Firms custodying at E-Trade question fate under Morgan Stanley

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While Morgan Stanley's $13 billion deal for E-Trade is pending, about 230 RIAs at E-Trade are wondering about the wirehouse's plans for them.

Morgan Stanley has yet to lay out its intentions — or express interest — for the small $20 billion division.

“It's kind of paralyzing, because you don't want to open a bunch of new accounts and then have to turn around and repaper them,” says Jeff Hybiak, CIO of SEM Wealth Management, an outsourced investment manager and an RIA which custodies approximately $450 million in assets with E-Trade.

Hybiak says his firm is looking at other custodians with a view to having a backup plan.

A Morgan Stanley spokeswoman declined to comment. Representatives at E-Trade did not respond to a request for comment.

E-Trade had been building out its custodial division, according to three executives at firms who together manage over 10% of the assets custodied at E-Trade Advisor Services.

“I feel like they were just hitting strides,” says Mike Walters, CEO of USA Financial, an independent broker-dealer with approximately 300 advisor offices. The firm, which also uses Pershing and TD Ameritrade to house its clients’ assets, custodies about $1 billion on E-Trade’s platform, including assets held in its TAMP.

Since E-Trade purchased Trust Company of America, it’s invested in a rebrand, new executives, a tech platform and an advisor referral program. It’s now set to transition clients to E-Trade’s securities platform, according to the firm.

For its part, Morgan Stanley has given no outward indication that E-Trade Advisor Services will be front of mind at the firm. The division wasn’t mentioned in an investor presentation outlining the deal’s benefits, and the company’s CEO, James Gorman, said it was not the driver of the deal on a call with shareholders.

Still, some firms custodying at E-Trade say there is reason to be optimistic. Should Morgan Stanley take a definite interest in the division, RIAs could benefit from its name recognition, according to Walters, who notes his firm had already experienced that benefit once when E-Trade purchased TCA.

“With Morgan Stanley, I would hope that would get magnified,” he says.

Brad Shepherd, CEO of Founders Financial, an IBD that custodies over $1 billion at E-Trade, agrees there is room for opportunity.

“Consolidation is taking place and it's ultimately a good thing long term, because it's going to create scale and efficiency,” he says.

But Hybiak observes that advisors are choosing to leave the captive wirehouse environment and that his company receives clients who say they’re not getting service at big firms like Morgan Stanley, Merrill Lynch or Wells Fargo.

“We’re the only ones that will work with the smaller clients,” he says, noting that his clients average around $175,000 in assets. “I don't know that any of them could get an appointment at Morgan Stanley.”

TCA and E-Trade’s service stands out to the firms on its platform. Shepherd described it as “intimate and more relationship-driven.”

Hybiak says that some of his firms’ relationship reps had been with the custodian anywhere from seven to 16 years, and was concerned SEM Wealth Management would be forced into a call center following the deal.

“You can't argue from an upper-management perspective about the efficiency of a call center until you sit on the other side of that,” he says.

But E-Trade’s technology, in particular its Liberty platform, really set the firm apart to some advisors.

E-Trade’s tech platform has modeling, trading, rebalancing, reporting and practice management capabilities and works on mobile devices. Hybiak says the platform keeps costs down for end clients, who pay an all-inclusive basis-point fee of under .14%, according to the SEM Wealth Management website. The firm used to custody with TD Ameritrade, which required purchase of portfolio management software like Orion or Black Diamond for some of these capabilities included in the Liberty platform, he says.

Walters says Liberty is able to handle complex trading needs other custodians can’t, such as unified managed accounts.

Between Schwab’s expected purchase of TD Ameritrade and this new deal, the custodial landscape is shifting. Advisors often find out about these changes in the news.

For Shepherd, it was via a CNBC Squawk Box notification on his phone, although a call between his firm and their E-Trade representatives followed shortly after, he says.

Many firms are accustomed to these purchases and deals.

“We’ve been through a lot of M&A deals with various institutions,” Walters says. “We’re not overly nervous with such things.”

As for Hybiak, he hopes the wirehouse will appreciate his clients.

“Our main focus is helping the small clients who are underserved — as well as the small advisors who are underserved,” he says. “And that's why we went with TCA. Hopefully Morgan Stanley sees the value in that.”

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Clearinghouses/custodians E-Trade Financial Morgan Stanley Client retention M&A James Gorman