Schwab Transition: A Look Behind the Scenes
Work continues in earnest on the transition to Schwab. There is a lot of preparation that goes into changing custodians. This is often referred to as “repapering” in the industry, as every account requires new paperwork. There is the logistical challenge of gathering information for each client and each account in a practical format. There is the professional challenge of interacting with a new customer service team and a new software interface. Most importantly, there is the challenge of providing consistent service to clients and making the process as seamless as possible.
I will not rehash our explanations for making the transition, but I will give you an update on where it stands and why we have been asking you to confirm personal details that may seem trivial or unrelated to investment strategy. Our goal remains to complete the process mostly digitally. Our clients have been willing and helpful participants to that end. We plan to continue utilizing digital forms and signatures in our normal course of business, when possible. Reducing analog paperwork between you and your custodian should improve speed and efficiency.
The whole team at Provident has been working hard to tackle the challenges I mentioned above. After negotiating terms of the move, the first step was aggregating all our information into the format requested by Schwab. This would include anything needed to open a new account, transfer assets, establish links to outside financial institutions, and so on. Over the years, the amount of data we store has grown with the business. The data has been segregated and protected. This put a few obstacles in the way of quick mass retrieval, but that is a welcome tradeoff for robust information security.
Those of us most involved in the transition met weekly with a Schwab transition team representing many specializations. We learned how they processed applications, how to best present information, and what clients would experience during the process. Schwab trained everyone in our firm on the client-facing Schwab software called Schwab Alliance, as well as the advisor-facing software we will be using for day-to-day operations. We met with the securities team, the trading team, and the fixed income team. We built a strong foundation of knowledge so we could hit the ground running.
After many weeks, we assembled our data and reviewed what was missing. We initiated a campaign of emails and phone calls requesting previously unrecorded or outdated information. This gave us a great opportunity to refresh our internal records, something we will continue to do through the completion of the transition and beyond. With your help, we completed our data collection and submitted it for processing.
Within a week Schwab populated over 700 digital envelopes and shipped us nine boxes containing nearly 200 envelopes of paperwork. If not for the digital signature capability we may have been negotiating with our neighbors for storage space! Provident employees completed our own applications and transferred our assets first as test cases. We incorporated our experience from these initial accounts when preparing the rest of the client applications. We entered data and flagged required fields; we attached voided checks and trust documents. Each digital and paper envelope was opened, updated, and sent to its owner for signing. As you continue to return your signed envelopes, we get closer each day to completing the process.
Some of you (and us) have asked about the information required on the account applications. Why does the custodian need to know my employer’s name? Why can’t I apply for an account using a P.O. Box as my address? Why do they want my mobile phone number? These are all requirements Schwab has put in place to comply with Know Your Customer (KYC) regulations. These industry-wide regulations are diverse, becoming stricter, and can be ambiguous regarding implementation.
KYC has its origins in the Bank Secrecy Act of 1970 (BSA). BSA, also known as the Anti-Money Laundering law (AML), is a U.S. law requiring U.S. financial institutions to assist U.S. government agencies in detecting and preventing money laundering. These rules were expanded in 2003 with the U.S.A. Patriot Act which required U.S. financial institutions to develop a Customer Identification Program, more commonly known as Know Your Customer. Additional requirements included internal controls, designated compliance officers, and ongoing employee training.
The cost of compliance with KYC regulations is high but the costs of fines and remediation are higher. Fines for KYC/AML compliance failures topped $10 billion worldwide in 2020, bringing the total worldwide KYC/AML fines since 2008 to over $45 billion. Goldman Sachs holds the unenviable record for the most penalized, having been fined a total of $6.8 billion dollars by nine regulators across five countries so far. Faced with these numbers, one can understand why Schwab puts in place these seemingly arbitrary requirements, and why they are not overly sympathetic to the plight of the data collector (Provident).
We moved our own accounts in late April and early May. A limited number of client accounts were moved over by mid-May. We paused briefly as clients taking recurring withdrawals were paid out on May 25th. Also, we anticipated taking action following a spinoff from a key holding around May 25th. It was prudent to have all accounts settled in place before accelerating the move to Schwab in June.
Moving custodians is not as simple as a flick of a switch. Each participant ranks their priorities differently but in the end the goal is common - completion. We continue striving to make this a seamless transition for you and we appreciate your support as we get one day closer to wrapping it up. If you have any questions regarding the transition, please contact us at 800.449.6970.
Eric Pozolo, CFP®