrs’ ctrl.

•Incentivepackagesusuallyincludecashandstock,yetasanemployeetherearelimitationstoinuencingthestockprice.

•Theloanforgivenessistreatedasordinaryincomefromataxperspectiveandtaxedattheadvisor’sincometaxrate.

The percetage tax pai the la rgiveess is sigicatly higher tha the percetage pai whe sellig a RIA.

•Thenewrmanditsshareholderssharetheprot;thetransitioningadvisor/teamtakestherisk.

s r RIa ri

Csier that the wer(s) a iepeet RIA chsig t sell a bsiess seve t ie years ater icepti may

ear mre tha i they ha accepte a rgivable la at the begiig that time peri. See the hypthetical case

sty illstrate i Exhibits 8, 9 a 10 r rther ptetial tax implicatis. I this example, the earigs are package

ieretly i that the avisr/team i’t have t cmmit t the cstia r seve t ie years t ear them.

The sale a RIA will either be a Stck/Membership Iterest Sale r a Asset Sale. I a Stck/Membership

Iterest Sale, the sharehlers/members are sellig their shares/membership iterest a pay capital gais tax

the ierece betwee the tax basis the shares/membership iterest a the sale price the stck. The lg-

term capital gais tax rate was 15 percet as Je 2009. I a Asset Sale, a large prti the prchase price

is allcate t “Gwill,” which is taxe as a capital gai.

Als csier the pssibility that the wer ies rig the ie-year peri. The wer’s amily iherits the shares/

membership iterest a their tax basis is eqal t the air market vale the shares at the ate eath. I they

immeiately sell the shares the RIA r a lmp sm, they pay capital gais tax. Eve i the sale were t reqire

a prti the prchase price t be pai ver time with iterest accrig the pai balace, the amily wl

ly pay riary icme tax the iterest prti the paymets.

Hdi ci

Fially, i y eel cmpelle t metize yr revee stream i the immeiate tre rather tha ater existig as a

RIA r a mber years, y might csier speakig with a represetative a hlig cmpay—a rm specializig

i csliatig RIAs. Hlig cmpaies te er sltis similar t rgivable las whe helpig a avisr/

team start r ji a RIA.

The services and opinions o Stark & Stark and Mssrs. Giachetti and Van Blunk are independent o Schwab. Schwabdoes not provide tax or legal advice. The taxes discussed are ederal taxes only, not state taxes, and the reader isadvised to consult with a tax proessional. This inormation is general in nature and limited. It is or illustrative purposesonly and may not be representative o your circumstances.



6


a “urii” l

o the llwig pages, y will a

series charts: Exhibit 8: Cmparig

a Frgivable La With Startig a RIA

Firm;Exhibit9:SampleAnnualIncome

Simulation;andExhibit10:SaleofRIAFirm r Acceptace Bak/Brkerage

Ctiity Prgram oerig. At right

y’ll a glssary terms se i

the exhibits.

glossaRy

t-12

Trailig 12-mth revee at Bak/Brkerage F irm

riA oha exp

Cst rig ay-t-ay peratis. des t icle

pricipal raws r -amiistrative pressial salaries

o + ou--pck xp

Icmbet irm’s allcati r prit a verhea

riA ep valu

Amt irm may be wrth i sl

Bak/Bka Cu Pa

Allws retirig avisr t traser his r her bk i retr

r revee stream

n P valu (nPv)

dierece betwee the preset vale cash ilws

a cash tlws

ow’ ic + Pf

Icles the salaries a beeits wers pay themselves

pls the prit ater payig all n-ower salaries a

overhea Expeses. Typically, -wer pressial

salaries are csiere a direct Expese a therere are

pai i aiti t overhea Expeses. Amiistrative sta

salaries are part overhea Expeses.



ai

The llwig assmptis were mae t

evelp the reslts shw i Exhibits 8, 9

a 10. Assciate ttes, te with

asterisks, ca be p. 19.

Grss revee r trailig 12-mth•

revee r the hypthetical rm i the

illstrati is $1,600,000.

niety percet the assets a revee•

llw the avisr/team ater startig the

ew iepeet RIA.

Revees grw 23.1 percet i the•

RIA mel verss 9.8 percet i the

wirehse r regial rm mel.*

Hypthetical avisr r team is•csierig acceptig a 9-year rgivable

la rm a cmpetig wirehse, with a

p-rt paymet 125 percet a a

back-e paymet 75 percet trailig

12-mth grss revee.

n-wers’ salaries + overhea Expeses•

are assme t be 35 percet i the RIA

mel, while the verrie (wirehse r

regial rm hairct pls t--pcket

expeses pai by the avisr/team) isassme t be 55 percet.

