From the July 2012 issue of Investment Advisor • Subscribe!

June 26, 2012

The Spirit of Scottrade: Little Firm Pushes Big Value

Brian Davis (and his team) trumpet value and service above all else, an attitude that has the relatively young institutional player gaining on more established rivals in the clearing and custody field

Photography by Stefan Hester Photography by Stefan Hester

Brian Davis is a nice guy—almost annoyingly so for the writer assigned to his interview. Asked to brag about himself, Davis instead goes out of his way to make it about “the team,” which number about 100 employees tasked with building out Scottrade’s institutional platform.

All well and good, but how specifically did he come so far so fast? No luck; he won’t budge and once again describes the pride he feels in “the team” for continuing to expand on the company’s service metrics. 

If you haven’t heard of Scottrade Advisor Services, you’re forgiven. Started in 2005, it resides in the decidedly non-financial hub of St. Louis alongside its better-known retail counterpart. But the institutional business is coming on strong, finding a niche among Schwab, TD Ameritrade, Pershing and smaller clearing and custody firms, not to mention the entire independent broker-dealer industry.

“Our strong consumer brand works to the advisor’s advantage,” Davis, the division’s director, explains. “The institutional brand certainly isn’t as well known, but clients know Scottrade and feel comfortable placing their money with us, as opposed to what could possibly be some sort of Bernie Madoff situation.”

Maybe it’s a Midwest, plain-vanilla sort of thing, but the Bernie Madoff reference is important. Davis notes the firm isn’t big in the alternative investment space, especially the “pure play private placement stuff.” It’s a surprising answer given the need for non-correlated asset classes in the current market craziness, but one he says stems from a lack of demand from their advisors, something rarely heard from other firms.

“It’s not what we do,” he says. “For those advisors that want [access to alternative investments], we offer qualified third parties that are the experts in that area.”

The attitude translates to other areas beyond alternative investments. The institutional division is not a supermarket like other firms, Davis adds. Some advisors need hand-holding and others don’t. Because of the unique, customized situation in which many advisors find themselves, Scottrade has narrowed it down to offering best-of-breed vendors that can help those advisors who want hand-holding, as well as those who don’t.

So, of course, when the subject of value is mentioned, Davis immediately seizes upon it.

“Value is a subject of cost,” he explains. “It is drilled into everyone’s heads here at Scottrade to deliver as much value as possible for the given level of cost. We do that through our superior service and through partnerships with first-rate technology and software providers, like with MoneyGuidePro. But we look at it more macro than that; value and cost [are] ingrained in our culture.”

In other words, the company is known for its low costs, but it doesn’t translate to low-quality service.

“Our service is something that advisors continually mention, and it’s something of which I’m extremely proud,” Davis adds. “It’s not a phone bank type of thing. When the advisor calls, they get a direct line to a dedicated representative to help with their situation.”

That level of service translates to more wallet share for the company. Contrary to the majority of RIAs and broker-dealers listed in Investment Advisor’s 2012 Broker-Dealer Reference Guide (see June 2012 issue), Davis says most of the advisors he’s signed use Scottrade Advisor Services exclusively.

“Typically, our partners only use Scottrade, as opposed to multiple custodians,” he says. “It’s stressful enough making the leap to a new clearing and custodial partner; getting to know multiple platforms is even more so. So they like to get their feet wet with just one.”

Whatever the case, something’s working. The firm reached a milestone recently, announcing in early April that it surpassed 1,000 advisory firms in its client base (as we said, coming on strong). According to the company, the institutional division “has seen progressive growth year over year, with 2010 assets growing by 50% and 2011 assets growing by 45%.”

“It’s a 50-50 split as to where the advisors are coming from,” Davis claims. “Half come from wirehouses and half from independent broker-dealers.”

While they have the ability to serve advisors of all stripes and experience levels, their sweet spot is the state-registered advisor with less than $100 million in AUM; those advisors who might have recently left the wirehouses with $80 million, or those who are just starting out with $20 million or less.

For the smaller advisors, he sees a growing trend related to “planning networks,” like Garrett Planning Network, which offer clients hourly fees, as opposed to charging them based on AUM.

