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The RIA Stealth Machine

Ever consider State Street Corp.? Perhaps you should. Best known for its institutional business catering to pension funds, endowments, foundations and mutual funds, the Boston-based behemoth has stealthily built up a presence in the RIA custody business since the beginning of the decade. And now, suddenly, it's number three in the business. These days, State Street boasts RIA custody holdings of $250

Ever consider State Street Corp.? Perhaps you should. Best known for its institutional business catering to pension funds, endowments, foundations and mutual funds, the Boston-based behemoth has stealthily built up a presence in the RIA custody business since the beginning of the decade. And now, suddenly, it's number three in the business. These days, State Street boasts RIA custody holdings of $250 billion with at least 400 different advisors — behind only Schwab Institutional with $542 billion and Fidelity Wealth Services with more than $330 billion. Trailing State Street are TD Ameritrade with $82 billion and Pershing Advisor Solutions with $70 billion. In other words, this Boston-based behemoth is no longer an outlier in the RIA custody business. It cannot be ignored.

“There's a sense that this is a growth business, and that unique circumstances are aligning to help us serve new and existing clients of State Street,” says Steve Navarro, who heads the RIA custody business for State Street.

In fact, State Street caters to perhaps the most lucrative niche in the business and one that its rivals Charles Schwab, Fidelity and Pershing also want to attract: large RIAs with $1 billion or more in assets and their ultra HNW clients. Schwab already has many clients in this group, but State Street has a few advantages with the biggest RIAs. For one thing, State Street has more powerful global trading capabilities than its rivals, and some analysts say its name still has the kind of Wall Street cachet that has elsewhere been sullied by the sub-prime debacle.

In addition, it uses a trust platform to custody client assets, which means these assets never get used as collateral for the custodian's own loans, providing an extra layer of protection. Both Schwab and Fidelity custody client assets on brokerage platforms, where such protections do not exist for margin accounts. This might not have mattered very much just six months ago, but today, some clients want all the assurances they can get. Consider, after all, Lehman Brothers: Many clients still cannot get the assets that were held in custody on Lehman's brokerage platform when the firm failed.


And yet, the firm is still a very quiet player in the business. “We've never heard of State Street in the RIA business,” says Frank LaSalle, managing director of Pershing. State Street has chosen to keep its custodial services for RIAs beneath the radar for years — letting Schwab Institutional, Fidelity Investments, Pershing and TD Ameritrade grab the spotlight. Behind the scenes a different story was unfolding, as the firm courted advisers with $1 billion plus in assets and looked for strategic acquisitions.

In the summer of 2007, it acquired Investors Bank & Trust (IBT) — little known in the RIA world — for $4.5 billion, doubling its RIA assets overnight to $250 billion. (The acquisition also brought State Street new institutional custody assets, which now total $15 trillion, while its managed assets rose to $2 trillion.)

One reason for the obscurity of the firm's RIA business is that State Street keeps advertising for the division to a minimum and seeks no media attention. Though the firm allowed two of its RIA executives to be interviewed for this article, they were unwilling to offer many details about the size of the custody unit's staffing, resources or growth plans. (By contrast, State Street is willing to talk about its institutional clients like pension funds, endowments, foundations and mutual funds.)

But State Street says it wants to bring its custody business out of the shadows. “We're trying to proactively raise our profile,” says Martin Sullivan, sales director for the RIA division, who worked with the RIA custody unit of IBT for 19 years. Still, Sullivan remained reticent about precisely how State Street planned to gain more attention and said that it is not likely to increase advertising much in the near term. To raise its profile, State Street would have to allocate resources to marketing, sales and technology, and demand that top executives afford RIAs some of their intellectual capital says Steve Winks, principal of


One thing that has worked in State Street's favor is the recent market turmoil, Sullivan says. Firms like Goldman Sachs, Lehman Brothers, Merrill Lynch, Bear Stearns and Smith Barney are not known for serving the custody needs of independent RIA advisors, but many of them quietly do this business on the side. The turmoil at those investment banks created a group of high-end RIA malcontents that were looking for a substitute custodian. Accustomed to the cachet of a Wall Street brand name, many found a natural substitute in State Street because it did not record the kinds of losses that most Wall Street firms did in the mortgage mess.

