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E-Trade's RIA Custody Unit Sold for a Song. What Happens Next?

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What You Need to Know

  • When Morgan Stanley chose to “unload” E-Trade’s RIA custody unit, it created a new option for RIAs and a new competitor.
  • Axos is positioning itself as an option for RIAs disillusioned with the Schwab-TD Ameritrade integration.
  • But Axos faces steep obstacles as a new presence in the RIA custody space.

Just when we thought the RIA custodian waters had settled after a tumultuous 2020 that saw Schwab gobble up its nemesis, TD Ameritrade, a new player is eyeing the RIA asset prize.

Enter Axos Financial, with a headline-grabbing announcement that it was acquiring E-Trade Advisor Services and its $23 billion in RIA assets from Morgan Stanley for the bargain-basement price of $55 million in cash.

Why “bargain basement,” you ask? Just four years ago, E-Trade bought Trust Company of America for $275 million and rebranded it E-Trade Advisor Services (EAS). Where did the $220 million in leftover value go?

It was most likely eaten up by Morgan Stanley’s indifference to the opportunity with independent RIAs as Morgan’s 16,000 in-house brokers compete with RIAs on a daily basis for the assets of high-net-worth clients.

As part of Morgan’s seminal deal to acquire E-Trade last year, EAS came along for the ride in a manner that suggested an RIA custody division would not end well inside a wirehouse.

In fact, upon the initial deal announcement that Morgan was scooping up E-Trade, Morgan’s loquacious and well-known CEO, James Gorman, foreshadowed as much on a call to analysts: “Obviously, [EAS] wasn’t the primary motivator of the transaction, but we respect the RIA business and understand it a little bit, and we will play that out over time.”

Clearly, Morgan Stanley does not understand the RIA business, nor did it want to play it out over time, so it unloaded EAS to Axos Financial at a substantial and significant loss. It was no surprise that Morgan Stanley unloaded EAS; the surprise was to whom Morgan sold it.

Ultimately, Morgan’s choices were strategically limited in that it did not want to provide a $220 million RIA subsidy to any of its direct competitors that have significant RIA custody businesses, such as Schwab, Fidelity or the Bank of New York Mellon, which owns Pershing.

As Schwab is digesting TD Ameritrade and gaining near-monopoly market share in RIA custody, Morgan would much rather absorb a significant financial loss than hand over a juicy $23 billion RIA prize such as EAS to its biggest competitor.

This reluctance, combined with the small pool of potential buyers who aren’t competing with Morgan Stanley, most likely added significant leverage to Axos’ negotiating stance, giving Axos instant entry into the lucrative RIA custody space.

Not only did Axos leapfrog the smaller custodian marketplace, it also picked up a complete technology solution, purpose-built for RIAs, at a staggering 80% discount. Talk about the deal of the century. Kudos to Axos’ negotiating team!

Axos Who?

Which raises the question: Who is Axos Financial?

According to the company website, Axos Financial is “the holding company for Axos Bank, a nationwide bank that provides consumer and business banking products through its low-cost distribution channels and affinity partners.

With about $14.4 billion in assets Axos Bank provides financing for single and multifamily residential properties, small to medium size businesses in target sectors and selected specialty finance receivables.”

Axos Financial’s wholly owned non-bank subsidiaries, Axos Clearing LLC and Axos Invest, Inc. provide comprehensive securities clearing services to introducing broker-dealers and registered investment advisor correspondents and digital investment advisory services to retail investors, respectively.”

Before the EAS deal, Axos did not appear in any competitive searches for an RIA custodian. It was clear, however, that it had an inkling of where it wanted to go in late 2018, with an early acquisition of the robo-advisor WiseBanyan — one of the first robos to offer its services “free,” providing Axos with an entrance into digital wealth management.

According to Axos President and CEO Gregory Garrabrants: “The addition of approximately 200 RIA custody relationships with $23 billion of combined assets under custody significantly accelerates our time-to-scale in this business. We intend to leverage EAS’ turnkey technology platform and Axos Clearing’s capabilities to expand the service offerings to independent registered investment advisors and turnkey asset management program managers.”

As part of the EAS deal, Axos picked up a comprehensive technology platform, Liberty, that includes reporting, CRM, rebalancing, proposal generation, e-signature, billing, UMAs and tax management tools, all built on “proprietary web-based software.”

Next Steps for Axos-EAS

What also made EAS particularly appealing to Axos was the newfound ability to go after dissatisfied advisors leery of becoming just another number in the vast call centers and DIY websites of the Schwabitrade goliath.

The latest estimates coming from the discount behemoth point to at least two or three more years before Schwabitrade begins to actually integrate systems. Things will start to get really interesting then.

In the meantime, this extended period in which Schwab and TDA technology executives play a high-stakes game of chicken as to whose technology will prevail is creating lingering uncertainty and keeping TDA advisors in the dark regarding the fate of the award-winning Veo One workstation they admire so much and depend upon.

These significant merger and integration delays are giving Axos ample time to bring all the pieces of EAS into its custody, clearing and banking platforms to become an instant competitor of size and scale for RIAs looking to diversify custody.

The bigger question for the new Axos-EAS tie-up, however, is about marketing, branding, and its position in the advisor technology ecosystem. Will established advisors want to do business with an unknown entity in the near term? Or will Axos/EAS need to focus on newer, smaller RIAs and those just getting started?

RIAs fundamentally care about the name on the statements and account-opening forms their clients will see. They don’t want to have to convince clients that the institution where their money will reside is a viable and trustworthy enterprise.

And because most RIAs already have multiple components of their technology stack in place, how much investment will Axos need to make to bring together and integrate those popular advisor technology applications and components?

These marketing, branding and technology decisions are very important. Axos/EAS will need to make these expensive strategic investments to continue the momentum and enter the market successfully.

At the same time, the Axos-EAS venture will need to fend off competition from the new crop of smaller, advisor-focused custodians, many of whom have recently launched and will be messaging a similar story of disruption to the Trust Company of America RIAs who are now on their third owners in less than five years.

All of which goes to show that things are about to get very interesting again in what many portray as a sleepy, slow-moving corner of the financial services industry.

Timothy D. Welsh, CFP, is president, CEO and founder of Nexus Strategy, LLC, a consulting firm to the wealth management industry. He can be reached at [email protected] or on Twitter @NexusStrategy.


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