There’s a new competitor to Schwab, Fidelity, and Waterhouse’s RIA custodial business. It’s Trust Company of America. If the name sounds familiar, you’re probably confused. Contrary to the prominence its name implies, TCA is not some white-shoe institution catering to old money. It’s a startup with about $3 billion in advisor assets. But the man behind the company, Stephen Finn, is one of those rare entrepreneurs with a knack for the kind of marketing flair evident in the company’s name. He’s built several successful financial services businesses over the last 25 years and TCA could become his biggest success yet. But it won’t be easy.
TCA is going after a very specific segment of the RIA business: advisors with more than $25 million under management who manage money in mutual funds or ETFs and use model portfolios to run their investment advice business. TCA wants advisors using models because they see that as being a scalable business where trading costs can be minimized through the use of technology.
TCA has just unveiled a technology platform that rivals Schwab, Fidelity, and Waterhouse–in fact, it may be better in certain respects–and its technology platform is targeted toward serving the needs of its niche in the RIA market–those who use model portfolios to trade in bulk.
What’s impressive is that TCA says it is only interested in RIAs that will pay it at least $100,000 a year in fees, because then it can afford to provide the client with totally personal service and technology. That’s a gutsy business idea, but one I believe can work in the RIA market. Custody is a commodity. Custodians must differentiate themselves with technology and service, and that’s what Finn is aiming to do.
I asked TCA for specifics about how its service is better. The answer came in a long list that was neither substantive nor compelling. I told that to TCA’s VP for marketing, Sara Nelson. Her reply: “We know we’re providing superior customer service because our customers tell us that, and that is the nature of customer service. Everyone says they have it, but we really do.”
Nelson’s right. It’s hard to prove that you offer better customer service than your competition. Good service providers in the RIA industry become known by word of mouth. Still, some specifics on TCA’s list of service extras indicate where TCA may indeed be able to provide RIAs superior service.
For instance, when an RIA moves assets to TCA, TCA assigns a conversion manager to the RIA. For six to nine months, the RIA works exclusively with that manager to transfer assets. TCA says this is different from other large institutions where an RIA might get shuffled around to different service reps.
Once the transfers are complete, TCA assigns a dedicated trading rep to help with transactions and a dedicated service rep to the RIA’s account. They are trained by the conversion manager to ensure an RIA’s business is understood by the service reps.
Making service reps own a client’s problems is a good idea. Of course, it must be well executed. It won’t be much good to have a dedicated service rep if your rep must also work with 20 other RIAs. Nelson assures me that this is not happening.
No Call Centers
Another indication of the commitment to personal service: TCA gives you a direct line to your service rep and does not have a call center. TCA also says it will customize account statements with an RIA’s logo and brand a client account look-up Web page. TCA also assesses, collects, and deducts all your fees each quarter–even if you have multiple pricing schedules–and there is no need for you to upload a spreadsheet as some other custodians require.
Will these differentiators be enough? Maybe. Finn, 54, proved himself capable of converting profits out of one of the most troubled corners of the financial services industry. He got started in the industry by working with limited partnerships. He graduated from University of Santa Clara in 1976 with an MBA after getting a BA in business and showing a special interest in computer science and systems analysis. He landed a job in Silicon Valley selling payroll service platforms to small businesses for a couple of years. In 1981, he went to work at LCS Investor Services selling data processing to small businesses, including limited partnership syndicators. He became a specialist in systems for syndicators of direct investments and turned LCS into a securities transfer technology platform for syndicators and wirehouses.
His timing was great. Finn got into the business of processing direct investments right when the LPs were about to take off. He bought out one of the partners at LCS in 1985, and the remaining two in 1988. That same year, LCS bought Gemisys, another securities transfer agent. Gemisys could process everything for syndicators, from subscription agreements to blue sky filings, commissions, and K-1s. “We rode the wave to the peak in 1988,” says Finn.
By 1990, however, the LP business was getting ugly. “I decided to reinvent the company and find a new business,” he says. “I was too young to retire.”
It took three years for the LP business to become a disaster, and Finn saw it coming. Integrated Resources, Consolidated Capital, and the wirehouses–his biggest clients–would be ruined or forever tarnished by the LP scandals.
“I was peddling as fast as I could to figure out a new business while Gemisys was still doing well,” says Finn. “But I could see that eventually all the LPs would be liquidated and we wouldn’t have a business.” As the bottom was falling out and he saw the LP transfer agent business evaporating, Finn demonstrated the resourcefulness that it takes to succeed in the RIA custodial business: He discovered not one but two, businesses that would capitalize on the LP disaster that was shrinking Gemisys.
The LP Secondary Market
In 1993, Finn helped create a secondary market for LPs. He bought out three mom-and-pop businesses that were brokering LPs and consolidated them into one business that he called American Partnership Board. APB matched buyers and sellers and created liquidity and made the secondary market for LPs fairer. Until APB came along, the illiquid secondary market for LPs forced some grandmas and grandpas to sell their interests at five, 10, or 20 cents on the dollar. APB published bids and widely distributed them via fax. It created an auction, kind of like e-Bay, that was more transparent. In 1998, APB became an Internet marketplace. APB raked in $5 million in commissions in its first year of operations, Finn says, and it is still active, although the vast majority of the LPs have been unwound and the secondary market is relatively quiet now (Investment Advisor, however, continues to publish actual secondary market prices for LPs at www.investmentadvisor.com).
Though APB showed Finn’s dexterity, another business he started that same year has had more lasting power and would presage his entrance into the advisor custodial business. Finn says that as the partnership market continued to be devastated, he discovered in 1993 that it would be wise to start a trust company to complement his LP transfer agent business.
Forty percent of the LPs administered by Gemisys were in IRAs, and that meant the company was administrator to about 30,000 IRA accounts. Finn realized that by creating a trust company, he could pretty easily transition his business from just being a direct investment transfer agent to become an IRA custodian and administrator. The trust company initially held illiquid IRA investments and became known as a niche player in the IRA custody business because it would accept LPs, which was uncommon among trust companies. Hence, TCA was born.
Not long after starting TCA, Finn discovered the RIA custodial business. “It meant doing business with other businesses, which fit us well,” says Finn. Finn looked at what the competition–Jack White (which eventually merged with Waterhouse), Schwab, and DATAlynx–were offering. “We thought their technology was Mickey Mouse,” he says.
In 1995, TCA’s board decided to pursue the RIA business vigorously by putting to work his tech team from Gemisys on creating an RIA platform. That software was rolled out in 1997. In 2003, it was launched as an Internet platform. Along the way, TCA has lured $3.2 billion in advisor assets. That’s a tiny fraction of Schwab’s RIA assets, but the technology platform and commitment to providing service and support to a well-defined niche makes me think there’s room for TCA to succeed.
Finn estimates that about 2,000 RIAs are in TCA’s sweet spot, meaning they have at least $25 million in assets, use funds or ETFs, and base all of their client portfolios on groups of model portfolios. He has 75 advisors now.