February 20, 2020
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The future of E*Trade Financial’s custody business for registered investment advisors appears uncertain following Morgan Stanley’s plans to buy the discount brokerage giant for $13 billion.
Wirehouse executives on Thursday championed the potential for some of its 15,500 brokers to receive referrals of wealthy E*Trade clients seeking full-service advisory relations. RIAs compete for the same clients, and Morgan Stanley executives expressed some ambivalence about creating channel conflicts between captive brokers and external advisors.
“Obviously those leads are going to go to our advisors,” said a person close to the deal.
On a conference call with analysts, however, Morgan Stanley chief executive James Gorman said E*Trade’s business of providing trading and custody to RIA custody, while “relatively small,” is interesting. “Obviously it 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.”
Wells Fargo Advisors a year ago created an RIA channel, and smaller rival Raymond James Financial also has RIA and independent broker sectors alongside its employee advisor channel.
E*Trade reentered the RIA custody business with its 2018 purchase of Trust Company of America, but provides services to only around 230 advisors overseeing about $20 billion in client assets. Charles Schwab & Co., the industry’s largest custodian, services about 7,500 RIAs and in December announced plans to buy TD Ameritrade Holdings, the second-largest with about 7,000 customers.
“It’s going to create disarray for the advisors currently at E*Trade,” said Robb Baldwin, founder of TradePMR, a Florida-based custodian with about 400 RIA customers that include those affiliated with Wells Fargo Advisors. “They’re going to be thrown into the pain of the unknown.”
Even if Morgan Stanley were to retain the custody unit, it might have trouble attracting registered investment advisers, many of whom began their careers with wirehouses, consultants said.
“There’s no way advisors are going to custody with a Wall Street firm,” said Tim Welsh, a former Schwab RIA official who runs consulting firm Nexus Strategy. “Morgan Stanley is enemy number one.”
If Morgan Stanley shutters the E*Trade unit, it would further narrow choices for RIAs who are already concerned about losing negotiating power because of the Schwab-TD Ameritrade merger. Some smaller RIAs who work with TD Ameritrade also have expressed concerns that Schwab is not interested in their business, a sentiment the discount brokerage giant denies.
“Only a coterie of small-RIA custody options left, and even fewer competitive choices for large RIAs,” Michael Kitces, owner of Pinnacle Advisory Group and founder of an RIA customer-referral network, tweeted after Morgan Stanley announced its E*Trade deal.
Schwab’s plan to close its TD Ameritrade acquisition by yearend also could be hampered if regulators suspect elimination of another RIA custodian. The U.S. Justice Department last month filed a second antitrust request for information from the firms.
“This makes a Department of Justice case against the merger even more likely,” Welsh said.
Brian Hamburger, a lawyer who specializes in RIA firms and in advising brokers on becoming independent advisers, was skeptical that regulators would take note of today’s announcement when evaluating the Schwab-TD deal.
“If anything, what this tells them is that there are strong competitive forces at play within financial services and validates the reason why Schwab went after TD to begin with,” said Hamburger.
TD Ameritrade spokeswoman Rebecca Niiya said the firm “remains focused on our business priorities and planning for our proposed combination with Schwab.” She declined to comment on any specific implications of the Morgan Stanley-E*Trade announcement.
“Individual investors and advisors will continue to have a wide array of choices when it comes to working with different kinds of financial services providers in the industry at large,” said Rob Farmer, a Schwab spokesman.
E*Trade had been ramping up marketing of its RIA custody business after Schwab and TD Ameritrade announced their plans, in hopes of capturing disenchanted TD Ameritrade RIAs. E*Trade in the past added retirement planning giant Edelman Financial Engines and Denver-based roll-up Mercer Advisors as clients, though like other large RIAs they also use other custodians.