In the wake of Thursday morning's announcement that Morgan Stanley is buying ETrade Financial Corp. for $13 billion in stock, Rudy Adolf, the founder and CEO of one of the industry's most prominent buyers of registered investment advisers, Focus Financial Partners Inc., revealed his thinking about the deal and his overall distaste for broker-dealers.
Focus Financial, of course, buys RIAs, which are often owned by advisers who got their start at wirehouses like Morgan Stanley. RIAs operate under a fiduciary standard of care for clients while broker-dealers like Morgan Stanley hew to the industry's broader and less stringent suitability rule.
When asked about the Morgan Stanley acquisition on a call with analysts to discuss Focus Financial's earnings, Mr. Adolf took a swipe at retail brokerage.
"It’s simply a reflection that the traditional [brokerage] model is broken and cannot compete with the winning model in this industry, which is the RIA/fiduciary model," he said.
The RIA side of the financial advice business "of course is gaining market share to the tune of hundreds of billions of dollars [in client assets] per year," Mr. Adolf said. "This means when you’re operating on the losing side of the equation, you need to do consolidation."
Morgan Stanley's purchase of ETrade and Charles Schwab's deal to acquire TD Ameritrade are defensive moves, Mr. Adolf said. Such deals are "traditional consolidation moves that are ultimately defensive in nature and not about [adding] higher client value but really about cost savings and consolidation."
Of course, senior management at Morgan Stanley clearly disagrees with Mr. Adolf.
“ETrade represents an extraordinary growth opportunity for our wealth management business and a leap forward in our wealth management strategy," Morgan Stanley's CEO James Gorman noted in a statement. "The combination adds an iconic brand in the direct-to-consumer channel to our leading adviser-driven model, while also creating a premier workplace wealth provider for corporations and their employees."
Meanwhile, Focus Financial posted total revenues of $1.2 billion last year, an increase of 33.8% when compared to a year earlier. It also reported a loss of close to $12.9 million.
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