What's in a name? For TCA by ETrade, everything

Trust Company of America is gone, and there's big buzz over the name change. But turning the custodian into an industry powerhouse will take a lot longer — if it happens at all

Aug 18, 2018 @ 6:00 am

By Jeff Benjamin

Joshua Pace, President, TCA by ETrade
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Joshua Pace, President, TCA by ETrade

Has Trust Company of America hitched its wagon to a star or turned its back on loyal clients?

It depends on whom you ask.

Either way, the $275 million acquisition in April of TCA by discount broker ETrade has the custodian world buzzing.

In one corner are ETrade and TCA by ETrade, as TCA is now known. They believe the merger will help both companies become stronger. On the custodial side, the brand power of ETrade could give TCA by ETrade the jolt it has needed for some time.

ETrade also could benefit. Like other brokerages, ETrade is struggling with falling commission rates and needs to find new sources of revenue. Furthermore, adding a custodian gives it access to registered investment advisers who can help it gather and hold onto more assets, an important consideration for a company that derives substantial revenue from net interest income.

But the acquisition is not without its naysayers. Custodial competitors claim ETrade competes for retail clients with the RIAs that all custodians, including TCA by ETrade, are trying to serve.

"We used to compete with TCA a lot, when it came to not having a retail channel," said Robb Baldwin, CEO and founder of custodian Trade PMR. "ETrade has branch offices, and that's where all the competition stems from."

Barry Boyte, executive vice president of sales at competing custodian Shareholders Service Group, also took a jab at TCA by ETrade for what he perceives as a conflict.

"We're not for sale, and we have no plans to sell," he said. "We tell RIAs that we're not going to become an independent RIA as long as they don't become a custodian."

Benefits to advisers

Joshua Pace, president of TCA by ETrade, balked at claims of competition with advisers, insisting that its adviser clients will benefit from the merger because ETrade will channel customers it's not equipped to serve in their direction.

"ETrade is structured with solutions for a wide continuum of customers," Mr. Pace said. "They've got a robo and managed set of solutions, but prior to the acquisition, ETrade didn't have a full RIA solution."

Mr. Pace said TCA by ETrade is now positioned to make inroads into the custody business thanks to its new parent company.

"We believe the industry is ripe for a new entrant of scale in the custody space, and we knew we would grow fast with the power of the ETrade brand behind us," he said.

"We believe the industry is ripe for a new entrant of scale in the custody space."Joshua Pace, President, TCA by ETrade

It will need all the help it can get. The custodian market is dominated by four major firms: Charles Schwab Corp., Fidelity Investments, TD Ameritrade and Pershing. Collectively they custody more than $2 trillion worth of RIA assets, making TCA by ETrade's $20 billion in assets look downright puny by comparison.

Mr. Pace said the "halo effect" of the ETrade brand has put the second-tier custodian on the map for the first time in its 46-year history.

"What I feel now is a huge degree of optimism," Mr. Pace said. "In my heart of hearts, I definitely wanted a real brand. It's the No. 1 thing we thought about, how everyone would always wonder, 'What is Trust Company of America?'"

Mr. Pace, who joined TCA nearly seven years ago, said the swagger of ETrade has already gotten the attention of RIAs looking for custodial relationships.

While he won't disclose details, he said pre-acquisition inquiries typically included RIAs with between $50 million and $150 million in assets, and that the current range is between $250 million and $1 billion.

Mr. Pace said the custodian has a three-pronged strategy to leverage the ETrade brand, including increased ad purchases and visibility at key industry conferences in the second half of 2018, and leveraging messaging through digital channels.

Players in the deal
ETrade's $275M acquisition of TCA was announced in October 2017 and finalized in April.
ETrade:
Headquarters: New York
CEO: Karl Roessner
Founded: 1982
IPO: 1996
2017 revenue: $2.4 billion
2017 earnings: $614 million
2017 total assets: $63.4 billion
No. of employees: 3,600
TCA by ETrade
Headquarters: Centennial, Colo.
President: Joshua Pace
Founded: 1972 as Trust Company of America
Entered the custodian business: 1990
No. of clients as of 2017: 205, up 2.5% over 2016
Custody assets as of 2017: $18 billion, up 12.5% over 2016

The strategy represents a dramatic shift from the formerly low-key approach to connecting with RIAs, according to Carolyn Armitage, managing director at the investment bank Echelon Partners.

