Page 14 - Investment Advisor June 2021

INDUSTRY INSIGHTS

By Tim Welsh

New Custodian Axos Eyes the Prize

When Morgan Stanley decided to “unload” E-Trade’s RIA custody unit in
April, it created a new option for RIAs and a new competitor.

ust when we thought the RIA
custodian waters had settled
Jafter a tumultuous 2020 that saw
Schwab gobble up TD Ameritrade as
its competitive nemesis, a new player is
eyeing the RIA asset prize.
Enter Axos Financial, with a head-
line-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 mil-
lion 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 substantial and significant loss. It was no small pool of potential buyers who
acquire E-Trade last year, EAS came surprise that Morgan Stanley unloaded aren’t competing with Morgan Stanley,
along for the ride in a manner that sug- EAS; the surprise was to whom Morgan most likely added significant leverage
gested an RIA custody division would sold it. Ultimately, Morgan’s choices to Axos’ negotiating stance, giving Axos
not end well inside a wirehouse. In were strategically limited in that it did instant entry into the lucrative RIA cus-
fact, upon the initial deal announcement not want to provide a $220 million RIA tody space. Not only did Axos leapfrog
that Morgan was scooping up E-Trade, subsidy to any of its direct competitors the smaller custodian marketplace, it
Morgan’s loquacious and well-known that have significant RIA custody busi- also picked up a complete technology
CEO James Gorman foreshadowed as nesses, such as Schwab, Fidelity or the solution, purpose-built for RIAs, at a
much on a call to analysts: “Obviously, Bank of New York Mellon, which owns staggering 80% discount. Talk about
[EAS] wasn’t the primary motivator of Pershing. As Schwab is digesting TD the deal of the century. Kudos to Axos’
the transaction, but we respect the RIA Ameritrade and gaining near-monopoly negotiating team!
business and understand it a little bit, market share in RIA custody, Morgan
and we will play that out over time.” would much rather absorb a significant AXOS WHO?
Clearly, Morgan Stanley does not financial loss than hand over a juicy $23 Which raises the question: Who is
understand the RIA business, nor did billion RIA prize such as EAS to its big- Axos Financial?
it want to play it out over time, so it gest competitor. According to the company website, Adobe Stock
unloaded EAS to Axos Financial at a This reluctance, combined with the Axos Financial is “the holding company

12 INVESTMENT ADVISOR JUNE 2021 | ThinkAdvisor.com