Whe it cmes t metizig the asset, a•

actr 2.5X revee has bee applie

t the prjecte grss revee r the RIA

rm i year 9. The eqivalet cmparis

pit i the bak/brkerage rm mel is

the rm’s ctiity prgram. A paymet

100 percet grss prcti r

year 9 is actre it the mel base

a ve-year paymet pla.**

The tax cseqeces refecte i the•

Exhibits were reviewe by Tm Giachetti

a Hery Va Blk Stark & Stark,

Attreys at Law. Their views are

iepeet Schwab. Schwab es t

prvie tax r legal avice. The llwig

assmptis were mae: a Stck/

Membership Iterest Sale i the RIA

Model;acapitalgainstaxrateof15%;

a riary icme tax rate 35%.


While Schwab believes the regig assmptis are reasable, it ca give assrace abt their accracy. The assmptis may r

may t refect yr circmstaces.

n prti the abve iscssi shl be cstre as legal avice a/r apprpriate r ay specic rm’s circmstaces. Mssrs.

Giachetti a Va Blk are t makig ay represetati a/r recmmeati that a Stck/Membership Iterest Sale is a preerre

sale mel. Rather each RIA shl cslt with pressials t etermie what is best r its particlar circmstaces.



8

A CAse for stArting or Joining A registered investment Advisory firm

Year 1 Year 2 Year 8 Year 9

Gross Revenue $1,440,000 $1,772,640 $6,168,348 $7,593,236

Non-owners’ salaries + Overhead ($504,000) ($620,424) ($2,158,922) ($2,657,633)

$936,000 $1,152,216 $4,009,426 $4,935,604

Start-Up Expenses (sunk costs) ($102,606) $0 $0 $0

$833,394 $1,152,216 $4,009,426 $4,935,604

Income Taxes ($291,688) ($403,276) ($1,403,299) ($1,727,461)

$541,706 $748,940 $2,606,127 $3,208,142

$18,983,091

Capital Gains Tax ($2,847,464)

Net Proceeds After-Tax $16,135,627

Total Net Proceeds After-Tax

Year 1 Year 2 Year 8 Year 9

Gross Revenue $1,440,000 $1,581,120 $2,770,632 $3,042,154

($792,000) ($869,616) ($1,523,848) ($1,673,185)

Operating Pre-Tax Net (Income + Prot) $648,000 $711,504 $1,246,784 $1,368,969

Forgivable Loan $2,000,000 $0 $0 $1,200,000

Pre-Tax Net (Income + Prot) $2,648,000 $711,504 $1,246,784 $2,568,969

Income Taxes (earnings) ($226,800) ($249,026) ($436,375) ($479,139)($77,778) ($77,778) ($77,778) ($497,778)

$2,343,422 $384,700 $732,632 $1,592,052

Continuity Program (Monetized Book Value NPV)** $3,042,154

Income Tax ($1,064,754)

Net Proceeds After-Tax $1,977,400

Total Net Proceeds After-Tax

$30,531,371

$9,729,170

Bank/Brokerage Firm Advisor/Team After-Tax Net

Income Taxes (forgivable loan)

Bank/Brokerage Firm Model

$30,531,371

$9,729,170

Monetized Book Value**

RIA Model

Bank/Brokerage Firm

RIA Owners’ Income + Prot Adjusted

Owners’ Income + Prot

RIA Model

TOTAL CASH COMPENSATION

RIA Owners’ Income + Prot After-Tax Net

A

B

C

D

EXHIBIT 8: COMPARING A FORGIVABLE LOAN WITH STARTING AN RIA FIRM

Starting an RIA and selling it in nine years* can be lucrative compared with accepting a

forgivable loan and fullling a multi-year commitment.

Override + Out-of-pocket expenses

The defaults on Exhibit 8 are illustrative only and are not meant to be recommendations or endorsements of how terms of an agreement should be

negotiated, nor does this Exhibit represent a guarantee of future performance. Actual experience may vary.

Years

Includes sale of practice/book in the RIA

Model and transition of practice/book

through a continuity program in the

Bank/Brokerage Firm Model

Years

C + D

A + B




0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

$3,500,000

1

Years

2 3 4 5 6 7 8 9

EXHIBIT 9: SAMPLE ANNUAL INCOME SIMULATION

RIA Owners’ Income + Prot (After-Tax Net )

Bank/Brokerage Firm Advisor/Team After-Tax Net

Year 9 Sale

EXHIBIT 10: SALE OF RIA

FIRM OR ACCEPTANCE

OF BANK/BROKERAGE

CONTINUITY PROGRAM

OFFERING

Net

After-Tax

Proceeds

From

Continuity

Program

$16,135,627

$1,977,400

0

5,000,000

10,000,000

15,000,000

$20,000,000

Net

After-Tax

Proceeds

From Sale

of RIA

*The rati rgivable las typically rs rm seve t ie years. As a prxy, assets er maagemet cmp aal grwth raterm 2002 t 2006 was 9.8 percet r wirehses, 12 percet r RIAs a 23.1 percet r Schwab Avisr Services RIAs. Srce: Wirehse

Assets&RIAAssets:CerulliAssociations;RIAAssetsatSchwabAdvisorServices;SchwabStrategyGroup.Pastperformanceisnoguaranteeof

tre reslts. usig a grwth rate 9.8 percet i the RIA mel reslts i a Ttal net Prcees vale $14,590,440.