"The problem I had with TCA beforehand was that they didn't go out and market themselves, and they didn't go to conferences," she said. "The company name sounded like a trust company, not a custodian for RIAs."

Mark Pearson, founder of Nepsis, a third-party money manager for advisers with $300 million under management, moved his custodian business from TD Ameritrade in December to TCA because of the ETrade deal that was pending at the time.

"ETrade is a huge player in the retail world with great technology and a great brand, but they haven't gotten into the advisory space until now," he said. "This is great for the investor and it's great for the RIAs, and it provides a great talking point for growing new business."

Mr. Pearson, who custodied assets at TD for 11 years, said TCA by ETrade reminds him of where TD was a decade ago.

"When I first went to TD, I saw TD the way I see TCA ETrade now," he said. "There's an opportunity to have input and help to grow the company."

Last month Mr. Pearson hosted an event for RIAs and was impressed to see Mr. Pace accept his invitation by showing up to speak with clients.

"I was with TD for a long time because I'm a huge relationship guy, and when I make a decision to change custodians it's a big decision and a long-term relationship," he said. "When Josh comes out to see you, that speaks volumes to me."

ETrade's evolution

By acquiring TCA, ETrade is following in the footsteps of other discount brokers such as Charles Schwab and TD Ameritrade that have branched out into the custody business.

ETrade was launched in 1982 and went public in 1996. At the time it had $60 million in annual revenue. Since then, it has grown annual revenue to $2.4 billion through both organic growth and acquisitions, which included online broker Web Street Securities and the discount brokerage operations of Bank of Montreal and JPMorgan Chase.

"This transaction is representative of the evolution of many of the discount brokerages over the last decade," said Cathy Sievert, a CFRA equity analyst who follows ETrade.

"Owning a custodian rounds out ETrade's revenues by building up a fee-based revenue stream," she said. "There's been downward pressure on commission rates and shifts to passive investing as part of a multiyear shift away from a dependence on commissions."

Cerulli Associates measures that shift by showing that the fee-based independent advice channel's share of total assets has grown to 41.1% in 2016 from 30.5% in 2006.

The other side of that trend shows the branch brokerage asset share falling to 58.9% from 69.5% over the same 10 years.

"The more of the distribution chain you can control, the bigger piece of the shrinking fee you can retain," said Alois Pirker, research director at Aite Group. "There are two safe spots in that distribution chain: the person who brings in the client, and the back office where layers of fees can be generated."

There are other reasons for ETrade to be optimistic over its acquisition.

ETrade's corporate services business administers stock purchase plans for 20% of the S&P 500 companies, which places about $150 billion worth of vested and pre-vested stock on the ETrade platform every year.

But the company has regularly watched about 85% of those stock holdings leave the platform within 12 months of being vested to individuals, who are typically wealthy corporate executives. ETrade's business relationship is with the companies vesting the stock, not with the employees earning the stock.

Now with a custodian subsidiary, ETrade hopes to direct those investors with newly vested shares toward TCA by ETrade, where they can be introduced to an RIA that custodies assets on the platform.

Referral program

Matthew Wilson, senior vice president in brokerage at ETrade, said a referral program is being formalized, which includes a "select group of RIAs" who will go through special training.

"The investors in the stock plans tend to need help with their bonuses and stock plans once they're vested, and we feel we can ... get those clients in front of RIAs to keep those assets in-house at ETrade," he said. "Having seen those types of programs at other custodians, it becomes an asset-gathering arm and a nice add-on service."

Efforts to keep more of those vested shares in-house not only gives RIAs an incentive to custody with TCA by ETrade, it has the potential to help beef up ETrade's bottom line. ETrade earns nearly two-thirds of its revenue from net interest income, which is money made off cash balances on its platform.

"Custodians are in a landgrab to get as much market share as they can, because when folks have money sitting in money market accounts, the custodians are making more money on that," said Ms. Armitage of Echelon Partners.

Mr. Wilson said access to RIAs through the custodian gives ETrade a channel to wealthier investors, which it didn't have before. He said the goal is to expand the TCA footprint without pitting ETrade or the custodian business against financial advisers.

