Are Altruist's technology and low fees enough to tame the giants?

This past February, financial planner Alex Chalekian and Altruist founder Jason Wenk were on vacation in Zihuatanejo, Mexico, when the firm's tax planning tools sent Wall Street into a tizzy.

Investors dumped shares in giant rivals such as Charles Schwab, LPL Financial and Raymond James after the upstart custodian and registered investment advisory platform unveiled its new AI-powered analysis of clients' tax documents and other materials. 

After Chalekian, the founder of Pasadena, California-based RIA firm Lake Avenue Financial and an early beta tester of Altruist's services, received the email about the rollout, Wenk's phone "started blowing up" and he "pretty much excused himself" to field interviews from the media, Chalekian recalled. 

Based on the power of capabilities through Altruist's Hazel AI, such as calling up a list of clients who need to take required minimum distributions from their individual retirement accounts this year and sending them all email notifications by hitting a button, Chalekian said he doesn't think the stock market moves that day were an overreaction. Altruist's financial advisor desktop will "slowly but surely replace all the other tools that we have" in the current setup of in-house and integrated software vendors from such large industry incumbents, Chalekian predicted. He compared it to how the iPhone replaced the BlackBerry.

"I think their leg up truly is that they take feedback and they implement it," Chalekian said. "They're truly building based on what the advisors want — what are the pain points? How do we solve for this? What do you like? What do you not like? I've never in 28 years heard a custodian ask me any of those questions. It is a challenge, but I think they're up for it. You've seen this happen in other industries."

Not everyone is quite so sure, given that the 8-year-old company has amassed only about 6,500 financial advisors using Altruist at roughly 4,000 RIAs as the custodian to an undisclosed number of assets. As part of Financial Planning's ongoing series analyzing the fees and business model of the industry's custodians, legacy players like Schwab, Fidelity Investments and BNY Pershing shared their much bigger footprints. And that scale and experience have always wrought them sizable advantages.

But Altruist has certainly changed from its early days as a plucky startup. Last year, the firm received a valuation of $1.9 billion as part of raising $152 million in Series F funding — just two years after purchasing brokerage and custodian firm Shareholders Service Group. 

Unlike most custodians, the firm's website provides its flat fee schedules for all of its advisory-firm clients for transactions and operations, tax management and model portfolios and subscription-based bundle of 0.01% per month, per household premium via its Altruist One service tier. Advisors like Chalekian say Altruist has helped them cut costs for themselves and their clients while saving everyone time they previously spent figuring out the industry's notoriously clunky technology.

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The firm is 'manically focused'

At the same time, Altruist hasn't completely launched a full menu of wealth management services like margin lending, and its nascent corporate RIA discloses some common industry conflicts of interest such as cash sweeps and payment for order flow. 

The basic model for the wealth management custodian business calls for some mix of revenue from four possible areas: transaction fees, third-party payments from fund managers or other product or service providers, cash management and lending, and advisor custody fees. So disrupting the big players will require both thoughtful innovation within those parameters and massive asset flows.

Altruist is admittedly and deliberately not profitable, according to Mazi Bahadori, the firm's chief operating officer and chief compliance officer. He said that the firm's payment for order flow enables the highest-quality execution and lower prices for advisors and clients, while the cash sweeps pay elevated rates compared to the firm's rivals and offer investors much easier methods to switch into greater-yielding vehicles. When asked in an interview how he would answer critics suggesting Altruist just won't be able to unseat the giants of the industry, Bahadori responded with the adage of doing so "gradually, then suddenly."  

"We're generally way less focused on what incumbents are doing, just as a matter of practical execution," Bahadori said. "If we just stay manically focused on building for and serving the clients, then good things will come. So that's what we do. We're very confident in our approach and really heads-down focused on execution."

Wenk reacted in a similar manner last month, when Seth Adam Stuart, a consultant to wealth managers and companies in adjacent fields, shared a 16-page analysis of Altruist's business on LinkedIn. Stuart wrote in his post that Altruist is facing "several critical questions that remain unanswered": Is the firm profitable? How many assets does it have under custody? Will its service and compliance arms grow as quickly as its product launches? Can it win "large, national, global and complex" RIAs with the wealthiest clients and "not just become a secondary or third or fourth or even a fifth" option? And will it "overcome the trust, capital and ecosystem advantages" of Schwab, Fidelity and Pershing?

"I prefer just staying laser focused on helping advisors and their clients," Wenk wrote in the comments. "We're in this for the lead position, not the fourth."

