Morgan Stanley sells ETrade's custody business in $55 million deal

After failing to muster much enthusiasm for ETrade Financial Corp.'s small but promising RIA custody business, James Gorman, CEO of Morgan Stanley, decided to unload it, agreeing on Tuesday to sell ETrade Advisor Services for $55 million in cash.

In 2017, ETrade acquired the RIA custody business through the purchase of Trust Company of America for $275 million in cash.

The buyer is Axos Financial Inc., parent of Axos bank, which is trying to grow its Axos Clearing business. ETrade Advisor Services does custody of client accounts for 200 registered investment advisers with $23 billion in assets and $1.2 billion in client cash.

That's barely even a blip for Morgan Stanley, which on Friday reported a combined $5.6 trillion in assets in its wealth management and investment management businesses.

Morgan Stanley said in February 2020 that it was buying ETrade Financial for $13 billion in stock. The investment bank has benefitted from ETrade's direct, online access to a younger group of clients, but the financial advice industry was watching the merger closely.

Wirehouses, like Morgan Stanley, have been seeing a steady outflow of employee financial advisers leaving to become independent RIAs, a path that leads to greater control for advisers and potentially far greater income and ownership of a valuable financial advice practice, as well.

Would Morgan Stanley take the step and expand the ETrade custody business for its own financial advisers?

In a call with analysts in July 2020 to discuss second-quarter earnings, Gorman's assessment of ETrade’s RIA custody platform was far from full-throated, calling it “a decent business model,” “a tiny business” for ETrade and “interesting.”

Indeed, one analyst in a research note last summer listed the potential to build or leverage ETrade's RIA capabilities as ninth when it came to potential positives for the Morgan Stanley’s valuation after it completed the purchase of ETrade.

Taking a page from the playbook of discount brokers like the Charles Schwab Corp. and Fidelity Investments Inc., ETrade entered the RIA custody business in 2018 when it bought Trust Company of America for $275 million. That's a far cry from the $55 million Axos Financial said it was paying for that business on Tuesday. The transaction is expected to close in the third quarter.