It's good to be a custodian these days. Online brokerage giants, including TD Ameritrade, Charles Schwab and Fidelity, are taking market share from almost every segment of the financial advisory business - except for RIAs.
In 2009 and 2010, the online brokerage segment gained an additional three percentage points of the $13.5 trillion advisory wealth management market, pushing its share up to 19%, according to a new report from Aite Group. Just about every other segment either lost ground or inched up by less than a full percentage point.
Self-directed investing is now the second-largest segment by market share behind wirehouses, which held 38% of the advisory business. Independent broker-dealers, banks and insurance-affiliated brokerages held 16%, self-clearing firms took in 15% and independent RIAs had 11%, according to the report.
"Online brokerages are an increasing competitive threat to all segments, other than the RIAs," says Sophie Schmitt, a senior analyst at Aite. That puts asset custody firms in a comfortable position, because they shepherd two of the industry's fastest-growing segments - RIAs and online brokerages - which have tremendous appeal to clients right now.
Also noteworthy is that while the online brokerage industry increased its assets by a total of 50% in 2009 and 2010, bringing the total market size to $2.5 trillion, the number of accounts rose just by 8%. That means the asset explosion stemmed from the fact that existing investors were putting more of their money into online brokerage accounts.
From that perspective, "Clearly, TD Ameritrade, Schwab and Fidelity are the main winners" of the financial crisis, says Alois Pirker, director of wealth management research at Aite. "They represent the market and are having a great time right now."
Online brokerage accounts are attracting mass affluent investors whom the large wirehouses are leaving behind. But high-net-worth investors are also participating. "It has been a move from, 'It's great for the self-directed mass market,' to HNW investors having a 'play' account," Schmitt says.
Going forward, how will those firms continue to support growth in the self-directed investing segment while ensuring that the RIA firms they serve do not lose the footing they've gained in the wealth management business?
Very carefully, according to executives at TD Ameritrade Institutional. The firm regularly steers clients who use its self-directed investing tools toward RIA firms, through its Advisor Direct program. These are individuals who might be dissatisfied with the workings of full-service commission-based brokerages and want to move all or some of their assets elsewhere. Often, they realize that they are not complete do-it-yourself investors.
"When we find those individuals, we will refer them to an RIA," says Tom Bradley, president of TD Ameritrade Institutional. "Our experience has been that it is a great opportunity to find individuals who want to benefit from an independent RIA."
In 2010, TD Ameritrade helped existing RIA firms add more than $3 billion in net new client assets to their businesses through Advisor Direct. This year, the custodian has already connected additional self-directed investors representing some $4 billion in business to RIAs, Bradley says.
"We have gotten very good in our branch network at identifying what type of investors these individuals are," he adds. "Do they have a do-it-yourself bent to their personality, or are they more of a delegator and should they have a discussion with an RIA?"
In the financial advisory business, TD Ameritrade Institutional trails its major rivals in some key industry categories, according to Aite. Schwab Advisor Services leads in having the largest fleet of advisor firms using its custody services and the most client assets. And Fidelity shares the lead with Schwab in highest average AUM per team.
But when it comes to its position in the custody market, TD Ameritrade Institutional has plenty of opportunities to exploit. For one, according to Aite, it acquired the most advisor teams going independent or transferring between independent firms from September 2009 to September 2010: 288. That represented $8 billion in assets.
Schwab brought 163 teams aboard in 2010, representing $13 billion; and Fidelity added 146 teams with $12 billion in assets. Pershing Advisor Solutions rounded out the top four in this category, with 40 new teams and $6 billion in assets.
Counting existing business, advisory teams with custody assets at TD Ameritrade Institutional have about $29 million in AUM on average. That puts it behind State Street, with $301 million; Fidelity, with $166 million; and Schwab, at $109 million. Pirker noted that the custodians provided client estimates to the nearest 1,000, which might account for slight discrepancies. TD's sister business, its online brokerage segment, increased client assets by almost 75% from 2009 to 2010.
A BRIGHT LINE
Schwab launched an Independent Branch Services program in June as a way to extend its network geographically. It seems to be protecting its RIA clients with a strictly enforced honor system that bars professionals in its company-managed branches from contacting clients at RIA firms. That means leaders in Schwab's growing branch network will have to let clients come to them.
"The no contact policy will apply to franchisees," says Michael Cianfrocca, a company spokesman. "It is written into the contractual language." Schwab plans to expand its network using a franchising model and choose branch leaders with a strong background in sales and relationship management, adds Andrew Salesky, senior vice president of the firm's independent branch services program. There's a broad spectrum of financial services firms from which Schwab can choose, including independent broker-dealers and RIAs, to lead its new franchise branches and serve mass-affluent investors.
Indeed, Schwab had identified 200 potential franchising opportunities by mid-June, most of which came from the ranks of RIAs and independent broker-dealers, Salesky says. "The opportunity to now leverage the Schwab brand in an independent model is unique and compelling," he adds.
Nevertheless, a larger Schwab branch network will not threaten the RIA space anytime soon. Aside from the no-poaching policy, there is a set of natural barriers between the two channels, according to Schwab officials. For one, the program is not a means to take the self-directed investing business upmarket and capture more affluent clients, Cianfrocca says. It will offer services to mass-affluent clients, whereas RIA firms deal mainly with decidedly wealthier households. The company plans to hire externally to staff the growing branch network.
Independent branch leaders will not advise clients on stock selection or be discretionary money managers in any other way, Salesky says. Further, branch leaders will continue to identify investors with sophisticated needs, like highly customized portfolio management, and refer them to advisors. Some 250 to 300 planners participate in the Schwab Advisor network's referral program, Salesky says.
Independent RIA firms generally would prefer that custodians stay at arm's length because they do not want to appear like branded extensions, according to Pirker, who adds that the online brokerage platform should continue to boost the more hands-on advisory business models. "We expect that the online and self-directed channel will become part of full-service models to a greater degree," Pirker says.