In an interview, Stuart said that he respects Wenk and his firm "immensely" for "doing a great service to the industry in poking the bear." However, after going through its Series F fundraising round, Altruist will eventually need "to have a liquidity event of some sort" and carry out a plan for "how to build to scale and how they can be truly profitable," Stuart said. With the largest custodians commanding the vast majority of the business and employing hundred-strong teams devoted to each aspect of it, they could absorb the pain of undercutting Altruist if they set out to do so, according to Stuart.

"They are very large, and, unless they're going to make a significant mistake, they're not going anywhere," he said. "That's the challenge, so they can grow, but they can only grow at a certain pace, and they don't have a global scale."

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Cash flows and business streams

To some industry veterans like Stuart and Tim Welsh, founder of Nexus Strategy, a consulting firm he launched after tenures with Schwab Advisor Services and Merrill, those high barriers to entry could just remain too far above anyone trying to reach them. In an interview, Welsh similarly applauded Wenk for earning a lot of advisors' attention while questioning whether the business can be sustainable for the longer term.

As custodians of any size reckon with the falling margins confronting them in this time of lower expense ratios and zero commission, even the biggest players must find new sources of revenue out of their four possible sources of it. And Altruist is starting from a smaller base.

Advisors will continue seeking out service providers that offer them their choice of preferred software vendors in an open-architecture operating system deploying cash management that reduces or eliminates other potential costs like direct custody fees on advisors, Welsh said. He viewed the February stock selloff through that same lens.

"It had nothing to do with Hazel. It was the specter of AI being able to automate that cash," Welsh said, suggesting investors had the importance of cash sweeps and other interest revenue to wealth management firms' businesses in mind, rather than the utility of Altruist's AI tax-planning or other tools under development. "We should smash their stocks, because, now, all of a sudden, they're definitely in trouble when AI shows up and starts to do that work."

For his part, Bahadori acknowledged that Altruist has heard from "many advisors thinking, 'This just sounds too good to be true." But the firm has set out to attract them by offering the "cleanest, simplest, most transparent fee schedule you can find in the industry," and has vowed not to "nickel and dime our clients or their clients" in the process, he said. 

Pointing out that Altruist has "an extraordinarily healthy balance sheet" and that firms like Amazon have operated at a loss for years, Bahadori said that Altruist has avoided making tweaks that could turn it profitable. 

Altruist's stance contends that, "if you deliver more value to the end client by not extracting fees from them to generate value for the custodian," then, "while it's very long term, it's the right way to set up a business," he said. And he cast its smaller size as an advantage in itself, in comparison to bigger firms that flip those profitability switches behind the scenes.

"We just fundamentally disagree with that — for us to expand margin, we get to control the op-ex," Bahadori said, referring to "operating expenses" by abbreviation for the cost it takes to support vast numbers of employees managing tasks like account opening, transfers and trades. "If you're operating on 40- or 50-year-old architecture and infrastructure, you just need more humans to do stuff." 

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Questions for the future

That approach is drawing advisors like Chalekian, who said that the rise of technology like AI and older digital tools prompted him to seek out "something that is a much better all-in-one solution" than the longer-tenured custodians who are "still bolting on tools and software." 

His firm has moved nearly all of its client accounts to Altruist in a series of phases as the custodian built out its capabilities in recent years, with the technology shrinking some transfers that usually take a business day or two into "a couple of minutes," Chalekian said. But a few accounts are staying with previous providers until Altruist has fully rolled out services like margin lending and option trades. He and Bahadori also both expressed excitement about an upcoming launch for Altruist's own financial planning software.   

But the fees represent a major driver as well. In contrast with custodians who use fees as a "negotiation tactic" that results in haggling over a patchwork of different pricing plans, Chalekian said that Altruist's automatic rebalances, lower portfolio management fees and lack of transaction or ticket charges have enabled his practice to cut its average advisory rates for clients to 0.84% of assets under management from 1.25% before going to Altruist.

"If I can get rid of those extra added layers in cost, then that is something that I can pass on to the client," Chalekian said of the firm's decision to move to Altruist. "It was a no-brainer to us."

Altruist must win over many more advisors in order to catch up to the giants someday, and it has seen some defections from its own executive ranks to competitors, Stuart noted. The unsatiated appetite for metrics like its assets under custody may add to some skepticism across a numbers-obsessed industry. Altruist reminds Stuart of TD Ameritrade in the 2000s, when it began attracting many smaller RIAs, he said.

The challenges will come from inevitable needs in areas like "the compliance, the legal, the risk, the service cells, the intellectual capital — the people who do all the things behind the scenes that people don't even realize," Stuart said. "It's a good firm, it's just, they're facing scaling issues, like TD 20 years ago. They're headed in the right direction."