**Metize Bk Vale ges by may ames29, 30 iclig “Termial Vale” a “Eterprise Vale.” This is what yr bsiess may be wrth.

While it is cmm t se iscte cash fws t etermie the vale a practice, we chse t se a mltiple revees t simpliy the mel.

A rm’s vale is ltimately etermie base may actrs iclig the stability the cash fw a market citis. It is reasable t se

a actr betwee 1.8 a 2.6 times revee r rms with $100 milli a p i assets er maagemet, while rms with $500 milli a

p may warrat a mltiple betwee 2.75 a 3.5 times revee.30 The eqivalet i the wirehse space is a rm’s ctiity prgram ere t

retirig avisrs. A ew the prgrams w reach 200 percet Trailig-12 (eqivalet “2.0” r this Exhibit), sally pai ver a 5-year peri

r the mst tere avisrs. We sprea the ctiity prgram cmpesati ver a 5-year peri sig 35 percet times the al year (9), Grss

Revee r Year 1, 25 percet r Year 2, 15 percet r Year 3 a 12.5 percet r Years 4 a 5 (r a ttal 100% r e times revee).

Evalatig the net Preset Vale (nPV) the Ttal Cash Cmpesati isplaye i Exhibits 8, 9 a 10 may help y evalate whether t start a RIA

rm r t accept a rgivable la. usig a 15 percet isct rate, the nPV reslts are as llws: RIA mel: $10,877,100. Bak/Brkerage mel:

$4,756,571 (ater isctig the 5-year ctiity paymet at 15 percet as well). At a 9.8% grwth rate, the nPV the Ttal Cash Cmpesati ithe RIA mel is $5,764,811.

The material i Exhibits 8, 9 a 10 is prvie r illstrative prpses ly a es t represet a actal case. It es t represet a

garatee tre perrmace. Actal experiece may vary. Exhibits 8, 9 a 10 are t itee t prvie specic acial, tax, cmpliace r

legal avice. Y shl cslt pressial avisrs i these els.



some Reasons WHy aDvIsoRscHoose tHe RIa moDel

0

tki cr yr s

Servig cliets a icreasig et icme are tw the key reass avisrs chse the

RIA mel. I the Recently Independent Advisor Study ccte r Schwab by Kski Research

(ccle octber 3, 2008), 62 percet the participatig avisrs state the esire t

prvie mre persalize service as a etermiig actr r startig their w iepeet

ee-base rm. Sixty-tw percet als cite the pprtity r greater lg-term acialsccess. Bt there are aitial reass t start r ji a RIA. Accrig t the sty,

75 percet avisrs cite a preerece r wrkig r themselves.

ori di

The recet prlierati bak/brkerage mergers a acqisitis, has create a

atmsphere palpable certaity r may avisrs. Reteti ers rm wirehses may

have rther exacerbate issesi becase the rms makig the trasiti package ers

may have etermie eligibility by the individual’s prcti level rather tha the team’s.

Felig the re, at least e majr wirehse has mve t elimiate vertical teams, which

previsly allwe grps avisrs t ear a higher cllective payt.36 Frther, team

leaers te ’t have ctrl ver the hirig sta i the bak/brkerage mel. The

iepeet brker-ealer a RIA mels ar the wer the pti t ecie whether t

hire sta a whom t hire.

As mre a mre sccessl avisrs that they ca jst as well r better r cliets

witht the aliati a majr rm—a that the rm may actally be hlig them back by

limitig the way they bsiess—iepeece is becmig icreasigly attractive.



mi cfi Ir

Avisrs te ecie that a great way t

er bjective acial avice is t start a

iepeet rm where they charge asset-

base ees rather tha cmmissis a

ee the prcts a sltis they ertheir cliets witht the prprietary

cstraits. “Fr me, [gig iepeet]

was all abt evelpig a evirmet

i which we cl act i the best iterests

the cliet sig a ciary staar

care,” says davi Brmelkamp, presiet

a CEo Allim Ivestmet

Csltats. “We elt like we ha t

this i rer t really take care r

cliets a act i their best iterests.”