In fact, during the height of the crisis, RIAs were bringing about $2 billion of net new assets per month to State Street, says Sullivan. That asset flow to his firm has since cooled down, but he expects inflows to pick up again in the spring.

That said, State Street has not been totally immune to the credit crisis. Robert Ellis, a securities industry analyst for Celent of New York, notes that the firm accepted $2 billion of federal bailout funds in October, for instance. And the company's fourth quarter earnings came in well below estimates even before troubled assets on its books are accounted for. Some analysts even think State Street is an acquisition target. “The firm now has $60 billion in liquidity, $59 billion of which is cash. The arguments concerning the company's earnings are not related to its cash flows. It is related to how to mark to market securities,” wrote Ladenburg Thalmann analyst Richard Bove in a recent research note. “The company's market capitalization is $6.4 billion. This is petty cash for companies like Bank of New York Mellon who should buy State Street immediately. The synergies would be significant; the power over the market would be impressive if these companies got together.” If State Street were acquired, that could certainly change its approach to the RIA custody business.

But in the meantime, RIA advisors say State Street has a very strong platform for the ultra-wealthy. Its biggest advantage is perhaps that it allows advisors to trade in over 100 foreign currencies, which reduces the currency risk of trading in dollars, and cuts the cost of using middlemen. “We can do things with State Street that we can't do with any other custodian in the world,” says Robert Levitt, managing principal of Levitt Capital Management, which manages $400 million and is based in Boca Raton. Levitt recently moved most of his assets from Schwab and Bear Stearns to State Street. “We can invest in any market in the world. It's something we couldn't even begin to think about with Schwab. It's a big difference.” By comparison, Charles Schwab does all of its trading in dollars, while Pershing can offer trading in 40 currencies and Fidelity in 35.

That said, both Schwab and Fidelity may soon take steps to bridge this global services gap. “We're looking at how we can expand our multi-currency capabilities,” says Lindsay Tiles, a spokeswoman for Schwab. “We're seeing more advisors who work with ultra-high-net-worth clients who need these global capabilities, and we want to make sure we can meet these advisor needs. It's a niche, but these are large, successful advisors [seeking multi-currency trading] and we want to be able to serve them.” Over at Fidelity, spokesman Steven Austin says the firm believes it has one of the strongest international capabilities in the world, “and it's going to get stronger,” he says.

Fans of State Street say it offers great service, too, and that helps to attract assets. Samantha Smith, partner and director of client services at Capital Counsel of New York, says, “We were the first [State Street] beta relationship, and [its services] allowed us to double our assets and only add one person to our staff … We don't have to pay New York rent and New York salaries for [the services of] their people.” Advisors say the firm is quick to respond to problems with accounts, and State Street Wealth Manager Services has 500 employees dedicated to handling accounting, reporting, global operating, alternative assets, tax issues and trust administration for RIAs globally.

Capital Counsel, which manages about $1 billion in assets, presently keeps about 80 percent of its assets parked with State Street.


Despite its attractions, State Street has drawbacks, says Levitt. For instance, when he first switched his firm's assets to State Street from Schwab, State Street's technology couldn't communicate well with his old Schwab software, and he was unable to supply clients with reporting information on a timely basis. He had to scrap his Schwab PortfolioCenter back office software and purchase Advent software

“Clients weren't happy” before the switch to Advent, he says. “I'm not sure you'd want to use State Street if you used mutual funds,” he adds.

State Street is aware of its technological shortcomings, however, and says it plans to make appropriate upgrades. “Robert [Levitt's] comments [about State Street's client technology] are fair and we've set to build out client-facing technology,” Sullivan says. He declined to specify which technologies State Street is revamping or how much it will invest.

That said, many of the firms to which State Street caters pay for their own technology, Pirker says. “As a bigger firm, you can pay for your own technology so the custody itself is more important. You can be pickier and do the integration yourself.”

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