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May 25, 2021 at 01:59 PM
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.”
