From the November 2003 issue of Investment Advisor • Subscribe!

This Bear Wants You

Your choices are growing, as witnessed by Bear Stearns's entry into the custody business and some notable tech advances

The independent advisor channel is still in its infancy and, a decade from now, we will probably look back at the choices advisors have today for custody, financial planning, and portfolio management as limited. But independent advisors are getting more choices and better ones.

Over the past few weeks, I was lucky enough to see some long-term trends in the independent advisor business unfold right before my eyes.

First, I interviewed John Tyers about Bear Stearns, a venerable Wall Street company that is entering the RIA custody business. Then I got a demo of Investment Advisory Network's new portfolio management and reporting platform. That was followed by a call from Herzl Hyton of Optima Technologies, who told me that his fledgling portfolio management and financial planning software company had struck a deal with H&R Block and would be profitable by year-end. Finally I talked to Bob Curtis about technology that may revolutionize the way advisors help people.

A New Custodian

Bear Stearns, which has a reputation for toughness and formidable institutional trading, and is the second-largest brokerage clearing operation in the nation, is actively bidding for business with RIAs who manage money for high-net-worth individuals.

A recent study sponsored by Charles Schwab found that advisors can cut expenses substantially by using only one custodian, but many advisors still want choices in custody. The big custodial firms are as loyal to advisors as their profits dictate. The advisor custody service is one of many competing lines of business that the big firms must consider in figuring out where to invest resources.

Housing your assets at more than one custodian may not be the most efficient way of running your business, but for many independent advisors it is a cost of doing business that they accept. It's an insurance policy. Advisors like choices, and that's why Bear Stearns's entrance is noteworthy.

Over the past year, Bear Stearns Advisor Services (BSAS) has quietly been building a sales force and technology platform that is now in place. "We had the makings of an RIA business when we started four years ago, because we already had a hedge fund prime brokerage business," says John Tyers, who heads up sales for BSAS. "Two years ago, the head of our clearing business made the decision to get into the RIA custody business formally and get our own business development team."

Tyers says BSAS has lured $30 billion in RIA assets from 70 firms, most of whom have relied on Bear's clearing operation. However, some of it is new money garnered by a sales team of five reps. The focus is RIAs with at least $100 million under management.

"We have a large clearing firm that truly wants to be in this business in a leadership position," says Tyers. "We don't want to be a leader in terms of the number of firms we work with. Our target market among the 10,000 SEC-registered firms is the 2,000 to 2,500 RIAs with more than $100 million in assets whose main business is managing private client money."

BSAS is one of three businesses run by Global Clearing Services, the clearing operation at Bear Stearns & Co. In addition to the RIA business, the other lines are clearing trades for 350 broker/dealers and serving as a broker and back office to hedge funds.

Tyers worked at Schwab Institutional from 1994 to 2000--years of stupendous growth in Schwab's RIA business--and ran sales in the Southeast region during his last three years at Schwab. Tyers says BSAS has a 50-person service team, but can also leverage the service personnel working at the hedge fund and correspondent clearing operations. Each RIA has one relationship manager for all operational needs, Tyers says, and that person is generally not using voice mail "because RIAs tell us they are tired of getting voice mail."

BSAS, which has a proprietary portfolio management and accounting application, is about to announce a relationship with Investment Scorecard, a Nashville-based performance-reporting platform company. Tyers says BSAS plans to charge $5 to $7 per account per month for this performance- reporting service bureau, but will provide "relationship-based pricing" to RIAs that are BSAS clients. He says Investment Scorecard's integration with BSAS's back office is "seamless," which will make performance reporting easier for RIAs housing assets at Bear.

Tyers says seeds of growth in the RIA market are being sown by wirehouses. In an irresistible reaction to the bear market and scandals over conflicts of interest, the wirehouses have introduced more fee-based services and are actively advertising themselves as financial planners and wealth managers. By relying more on fee-based advice revenues and copying the business model of independent RIAs, Tyers says the wirehouses make it more likely that their brokers will break away. "The more that the wirehouses look like RIAs and charge fees, the more the RIA market will grow," predicts Tyers.

"We're seeing more of these breakaway brokers," says Tyers, citing a group that managed about $350 million at Smith Barney but which defected to BSAS. "These high-end brokers that leave wirehouses want an institutional firm to support them and do not want a retail-oriented custodian," he says. "They're used to having more resources at their disposal than are provided by retail-oriented custodians, and that is what we are doing."

Tyers says BSAS has a competitive advantage over custodians whose main business is serving retail clients because of its institutional focus. He cites Bear's restricted stock, derivatives, and fixed-income desks as examples. "We're one of the largest fixed-income desks on the Street," he says. "Or if an RIA has a client with a significant portion of his wealth in a single stock or illiquid securities, we have a very strong derivatives department specializing in structured products. Our competitors in the custody business shop out these transactions to us on an agency basis because they simply do not have the capital markets resources to put these transactions together."

Bear Stearns is the first of the old-line Wall Street brokerages to seek business from RIAs. The firm was founded in 1923 as an institutional trading house, and retains to this day a reputation for favoring highly motivated street smarts over Ivy League MBAs. While Bear never sought to have the huge retail network of a Merrill or Smith Barney, it has made money over the decades from its trading desks and capital markets capabilities. Tyers says Bear Stearns's clearing business, Global Capital Services, ranks second only to Bank of New York (which recently purchased Pershing's clearing operation) in terms of assets.

BSAS plans to leverage those institutional relationships to convert them into custodial relationships. "As a fixed-income and trading house, we already have trading relationships with most money managers," Tyers says. "So we work well internally with our capital markets group to offer our services to RIAs that trade with us. It's a cross-selling opportunity." Tyers says RIAs could also benefit from Bear's institutional lines of business. For instance, an RIA who holds assets at Bear might be helped with trying to start a hedge fund by Bear's Prime Brokerage group.

The entrance of Bear Stearns into the RIA custody business--to compete with Schwab, Fidelity, and Waterhouse--underscores the maturation of the fragmented RIA market and its growth potential. The push by BSAS to target the large-RIA niche follows an announcement by Ameritrade earlier this year that it would seek to build relationships with hundreds of fledgling firms. Until now, custodians have not been so niche-oriented, at least not publicly.

Only time will tell if this segmentation will work. Can Ameritrade succeed in helping hundreds of smaller advisors grow their assets? Will BSAS's effort to lure the most profitable RIA relationships make it tougher for custodians that serve the hundreds of RIAs with $25 million to $100 million under management? Meanwhile, the competition for RIA business is good news because you have more choices. It's also good news that these large companies are making business plans based on the projected growth of the independent advisor channel.

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