“We enjoy a great relationship with Garrett Planning Network, which is structured in a unique but effective way of which advisors can take advantage,” he says. “By pooling the AUM, the advisors and clients can enjoy the hourly rate relationship, but from Scottrade’s perspective, we’re still receiving the assets under management.”

If only the discussion of value and service could end there. Competing against dominant players like Schwab and Fidelity means Scottrade suffers many of the same headaches experienced by Schwab and Fidelity; namely headline risk and the recent Facebook IPO debacle, which NASDAQ now counts as 30 million improperly executed shares.

In late May, Scottrade was criticized (along with its competitors) by The New York Times and other news outlets for incorrect trades and what it saw as poor customer service in the days following Facebook’s market debut.

“[R]etail investors have spent much of this week looking for someone to address their losses, or even just to answer questions about where they can take their complaints,” the paper noted.

It went on to claim that “brokers like Scottrade have almost universally declined to take direct responsibility for the losses their customers suffered. The frustration of these customers has played into a broader sense that small investors got the short end of the stick in the bungled Facebook offering.”

“Clients who have shares of Facebook stock in their accounts can trade their shares at any time,” Scottrade spokesman Whitney Ellis told the Times. “We have tried to address every client’s concerns on an individual basis and will continue to do so until everything has been resolved.”

So how does this square with the pride Davis feels in the company’s customer service?

First, the official company line:

“Due to the reported issues at NASDAQ, some clients experienced delays in seeing their Facebook (FB) orders execute. These issues were industry-wide and beyond our control. We worked diligently to process all Facebook orders by Wednesday’s settlement date (May 23).

 Davis, for his part, claims it wasn’t an issue for the institutional division and had little to nothing to do with his team:

“It didn’t really affect Scottrade Advisor Services. Less than 3% of our advisors were in any way involved, which is further proof that the advisors we partner with are reluctant to get involved with anything like that.”

With that out of the way, Davis is eager to hype a new relationship Scottrade recently initiated with Lexington Compliance, developers of the popular “RIA in a Box” platform.

“We recently instituted a new, free compliance program. It’s a hotline for our advisors through Lexington to help answer day-to-day compliance questions that arise,” he said, adding it came about as a request from advisors for help with the increasingly complicated compliance portion of their business.

Davis is also eager to note that the institutional division’s comparatively recent inception is a competitive advantage in a number of ways; Scottrade is nimble, as they are not a legacy firm and can accommodate changes and trends quickly.

For example, Davis notes that as a function of overall allocation, there is greater adoption of ETFs than mutual funds by the firm’s advisors.

“Currently, 23% of our client assets are in ETFs and ETNs and 21% to 22% are in mutual funds,” Davis says. “We started right as the movement to ETFs really started to ramp up. It probably would have been a different mix had we started in 1990.”

In order to capitalize further, Scottrade bought FocusShares in June 2010, and subsequently launched 15 ETFs on March 30, 2011.

The products, already in the low-cost ETF industry, boast even lower costs when compared with rivals, said Erik Liik, CEO of FocusShares. The Total Market Index has an expense ratio of five basis points, and FocusShares’ sector-specific ETFs have an expense ratio of 19 basis points.

“For Scottrade’s advisors, affiliated RIAs and 3 million retail customers, there is no load and a low expense ratio,” Liik explained.

“Overnight success in the ETF space is difficult,” Liik added, “but we’re doing it right by tracking closely to the index and having a very low cost. And now the word is getting out. We’re the best deal on Wall Street.”

As for future growth, goals and operations, Davis is coy, suggesting a number of announcements just over the horizon and advising readers to “stay tuned.”

As for the overall institutional industry and where he sees Scottrade’s place in it?

“I think that given the market environment and the fact that it’s constantly changing, combined with the ongoing breakaway broker and RIA movement, we’re still in the early innings when it comes to opportunity for institutional firms like ourselves,” says Davis, a baseball aficionado and long-suffering Chicago Cubs fan (redundant). “Because of our brand, reputation and cost structure, when we finally arrive at the bottom of the ninth inning, we’ll be a major player in the space.”

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