SAN FRANCISCO - Seeking to duplicate its success with OneSource for retail mutual funds, financial powerhouse Charles Schwab is now taking aim at the small to midsized defined benefit plan market - a roughly $300 billion market.
To do this, San Francisco-based Charles Schwab & Co. Inc. is private-labeling InvestorForce Inc.'s institutional funds marketplace. Terms of the deal weren't disclosed.
Adding the 500-plus pooled funds from InvestorForce's platform to Schwab's existing actuarial, custodial, participant services and money management capabilities will enable the financial services firm to offer bundled and semibundled arrangements, explained Benjamin Brigeman, senior vice president at Charles Schwab Corporate Services, Richfield, Ohio.
What's different about Schwab's approach is the so-called open architecture, enabling pension executives to choose among a host of investment funds provided by an array of managers charging institutional-level fees. Managers range from Mellon Financial Corp. units to boutiques such as Turner Investment Partners Inc., Berwyn, Pa.
"I think Schwab has sort of a unique spin to the story," said Joshua Dietch, associate director at Cerulli Associates, Boston, a consultant to money managers. He noted that most of Schwab's competitors use proprietary asset management products in this market.
`A strong firm'
"Schwab is a very strong firm and has excellent technology and record-keeping capabilities," said Curt Kohlberg, president of Chatham Partners Inc., Newton, Mass., a financial services consulting firm. While the addition of InvestorForce's investment options will be a big plus, Schwab will be at a disadvantage when competing with bundled offerings that include investment consulting, he said.
A 2001 study by Chatham found the two key drivers in selecting bundled or semibundled providers are cost and ease of administration - essentially, one-stop shopping. The study projected that 44% of defined benefit plans would be partially or fully bundled by the end of 2003, up from one-third.
Schwab officials define their target market as defined benefit plans with between $20 million and $300 million in assets. Schwab now has only about a dozen defined benefit clients.
About 100 to 150 of Schwab's current corporate clients for defined contribution, deferred compensation and stock-option plan services also have defined benefit plans, about two-thirds of which fall in the target range. Schwab's force of 60-plus relationship managers and its 27-person sales force will market the product.
While cost and access to institutional managers are big drawing cards, the platform also offers the ability to use sophisticated risk controls and analytics, such as Sharpe ratios and Zephyr Associates Inc.'s style analysis.
Some competitors think Schwab is a bit late to the party. Tom Clough, managing director of New York Life Investment Management LLC, New York, said his firm has been offering a bundled approach to defined benefit plans since 1996. The firm's platform includes several hundred mutual funds, including ones from about 40 outside managers.
Tom Johnson, senior vice president of MassMutual Retirement Services Inc., Springfield, Mass., said his firm has been offering bundled and semibundled products since 1947, but sales to defined benefit plans have taken off in the past two or three years. He said the firm booked more than $800 million in business last year from bundling defined benefit plans alone, up from $680 million in 2001 and $350 million in 2000.