RIAs are reqire t isclse ptetial

cficts iterest i their Frm AdV, which

they mst eliver t cliets at the start

the relatiship.

prii fibii

Iepeet avisrs, especially RIAs, ejy

greater pricig fexibility withi reglatry

gielies. They are ree t set their ee

schele with cliets. They ca ecie

whether r t t charge ees cash. They

ca charge hrly r plaig. This fexibility

allws them t be mre cmpetitive a

maage their practices mre eectively. It’s

bee Schwab Avisr Services’ experiece

that—sig a $1 milli cliet as a staar

r cmparis—the typical asset-base ee

is 100 basis pits (bps). Meia prices

might eclie t 60 bps r a cliet with

$10 milli i assets.37

“oe mtivati rivig the ecisi was

pricig. Whe we bega thikig abt

[startig r w rm], we thght that i

we were pitchig sme type erivative

r cllar it wl be ice t be able t price

that the street a t reach t it the

pe-architectre wrl i which we live.

We were tire lsig bsiess t baks

becase price.”

— John Krambeer, President and CEO

Camden Capital Management

The experiece Jh Krambeer a Came

Capital Maagemet may t be represetative theexperiece thers a is t a garatee tre

perrmace r sccess.

SoME REASonS WHY AdVISoRS CHooSE THE RIA ModEL




2

(in billions of dollars)

$34

-$26

-$14

-30

-15

0

15

30

45

$60

$60

RIA Assets

with Schwab

Morgan

Stanley

Citi/Smith

Barney

Merrill

Lynch

EXHIBIT 11: NET NEW ASSETS, 2008

Srces: Mrga Staley, Citigrp Ic., Merrill Lych & C. a Charles Schwab

& C. 2008 Qarterly Earigs. Als “Whle Ltta Lve,” Christia Mccil,

Registered Rep., September 1, 2008.

RIa Fir r grwi Fr

I the six qarters rm the start 2007

thrgh Je 2008, the three largest RIA

cstias gathere $215 billi i et ew

assets, cmpare t $168 billi brght i

by the tp r brkerages.38

Fr may grps,iepeece cl be the ticket t grwth:

The Glb Grp, r example, lache with

$180 milli a icrease cliet assets by

mre tha 30 percet, t $240 milli, i jst

15 mths. Three years ater the lach, it

ha srpasse $500 milli i AuM.39

“It’s easier t grw as a RIA. Y

yrsel i a ieret psiti i yr

hmetw by beig the CEo a wealthmaagemet rm verss beig a salespers

i a majr rgaizati. nw I’m ig

mysel paels a crprate bars.

We’re t beig viewe as a spsr as mch

aymre. Istea, I sit acrss the table rm

cliets a r a cmpay jst like they .”

—Trevor Callan, CIMA, CEO

Callan Capital, LLC

The experiece Trevr Calla a Calla Capital, LLC



ehibi 11 r w fw r hr h jr

wirh (rir h d ji r bw

mr s d sih Br) shwb adir sri,

whih rrd h hr bid i 2008.



movIng FoRWaRDWItH InDepenDence

Jii RIa Fir

oce the ecisi is mae t perate as a RIA, the ext ecisi is hw t it. Jiig

establishe RIAs is emergig as a cmm meth r gig iepeet.40 Fr example,

Cverget Wealth Avisrs, LLC ae tw rmer wirehse teams i 2008, each maagig

mre tha $3 billi i assets at the time the mve. The teams reprt that they beete

rm the peratig eciecies a service cltre iheret i their ew rm’s mel. (See“Brs Wealth Maagemet: Sharig Ctrl Yr destiy,” page 24.)

While startig a rm may reqire re-creatig mch the irastrctre the avisr is se t,

jiig a establishe RIA may prvie a st laig r avisrs seekig a permaet ew

hme r r thse wishig t experiece the RIA mel bere lly egagig i startig their

w bsiess. Aliatig with a existig rm may ivlve less risk a lwer p-rt csts,

bt als er less ctrl.

It’s pssible t sbstatial spprt withi sme RIA rms. I act, the chice startig

a rm r jiig a existig RIA te epes the amt spprt the avisr ees.

Sme rms reqire that ivestmet philsphies alig. Mst search r avisrs wh will t

it the rm’s cltre.

sri wih ri

A service team i a existig RIA ca agmet the cstia’s cversi services whe a

ew avisr r team jis. I the existig rm has itsel trasitie rm the wirehse r IBd

mel r has previsly ae a avisr rm e thse mels, the mltiple resrces

will have rst-ha experiece with cliet trasitis. By leveragig existig services, the ew

avisr r team may be able t scale mre ecietly a ptimize cliet-acig service time,

t like the evirmet they are leavig.

“We have a sphisticate cliet base a eee a irastrctre tailre specically r them.

By jiig a rm like Cverget Wealth Avisrs, the irastrctre was alreay i place, sch

as maager research, techlgy a peratis. This allwe s t remai cse r

cliets a their ivestmet ees verss rgaizatial a bsiess maagemet isses.”