"Introducing an advisory channel complements rather than competes with our branch network," he said. "And our branches are thrilled to be able to offer this new solution, where previously those customer types seeking help would go elsewhere."

Mr. Pirker of Aite agreed that ETrade's current business model should not be viewed as a threat to RIAs.

"The online discount brokerage clients are very cost-conscious, and RIAs are not known for discounts," he said. "The ETrade branch office is not the same kind of dedicated relationship that you get with a high-priced adviser. If Merrill Lynch went into the RIA custody business, that would be competition."

CLEARING FIRMS
Listed by reported number of broker-dealer clients
FirmPhone/website# of clients% change vs. 2017ContactPhone/email
Pershing (800) 445-4467 654 -8.40% Michael Row (800) 445-4467
One Pershing Plaza, Jersey City, NJ 07339 pershing.com Chief relationship officer pershing.com/contact
RBC Correspondent Services (612) 371-2711 191 16.70% Greg Plifka (888) 524-9800
60 S. Sixth St., Minneapolis, MN 55402 rbc-cs.com Director, business development greg.plifka@rbc.com
Hilltop Securities Inc. (800) 678-3792 153 -14.00% Lana Calton (214) 859-9228
1201 Elm St., Dallas, TX 75270 hilltopsecurities.com Managing director, head of clearing lana.calton@hilltopsecurities.com
COR Clearing (800) 811-3487 70 -12.50% Michael Scaplen (732) 635-2490
1299 Farnam St Ste 800, Omaha, NE 68102 corclearing.com Senior VP sales and relationship management michael.scaplen@corclearing.com
First Clearing (888) 322-2532 69 0.00% Peter C. Sheehan (410) 329-1459
One North Jefferson Ave., St. Louis, MO 63103 firstclearing.com Senior vice president peter.sheehan@firstclearing.com
Apex Clearing Corporation (214) 765-1100 58 -12.10% Michael Lanyon (214) 765-1066
350 North Saint Paul Street #1300, Dallas, TX 75201 apexclearing.com Head of digital wealth sales mlanyon@apexclearing.com
Raymond James & Associates Inc. (727) 567-3990 41 5.10% Robb Combs (813) 541-0340
880 Carillon Parkway, St. Petersburg, FL 33716 rjclear.com Director, custody & clearing division robb.combs@raymondjames.com
Fidelity Clearing & Custody Solutions (877) 262-5950 N/D* N/A John Phillips (617) 563-2253
200 Seaport Blvd., Boston, MA 02210 clearingcustody.fidelity.com EVP, head of broker-dealer and bank sales john.d.phillips@fmr.com
Merrill Lynch Professional Clearing Corp. & Broadcort (646) 743-0110 N/D N/A Vito Laurenzano (646) 743-1246
1 Bryant Park, New York, NY 10036 broadcort.com Director vito.laurenzano@baml.com
As of May 31. N/A = not available. N/D = not disclosed. Wedbush Securities Inc. and INTL FCStone Financial Inc. did not respond to the survey request for data.
*As of June 30. Fidelity Clearing & Custody Solutions had 3,800 combined clients and $2.2 trillion; the firm does not break out custody clients from clearing clients.
Source: InvestmentNews Research
Where the Largest IBDs Clear
Clearing firms used by the independent broker-dealers with the most revenue
IBDs2017 Total firm(s) usedRevenue ($M)
1Ameriprise Financial Services Inc.Self-clearing$4,260.00
2LPL FinancialSelf-clearing$4,206.10
3Raymond James Financial Services Inc.Self-clearing$2,071.20
4Commonwealth Financial NetworkNational Financial Services, Pershing$1,241.60
5MML Investors ServicesNational Financial Services$1,050.40
6Wells Fargo Advisors Financial NetworkFirst Clearing$990.80
7Northwestern Mutual Investment ServicesN/A$945.40
8Cambridge Investment Research Inc.National Financial Services, Pershing$811.40
9AXA AdvisorsLPL Financial$786.50
10Lincoln Financial NetworkNational Financial Services, Pershing$740.20
11Securities America Inc.National Financial Services, Pershing$637.30
