Axos Financial is buying E*Trade Advisor Services (EAS), the registered investment advisor custody business acquired by Morgan Stanley in 2020 as part of its $13 billion takeover of E*Trade, in a $55 million all-cash deal, according to an announcement made Tuesday. The transaction, expected to close in the third quarter of 2021, brings Axos into the competitive marketplace of RIA custodians.
The deal encompasses approximately $23 billion in assets under custody and another $1.2 billion in client cash deposits, across “approximately 200 RIA custody relationships,” according to Gregory Garrabrants, president and CEO of Axos Financial. The acquisition will be executed by the firm’s clearing subsidiary, Axos Clearing.
While the assets under custody at EAS pale in comparison to behemoths like the combined Charles Schwab and TD Ameritrade or Fidelity, Axos Financial will also be looking uphill at other alternative custodians, including Interactive Brokers, which has $56.3 billion in AUM in the firm's RIA business, and SEI, which has $80 billion under custody, according to Bob Veres, publisher of Inside Information.
In 2018, E*Trade completed its purchase of the advisor custodian business Trust Company of America for $275 million. At the time, TCA had $18.3 billion in institutional assets under custody and $1.6 billion in customer cash, with over 200 “active” RIAs on its platform. It was billed as an acquisition that would make E*Trade’s “investing advice continuum more complete,” according to then-CEO Karl Roessner.
The acquisition is about more than just assets for Axos. EAS “adds new sources of fee income and services that complement Axos Clearing’s product offering” and it “accelerates time-to-scale in the RIA custody business,” according to an investor presentation shared by the firm’s executives. Axos will also acquire the web-based “Liberty Platform,” ESA’s tech platform (originally built by Trust Company of America), and its third-party integrations.
While firms like Goldman Sachs are jumping into the RIA custody business, Morgan Stanley is moving in another direction. Last year, Morgan Stanley CEO James Gorman described the RIA business as “an interesting channel,” primarily for referrals, while stating that it wasn’t a primary reason for acquiring E*Trade.
With this move, however, Morgan Stanley is making it clear that it doesn’t see a future in owning E*Trade’s RIA custody business.
“It answers one question about the direction of Morgan Stanley’s wealth management business,” said Devin Ryan, an analyst at JMP Securities covering the firm. “Morgan Stanley is not interested in evolving toward an independent RIA model over the long term.”
“We had viewed the small custodial business as an opportunity for Morgan Stanley to provide optionality for advisors that otherwise may leave the firm to become an RIA,” Ryan continued. “This would have represented an economically dilutive alternative, creating a channel conflict and it was not clear if independent advisors would have wanted to be associated with a wirehouse firm which many had previously worked for.”
Ryan called the deal immaterial for Morgan Stanley and “not unexpected.”
ESA is just not big enough for Morgan Stanley, added William Trout, director of wealth management at Javelin Strategy & Research. “No transaction fees means [Morgan Stanley] is entirely dependent on revenue from customer deposits,” he explained. “The spread in this case is going to be small beans for a firm like Morgan Stanley, as would be the volume of business maintained by this custodial business, more broadly.”
Meanwhile, Axos is enthusiastic about its new purchase. “The RIA custody business is an integral part of our strategic plan,” said Garrabrants in a statement. “Adding a team of experts with decades of experience and relationships with the RIA community is something we highly value. We look forward to investing in and growing the EAS team to support their high-touch service model.”