Morgan Stanley, RIA custodian? Not so fast

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With its proposed acquisition of E-Trade, Morgan Stanley is set to expand rapidly into online brokerage, digital banking and stock plan administration. It will also net a small unit that will give Morgan Stanley a unique title: wirehouse with the biggest RIA channel.

E-Trade’s RIA platform has approximately 225 firms and $20 billion in client assets. With it, Morgan Stanley can leapfrog Wells Fargo, which has been slowing building its year-old RIA channel from scratch.

So is Morgan Stanley and its $2.7 trillion client assets about to go head-to-head against custodial giants like Charles Schwab? Not quite.

Morgan Stanley hasn’t actually unveiled plans to grow the RIA business. In fact, it didn’t even merit a mention in the investor presentation the wirehouse put together to outline the deal’s benefits to the firm.

When asked about its new RIA business during the presentation, Morgan Stanley CEO James Gorman downplayed its significance.

“It’s relatively small [and] has not been the overall driver of the deal,” he said, declining to go into further detail until the acquisition closes later this year.

His comments follow E-Trade’s previously outlined plans to grow the RIA platform, which it acquired in 2018 from Trust Company of America.

Problem is Morgan Stanley executives see the platform as a potential competitor to the firm’s existing 15,500 financial advisors, who are the likely future beneficiaries of client referrals from E-Trade and Morgan Stanley’s growing stock plan administration business, according to a person familiar with the matter who asked not to be named in order to discuss the company’s thinking.

The wirehouse will not provide client leads to RIAs now on E-Trade’s platform, but rather to its own brokerage force, the person said.

Morgan Stanley’s chief executive appeared to echo that sentiment during the investor presentation. He repeatedly underlined the benefits of the E-Trade acquisition to his firm’s current brokerage force.

“We love our financial advisors. We have nearly 16,000. It’s a business I have been around for nearly 30 years and I feel passionate about. And I think this is a great way to augment them and provide them referrals,” Gorman said.

Analysts don’t consider the RIA platform a potentially significant business for Morgan Stanley, noting the acquisition’s other advantages.

M&A
The acquisition is the latest demonstration of firms merging banking, wealth management and digital services to meet clients' every financial need.
February 20

“It provides them options down the road if they want to offer RIAs to some of their advisors, à la what Wells Fargo has done. But I think this move has clearly targeted the workplace,” says Dennis Gallant, an analyst at Aite Group, noting that the platform provides “fertile ground” for wealth management firms to find new clients.

E-Trade’s RIA platform is also not a big business compared to Morgan Stanley’s existing wealth management operation. Indeed, the wirehouse has advisor teams with more assets than all of E-Trade’s RIAs — combined.

And while there may be RIA tools that the firm can incorporate into its existing advisor model, Gallant doesn’t see the firm as diving into the RIA business — an operation that requires “an immense amount of scale.” Plus, he adds, “Why create internal conflicts in your model?”

For its part, the wirehouse sees opportunities elsewhere. For instance: To bring in more assets from existing Morgan Stanley and E-Trade clients who hold an estimated $7.3 trillion in combined assets elsewhere, according to the company.

"It creates enormous potential to grow and consolidate assets over time," E-Trade CEO Michael Pizzi said Thursday during a call with analysts.

Morgan Stanley is also set to gain much bigger businesses than the RIA platform: E-Trade has a discount brokerage with $360 billion in retail client assets, a digital banking platform with $39 billion in deposits and a stock plan administrator with $300 billion in corporate services assets.

If Morgan Stanley does indeed snuff out E-Trade’s previous growth plans for the RIA channel, that would eliminate a potential competitor to Charles Schwab — albeit a very small one. Schwab has about 7,500 RIAs on its platform compared to E-Trade’s 225. Schwab is also getting bigger. The firm is in a deal to buy rival TD Ameritrade for $26 billion which would marry two of the three largest RIA custodians (Fidelity is the third). The Department of Justice is currently subjecting the acquisition to an antitrust review.

“It’s relatively small [and] has not been the overall driver of the deal,” Morgan Stanley CEO James Gorman said of E-Trade's RIA platform.

Schwab’s decision to slash trading commissions last year spurred the current round of M&A deals, analysts say. The move “has caused scale to become even more critical in the retail brokerage segment,” says Christopher Wolfe, managing director, North American Banks at Fitch Ratings. “With zero commissions on trading fees, retail brokers are more reliant on net interest income from accompanying bank sweeps and wealth management revenues. This further supports the strategic rationale for this [E-Trade-Morgan Stanley] tie-up.”

In a memo to advisors, Morgan Stanley leadership underlined how the E-Trade acquisition would benefit them.

“This will enable us to meet client needs wherever they are in their wealth journey and then evolve alongside them as their needs change, further setting Morgan Stanley apart in the industry,” Andy Saperstein, head of the firm’s wealth management business, wrote in the memo.

He pointed to E-Trade’s technologies, particularly its digital banking platform, self-directed accounts, and client-facing trading and investment tools. Those and other technologies will soon be available to Morgan Stanley advisors and clients. Plus, the firm will benefit from its expanded presence in the stock plan administration and financial wellness businesses.

“Upon completion, we will have the best administration platform, the best self-directed account structure and access to a vastly expanded employee base receiving equity compensation [that] will benefit from our advice and guidance,” he wrote.

The one aspect of E-Trade that went unmentioned in his wrap-up? RIAs.

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