—Lori Van Dusen, Managing Director, Convergent Wealth Advisors, Institutional Group

The experiece Lri Va dse a Cverget Wealth Avisrs may t be represetative the experiece

thers a is t a garatee tre perrmace r sccess. Schwab es t recmme r erse Cverget

Wealth Avisrs r ay ther avisry rm r avisrs csierig jiig a existig rm.



BuRns WealtH management: sHaRIng contRol oF youR DestIny

Ater weighig the risks a rewars iepeece, mre a mre avisrs are chsig t

ji RIA rms. Pal Hyes jie Brs Avisry Grp i Sa dieg ater speig 21 years with

a majr wirehse. He says that he mae the trasiti, alg with e assciate, t allw himsel

the reem a fexibility t mre easily serve cliets’ best iterests.

With assets er maagemet mre tha $100 milli, Hyes reasably cl have ecie t start his w

bsiess. Bt the spprt available rm like mie parters at Brs le him t ji a rm istea. As he pts it,

“Ale, y’re a isla. As a grp, y ca accmplish mre.” He as, “By jiig a existig RIA rm, we’re t

all speig the same llars t plicate cstly irastrctre a persel.”

It tk a team peple wrkig behal Hyes t maage his mve t iepeece. A persal cach kept

him schele. A bsiess csltat helpe with acial mels. With his parters, he prchase grp Errrs &omissis (E&o) israce at a sigicat cst savigs cmpare t iivial cverage. He gt bsiess israce

thrgh a lcal aget a wrkers’ cmpesati thrgh his payrll amiistratr. His baker prvie access t capital.

Hyes was prepare t ivest “whatever it tk” t g t his w. He als recgize that Jh Brs ha alreay

iveste time a mey makig may the big ecisis i creatig what Hyes calls a “avisr service hb.” Havig

the back-ce spprt i place wl allw Hyes t “hit the gr rig,” which, i tr, meat he cl spe

early 100 percet his time servig cliets. The parters at Brs Avisry Grp, iclig Jh Brs i oklahma,

Tm McGiga i Cectict a Hyes i Caliria, each have their w practice a share i the service expeses.

The experiece Pal Hyes, Jh Brs a Tm McGiga a Brs Avisry Grp may t be represetative the experiece thers a

is t a garatee tre perrmace r sccess. Schwab es t recmme r erse Brs Avisry Grp r ay ther avisry rm r

avisrs csierig jiig a existig rm.4


thr r i idr i ri

r h b rd :

Ji a RIA as a emplyee with the1.

pssibility byig it r earig

wership i the tre.

Merge practices, allwig r immeiate2.

share wership.

A cmpay that specializes i prchasig3.

RIAs r shares practices ca ai i the

lit t by erig practice maagemet

a acial assistace.

A avisr/team ca rm a rm that4.

shares services sch as techlgy a

legal/cmpliace with ther rms i

retr r a prti the revee stream,

while still bilig eqity i their w

iepeet rm.

Sme RIA cstias sta reay t t ly

help avisrs start a rm, bt als acilitate

itrctis t existig RIA rms.



sr-u cT help avisrs evalate the acial

implicatis gig iepeet by startig

a rm, Schwab Avisr Services prjecte

the start-p csts ivlve r a rm with

$1,600,000 i cliet ees (RIA rm revees),

tw wers a tw amiistrative sta.

See Exhibit 12, page 26.

Healthcare, ret, spplies a israce csts

are pai year i a year t, s t all the

csts shw are icremetal csts. May the

marketig a pressial services csts als

verlap with ay give year’s prt a lss

statemet. depeig whether y chse t

lease r by, there may r may t be sigicat

techlgy irastrctre a ritre-relate

csts ivlve i peig yr rs.

We estimate the key start-p csts by sig

the Schwab Advisor Services Proft & Loss

Illustrator 41 (r illstrati prpses ly).

Still ther csts were estimate thrgh

iscssis with a reqests r qtatis

rm thir-party vers. Exhibit 12, which

es t icle ay sigig bses r

cmpesati r wers, pressials ramiistrative sta, is base the

llwig assmptis:

Hh d hr ir b.

otsrcig hma resrces, payrll a

beets amiistrati thrgh a Pressial

Emplymet orgaizati allwig r

prchase grp meical, etal a visi

plas. The amt shw icles a set-p

ee, a mthly ee, a the rst mth’s

paymet r meical, etal a visi, a

the aal set-p ee r a Schwab 401(k).

This is ly a example a is t meat

t be a qtati r israce.

mrki. Icles creati lg/

crprate ietity, bsiess cars, welcme

letter, le bsiess acemet a

r page website.

o r d i. Leasig

1,400 sqare eet at $22/s. Icles a

tw-mth w paymet.

Iri h d iii.