12Royal Alliance Associates Inc.National Financial Services, Pershing$483.90
13Waddell & Reed Financial AdvisorsPershing$476.60
14Kestra Financial Inc.National Financial Services$475.40
15Voya Financial Advisors Inc.Pershing$429.30
16Signator Investors Inc.Fidelity Clearing and Custody Solutions, Pershing$423.30
17SagePoint Financial Inc.National Financial Services, Pershing$351.70
18Securian Financial Services Inc.Pershing$347.20
19Lincoln Investment PlanningPershing$309.70
20Principal Securities Inc. (fka Princor Financial Services Corp.)Pershing$299.70
Revenue figures as of firms' year-end. N/A = not available.
Source: InvestmentNews Research
MOST POPULAR
Market share, by number of clients, among the top two clearing firms used by the largest independent broker-dealers in 2017 and previous years
Percentages based on number of clearing firms specified by independent broker-dealers each year. *National Financial Services is part of Fidelity Clearing & Custody Solutions.
Source: InvestmentNews Research
CUSTODIANS
Listed by reported number of RIA custody clients
FirmPhone/websiteHead of RIA custody business# of clients% change vs. 2017Assets under custody ($M)% change vs. 2017Minimum assets of advisers
Schwab Advisor Services (877) 687-4085 Bernie Clark 7,600 1.30% $1,600,000.00 17.90% N/A
211 Main St., San Francisco, CA 94105 advisorservices.schwab.com Executive vice president and head of Schwab Advisor Services
TD Ameritrade Institutional (800) 934-6124 Tom Nally 6,000 20.00% N/D N/A N/A
One Plaza Four A, Jersey City, NJ 07311 tdainstitutional.com President
SEI* (610) 676-1000 Wayne Withrow 1,752 N/A $27,700.00 N/A $25M
One Freedom Valley Dr., Oaks, PA 19456 seic.com/advisors Executive vice president and unit head, SEI Advisor Network
Shareholders Service Group (800) 380-7370 Peter Mangan 1,569 3.40% N/D N/A N/A
9845 Erma Road, San Diego, CA 92131 ssginstitutional.com CEO
Pershing Advisors Solutions (800) 445-4467 Mark Tibergien 752 N/A $615,000.00 N/A $100M
One Pershing Plaza, Jersey City, NJ 07339 pershing.com CEO
Trade-PMR Inc. (888) 579-8640 Robb Baldwin 665 -8.90% N/D N/A N/D
2511 N.W. 41st St., Gainesville, FL 32606 tradepmr.com CEO
Folio Institutional (a division of Folio Investments Inc.) (888) 485-3456 Greg Vigrass 451 -0.70% N/D N/A N/A
8180 Greensboro Drive, 8th Floor, McLean, VA 22102 folioinstitutional.com President
LPL Financial (858) 450-9606 Frank Smith 438 2.80% N/D N/A N/A
1055 LPL Way, Ft. Mill, SC 29715 lpl.com Senior vice president, business consulting
U.S. Bank (513) 562-3621 Alan M. Markarian 239 11.70% $102,000.00 36.00% N/A
425 Walnut St., Cincinnati, OH 45202 usbank.com/itc Senior vice president
TCA by E*TRADE (303) 705-6000 Joshua Pace 205 2.50% $18,000.00 12.50% $10M
7103 S. Revere Parkway, Centennial, CO 80112 trustamerica.com President
National Advisors Trust Company, FSB (877) 527-3476 James A.Combs Jr. 198 3.10% $12,000.00 3.70% N/A
800 E. 101st Terrace, Suite 300, Kansas City, MO 64131 nationaladvisorstrust.com CEO and president
RBC Advisor Services (612) 371-2711 Brett Thorne 132 24.50% $20,000.00 30.70% N/A
60 S. Sixth St., Minneapolis, MN 55402 rbc-as.com Head, RBC correspondent & advisor services
Fidelity Clearing & Custody Solutions** (800) 735-3756 David Canter N/D N/A N/D N/A N/D
200 Seaport Blvd., Boston, MA 02210 clearingcustody.fidelity.com Executive vice president, head of RIA segment
As of May 31. N/A = not available. N/D = not disclosed. Interactive Brokers did not respond to the survey request for data.
* As of March 31.
** As of June 30. Fidelity Clearing & Custody Solutions had 3,800 combined clients and $2.2 trillion; the firm does not break out custody clients from clearing clients.
Source: InvestmentNews Research

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