Can the 'Big Four' custodians become the Big Five?

Scottrade is making a big bet that there is room in the booming RIA custodial market for another major player to compete against Charles Schwab, Fidelity, TD Ameritrade and Pershing.

The privately held St. Louis-based discount brokerage firm has hired well-regarded industry veteran Brian Stimpfl to rejuvenate the firm's nine-year old Scottrade Advisor Services unit, with new hires and improved technology and additional partners for its custodian platform.

Scottrade is "deeply committed" to expanding beyond its current plateau of approximately 1,000 advisors says Matt Wilson, the firm's president and chief executive. The firm plans to expand its dedicated relationship teams by 30% and beef up its business development division by as much as 50%, he says, adding about 18 people to the former and up to 10 sales staff to the latter.

The firm will also make substantial investments in technology and third-party solutions such as portfolio management, as well as infrastructure for improved web functionality and interaction, Wilson adds.


Stimpfl, a 17-year veteran of TD Ameritrade Institutional who most recently was a senior executive at ActiFi, an industry consulting firm, will be Wilson's point man to overhaul the custodial unit and give the current industry leaders a run for their money.

Industry insiders say Scottrade's best chance to gain traction in the RIA custodial market is to target the smaller firms that competitors are bypassing as they raise asset minimums and focus on larger firms.

But Stimpfl, whose new title will be senior vice president of program strategy and operations, says he doesn't want the unit to be confined to specific asset targets.

"We want to strengthen and bolster our offering to attract the right kind of advisor, whether they have $10 million in assets or $2 billion," Stimpfl says.


Such a broad-based approach may be risky, according to industry consultants.

"Scottrade's ultimate conundrum will be: What segment are they targeting?" says industry consultant Tim Welsh, president of Larkspur, Calif.-based Nexus Strategy. "If they go small, then they definitely have an opportunity to take market share, but not drive profitability -- as they have acknowledged themselves, by recently imposing fees on small advisors using their platform." ("We are reviewing asset levels held by advisors on our platform and outlining requirements to maintain a relationship with Scottrade," a Scottrade spokeswoman says.)

"If they target larger RIAs, then they’ll need to invest considerably to bring their platform and their brand on par with the Big Four," Welsh continues. That, he says, is "a more expensive and risky proposition, but one that has the most rewards. If they aren’t specific and committed to one strategy, then their outlook is cloudy indeed."

Scottrade "cannot afford to be all things to all advisor types," adds Dan Inveen, principal and director of research FAInsight, an industry consulting firm based in Tacoma, Wash. "They must settle on a target and build their business around creating the ideal experience for that targeted advisor."


Offering advisors "more intimate" personal relationship service will be key to gaining market share, Wilson and Stimpfl say.

"We have the ability to be competitive when it comes to pricing, but our value proposition starts with our people and our relationship teams," says Wilson, who is also a former TD Ameritrade executive.

Such a strategy could work, Welsh says, but only if Scottrade is willing to invest in technology and service. "Their competitors are moving upmarket and are dedicating their relationship managers to the fast-growing and larger RIAs -- creating space for Scottrade to jump in," he says. "The big question is, will this be a profitable strategy long-term? Can they differentiate their offering enough and build the brand to attract the RIAs and assets they need?"


Meanwhile, Scottrade has another advantage: a consumer-friendly name. "Even if RIAs don't know about our service, they know the brand," Stimpfl says.

That puts the company in the same subset as Schwab, Fidelity and TD Ameritrade, says Chip Roame, managing partner at Tiburon Strategic Advisors. "Scottrade will substantially be leveraging their discount brokerage infrastructure, technology, product access, etc., and then building institutional service teams," Roame says. 

"The RIA market is growing faster than any other financial advisory market," he adds. "The natural business evolution is that the bigger custodians will focus on bigger advisors, and that keeps opening the door for the next custodian.  TD Ameritrade used to be that custodian, and has now got its name in there with Schwab and Fidelity.  Scottrade can fill the old TDA spot."

Indeed, Scottrade's national footprint gives it a formidable weapon, Welsh says. "Scottrade can leverage their large retail presence and tap into it for referrals to RIAs on their platform and grow the business in a similar way that Schwab, TDA and Fidelity have done," he explains. That, he says, is "a huge carrot to offer."

And while Mark Tibergien, chief executive officer of Pershing Advisor Solutions, downplays Scottrade's threat to his own company, he agrees that the custodian could be a force to be reckoned with.

"They are a legitimate alternative for advisors who don't need the full capabilities of a firm like ours," he says, "and based on their past success, I would not dismiss them as a viable competitor for all of us." 

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