Prchasig techlgy irastrctre-relateitems sch as cmpters, priters a

mitrs, a tsrcig reprt recciliati

thrgh a hste prtli maagemet

system sch as Schwab PrtliServicesTM

at 432 ttal accts. (See page 10 r

mre irmati Schwab Perrmace

Techlgies.) utilities sch as Iteret,

Blackberries a phes (alg with their

service plas).

Frir rh. “u-shape” exective-

style esks, cerece tables, articlatig

keybars a ther ce rishigs.

ci/ ri ri.

The amt shw typically will cver

pressial thir-party legal csel

regarig, rmati the legal etity

(crprati, LLC, etc.) a SEC a/r

MoVInG FoRWARd WITH IndEPEndEnCE



state registrati, evelpmet

cmpliace prceres, review

emplymet ctracts a cliet

agreemet creati. I-pers assistace

with aits is assme t be actre

it gig verhea expeses.

Bi ir. Icles a estimate

aal expeses r Errrs & omissis

(E&o) israce a Prperty & Casalty

(P&C) israce with aggregate limits

$1,000,000 each. May actrs are se

t etermie the rates charge r E&o

Israce, iclig bt t limite t a

rm’s mix bsiess a traig activity.

addii r- i

Frm time t time, avisrs with assets at

varis levels ecie t wrk rm hme i

rer t maage expeses aggressively. Still

thers chse t lease space i exective

ce sites where ritre a basic

irastrctre is prvie at a arable,

agree-p price. Sme ew rms chse

t rerai rm iitially hirig amiistrative

sta, ptig istea t tsrce a

as-eee basis.

6


exHIBIt 12: sample RIa

staRt-up expenses

Health a ther israce beets $10,963

Marketig a bsiess evelpmet $14,000

oce ret a maiteace $5,133

Irmati techlgy a tilities $48,255

Fritre prchases $27,146

oce expeses (spplies, cpies, etc.) $2,623

Cmpliace/legal pressial services $11,500

Bsiess israce $6,940

Ttal $126,560

Fr illstrative prpses ly. nt all expeses are sk r icremetal t

Year 1 verhea expeses. A prti will be spet year i a year t.



Avisrs t have t g it ale whe startig r jiig a rm. Whether a avisr

chses t ji a existig RIA r g ttally iepeet a wrk with a cstia sch as

Schwab Avisr Services, help is available. “orgaizatis like Schwab sta reay t make

the prcess cmplicate. They’re available a mre tha willig t ecate the brker,”

says Cli Higgis the Glb Grp LLC. “It’s really a simple prcess. I y wat aswers,

g t peple wh have ge thrgh the prcess.”

The experiece Cli Higgis a the Glb Grp, LLC may t be represetative the experiece thers a is

t a garatee tre perrmace r sccess.

adir cri sri

Avisrs a their teams trasitiig their cliets’ accts t Schwab Avisr Services

wrk clsely with a eicate team rm Avisr Cversi Services (ACS)—a grp slely

eicate t halig trasitis. ACS team members create cstm trasiti timelies.

They te play a key rle i the weeks that llw the avisrs’ resigati rm their

rmer rm. They er a cct ace-t-ace a virtal traiig t help avisrs’

ersta ew stware a/r ew systems. Imprtatly, this is a ll-time jb r ACS

team members—they are t plle rm a service esk temprarily t wrk a trasiti.

Schwab’s Avisr Cversi Services Team assiste mre tha 500 avisrs i

trasitiig mre tha 100,000 accts a $50 billi i assets rm Jaary 2005

thrgh december 2008.42 While Schwab Avisr Services has trasitie mltiple teams

with mre tha $1 billi i assets, a typical team sally trasitis $100 milli i its rst

12 mths.

ResouRces to ease tHe tRansItIon



8

The acial avisry bsiess has chage

ramatically ver the past ecae. May

avisrs wh ce were i step with their

rms w are csierig alteratives. I

may ways, bak/brkerages have create

a ati r iepeece. The shit t

teams a ee-base accts at the majr

wirehses set the RIA mvemet i mti.

Ivestrs are reay r chage. Fr avisrs,

iepeece ca eliver that chage.

nt ly ca iepeece er mre

ctrl ver the variables that etermie

satisacti amg high-et-wrth cliets,

it ca als prvie the ability t keep a

greater share revees a bil eqity i

a grwig bsiess. Avisrs ctemplatigiepeece mst carelly csier their

bsiess gals a risk tlerace i the

ctext their w practices. They mst

als pla carelly r their trasiti.

