An Update on Provident
First of all, I would like to welcome James Skubik as a shareholder in Provident. James came to Provident almost five years ago after many years of experience in the investment management industry and before that in investment banking. James earned his undergraduate degree from the University of Michigan and an MBA from Case Western Reserve University. He is a CFA Charterholder as are Dan Boyle, Miles Putnam, and I, so it is fitting he joins the three of us as a shareholder in the business. Don’t read anything into this change beyond rewarding a valued member of our investment team because it is good for the business and for our clients.
We’re now several months past our transition to Schwab and I wanted to provide an update to our clients. Virtually all our clients made the journey with us, and we have considered our effort complete since August.
After more than 13 years with Fidelity, we decided to leave because service levels had declined yet Fidelity demanded a significant additional payment from Provident and/or our clients. We tried to negotiate ways to remain, including a smaller payment plus cost-saving moves, but we couldn’t get Fidelity to budge. The fee it wanted is not standard in the industry. We also became concerned that Fidelity’s stance suggested it was backing away from the business of serving investment advisory firms like us. We suddenly felt out of place.
To hedge our bets, we began discussions with Schwab even while still negotiating with Fidelity to see if something could be worked out. The decision to switch isn’t one we took lightly. Switching meant we and our clients must become accustomed to a different website, statement layout, forms, and processes. But in the end, we couldn’t work out a mutually acceptable deal with Fidelity while Schwab worked hard to give us a deal that was at least as favorable for our clients in every respect.
Several months in, it isn’t surprising that we’ve found Fidelity does some things better and Schwab does some things better. One very pleasant surprise was improved trade execution. We regularly reviewed statistics on Fidelity’s trade execution and found their capabilities to be good, perhaps even impressive. Fidelity warned us that Schwab accepts “payment for order flow,” which some in our industry consider the eighth deadly sin. Payment for order flow means that Schwab hands off customer orders to other brokerage firms who execute the trades for them. These are “execution only” brokerage firms like Citadel and Virtu, names that most people don’t recognize. It is widely assumed that payment for order flow adds to clients’ costs. Indeed, we calculated that cost as part of our due diligence process on Schwab and found it to be a fraction of the fees Fidelity wanted to charge.
What we have found, instead, is that having multiple firms compete to execute our trades seems to have resulted in better prices both when we buy and when we sell. Routinely, our orders appear to be executed a penny or two better per share than we observed at Fidelity. It appears that in payment for order flow, the executing broker makes a little bit, pays Schwab a little bit, and still gives our clients better prices than we expected. The value added by improved execution is many times what Schwab receives in payment.
We thought Fidelity was picky in certain practices, and Schwab is every bit as particular. One area of frustration is that Schwab requires our clients to authorize address changes in writing or on its website whereas Fidelity allowed us to make changes upon client request. Our Schwab team tells us they are working to improve this as it is a frequent complaint from investment advisors.
We have also found Schwab’s paperwork process to be more complex. It requires more information than we are used to, particularly on SEP IRAs, pension and profit-sharing plans, and corporate and nonprofit accounts. Much of this isn’t noticeable to our clients because we acquire the data and prepare the forms for signature. This is also a trend over my years in the industry—paperwork is becoming longer and more encompassing than many years ago.
What attracted us to Schwab more than anything is the quality of its people and their can-do attitude. We know things will occasionally go wrong, but the measure of an organization is how they go about fixing the inevitable problems. We have had much better success getting Schwab to escalate matters when we need quick action. Fidelity used to be pretty good at this, but service response slipped badly the last year we were with them. We noticed this when Fidelity’s employees began working from home in the early days of the pandemic, and in fact things worsened last winter leading up to our decision to move. Schwab’s employees also work from home, and their service levels seem better.
We recently spent an hour on the phone with our Schwab service team lead and the managing director of sales to discuss areas where we felt Fidelity was doing a better job than Schwab. They seemed receptive to our concerns, and in fact noted that several of them were already being addressed within Schwab.
I’ve been asked many times if I thought the move to Schwab was worth it. That’s a more loaded question than most people realize. We would have stayed with the Fidelity we had known if that were possible, but Fidelity changed. Whether we stayed with Fidelity or moved to Schwab, we were going to be dealing with change either way. We chose to go with the firm that showed the greatest commitment to our industry, our firm, and our clients. I’d rather move forward than settle for something less out of fear of action. There is risk in every action, whether in business or investing, but there can also be risk in inaction.
Scott D. Horsburgh, CFA