Mst avisrs with whm Schwab has

spke reprt beig happy they wet

iepeet. They attest that the reem t

ctrl their w bsiess practices—rm

hw t serve cliets t hw t cmpesatethemselves—carries pressial rewars

that exte ar bey the bttm lie.

yr n s

I r idri

idd d wd ik

pr & l Irr

i r- d r d ,

877-314-7821.

ab shwb adir sriSchwab Avisr Services is a leaig prvier

cstial, peratial a traig spprt

r iepeet ivestmet avisry rms. As

december 31, 2008, cliet assets

cstie with Schwab Avisr Services st

at $477 billi. These assets, maage bythe apprximately 5,700 iepeet

avisry rms Schwab Avisr Services

serve, represete apprximately 42%

ttal cliet assets cstie with The Charles

Schwab Crprati (thrgh its sbsiiaries).

Brkerage prcts ere by Schwab Avisr

Services are t FdIC isre, are t

garatee epsits a are sbject t

ivestmet risk, iclig the pssible lss

pricipal iveste. Schwab Avisr Services isa bsiess segmet The Charles Schwab

Crprati a icles the csty, traig

a spprt services Charles Schwab a

C., Ic., a registere brker-ealer a

member SIPC, as well as the prtli

maagemet a acctig sltis

Schwab Perrmace Techlgies (“SPT”).

CS&C a SPT are separate sbsiiaries

The Charles Schwab Crprati.

conclusIon



1 “Reay r a Reb,” Elle uzelac,

Research Magazine, Febrary 2009.

2 “The Trst Factr a High E

Cstmers,” Charles B. Weel, Fiacial

Istittis Csltig, Ic., May 7, 2008.

3 Frm 2005 t 2008, 365 avisrs rteams avisrs starte r jie rms

wrkig with Schwab Avisr Services t

csty their cliet assets.

4 The Recently Independent Advisor Study was

ccte r Schwab Avisr Services by

iepeet research rm Kski Research

rm September 16 thrgh octber 3, 2008.

Fity-ve avisrs wh recetly starte, r wet

t wrk r, a iepeet RIA rm were

iterviewe via telephe. Kski Research is

t aliate with Charles Schwab & C.

5 “Stability Ehaces Lyalty,” Sarah Hasar,

Investment News, december 7, 2008. Als,

“Tmlt Cl Expa Raks RIAs,”

Financial Advisor (Frtlie news), nvember

2008. Schwab Avisr Services ele 2,000

ib calls rm itereste avisrs i Q1

2008, p 40 percet rm the same peri

i 2007. Frm Q3 t Q4 2008, lie

iqiries icrease 41 percet.

6 See the llwig r rther perspective:

“Asset Gatherig Machies,” Halah Tryalai,

Registered Rep., Jly 1, 2008.

7 “I’ve Gt Yr Back,” Ae Fiel, Registered

Rep., december 1, 2004.

8 “Merrill bsts bs prgram,”

darla Merca, Investment News,

december 26, 2006.

9 “new Era Retail Brkerage Begis,”

Dow Jones News Wire, nvember 21, 2008.

10 A FundFire Exchange ccte byFundFire i Jaary 2009 styig the

Mrga Staley jit vetre with Smith

Barey that 83 percet 66 qick-

pll respets believe the brkerage

csliati tre will rive mre avisrs

t the iepeet chael.

11 “War Breaks ot r Wirehse Brkers,” Gail

Liberma,Financial Advisor , nvember 2008.

12

“Tie Chage r Traitial Retail-Brkerage Firms Expecte,” Investment News

Round Table: Wirehouse/Regional Brokerage

Firms, december 8, 2008.

13 “Breakaway uBS brker wrks lg

hrs, cl’t be happier,” Je Hrwitz,

Investment News, Febrary 8, 2009. The

article is base a webcast hste by

Schwab Avisr Services.

14 “Hybri Heave,” Halah Tryalai,

Registered Rep., nvember 1, 2008.

15 “Wall Street Sqeezes Small Brkers,

May G Iepeet,” Christia Mccil,

Registered Rep., May 13, 2009.

16 Levels at which RIA cstias eicate service

teams will vary rm e cstia t ather.

appenDIxenDnotes



0


17 Example: I there were r respets wh

gave a scre 10, 7, 4 a 1, respectively,

each scre wl represet 25 percet all

respets. The 7 wl be remve rm

the calclati, leavig e Prmter (the 10)

a tw detractrs (the 4 a 1). The net

Prmter Scre is the ierece betwee the

tw: 25 percet - 50 percet = - 25 percet.

18 The Cerulli Edge Advisor , Q3, 2007, a

Schwab Avisr Services Strategy Grp. The

Cerlli reprt iicate Charles Schwab & C.

was sixth. Hwever, the creati the jit

vetre betwee Mrga Staley a Smith

Barey mve Charles Schwab & C. p t

th place.

19

“Breaking Gridlck?” Andrew Gluck,Financial Advisor , February 2009.

20 “Payut” generally reers t a percentage

cmmissins r asset-based ee revenue earned

by the wirehuse r independent brker-dealer

that it pays t its registered representative

whse clients’ accunts generated that revenue.

Since independent advisrs are nt

representatives Schwab, they d nt receive a

“payut.” Schwab Advisr Services may enter

int st dllar arrangements and prvide ther

benefts t advisrs wh place their client assets

in custdy at Schwab.

21 Cstias have the fexibility t charge

cliets separately rm the avisr ee a

t charge a trasacti basis.

22 “Whle Ltta Lve,” Christia Mccil,


23 “Lw-prcers t exit wirehses,” da

Jamies, Investment News, Febrary 9–13,

2009. Als base On Wall Street

cmpesati gies.

24 “Tamig a I-Hse Rivalry,” Jh Chrchill,

Registered Rep., december 1, 2008.25 “LPL t challege csty biz,” Brce Kelly,

Investment News, Agst 6, 2007.

26 “The Matig Game,” Christia Mccil,

Registered Rep., March 1, 2009. Als,

“Wachvia stps erig prt-rmla

eals,” da Jamies, Investment News, April

12, 2009.

27 This cclsi is base igs the

2006 Moss Adams Financial Perormance Study o Financial Advisory Practices. The sty

ivlve 907 rms with 95 percet r mre

revees cmig rm ee-base maagemet.

I the $500,000 revee practice, the average

verhea expese r iepeet brker-

ealers was 11.51 percet higher tha i the

RIA mel. The $1,000,000 practice was 3.93

percet lwer a the $3,000,000 practice

was 4.48 percet higher.

28

The Schwab Institutional (nw knwn as Schwab Advisor Services) 2007 RIA

Benchmarking Study examined frm perrmance

acrss 647 advisry frms that did business with

Schwab Advisr Services at the time. Asset and

revenue grwth, surces new clients, stafng,

pricing and fnancial perrmance were amng

the tpics cvered. At the time the study, the

647 frms managed a ttal $256 billin r

mre than 140,000 clients. o these frms,



APPEndIx: EndnoTES

370 had more than $100 million in assets

and 110 had more than $500 million in assets.

Participants included 380 wealth managers, 43

fnancial planners and 224 money managers.

Results shown are or the wealth manager peer

groups rom the 2007 study. The top 20th

percentile (vs. the median) overhead expense

percentage is shown or each o the our

categories. So 20 percent o the frms in each

peer group came in at equal to or better than

(lower than) the overhead percentage shown.

29 Schwab Avisr Services Strategy Grup

a “M&A Talks Hit May Rablcks,”

Financial Advisor (Frtlie news),

September 2008.

30

Schwab Avisr Services StrategyGrup a “What is yur practice wrth? —

plety i yu’re ee-base,” Jh Churchill,

Registered Rep., August 25, 2008.

31 owers’ Icme + Prt is et verhea

epeses, which iclues supprt a

amiistrative sta plus -sta epeses

assciate with ruig a practice. owers’ et

take-hme pay is owers’ Icme + Prt less

epeses r -wer pressial salaries

a ay prts reiveste i the busiess.

32 Schwab Avisr Services Strategy Grup.

33 “Whle Ltta Lve,” Christia Muccil,


34 “A Seller’s Market,” Jh Churchill,


35 Csult a ta avisr t eplre the ptetial

pre-ta beets settig up a iepeet

busiess.

36 “Mrga Staley Chages Pay Plicies,”

da Jamies, Investment News, december

3, 2007.37 Schwab Institutional (w kw as

Schwab Advisor Services) 2007 RIA

Benchmarking Study .

38 “The Five new Realities Wirehuse

Avice,” Timthy d. Welsh a Patrick Butler,

Investment News, February 22, 2009.

39 The eperiece The Glub Grup, LLC may

t be represetative the eperiece thers

a is t a guaratee uture perrmace rsuccess. Yur eperiece will vary.

40 Base Schwab Avisr Services

iteral Advisors Turning Independent results

refectig a icrease rm 2006–2008

avisrs jiig rms.

41 The Schwab Avisr Services Prt & Lss

Illustratr uses the Schwab Advisor Services

2007 RIA Benchmarking Study (see tte

28) as a uati r its assumptis a

estimate csts.

42 Schwab Avisr Services Activity Metrics,

Jauary 2005–december 2008.



This content is or general inormation purposes only and is

not intended to provide specifc fnancial, accounting or legal

advice. You should consult your legal, tax and fnancial advisors

beore making any fnancial decisions.

Experiences expressed by advisors may not be representative

o the experiences o other advisors and is not a guarantee o

uture success. The mention o third party frms are not, and

should not be construed as a recommendation, endorsement

or sponsorship by Schwab. These frms are not afliated with or

employed by Schwab.

©2009 Charles Schwab & Co., Inc. All rights reserved. Member

SIPC. Schwab Advisor Services (ormerly Schwab Institutional)

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