Axos Axes Six Former E*Trade Sales Reps as Competitors Circle RIA Pool
Online bank Axos Financial is digesting its $55 million deal for the former registered investment advisor custody business of E*Trade Financial as competitors are circling its pool of newly acquired advisors.
Among those discharged from the firm’s RIA custody unit were head of national sales Charles Latimer, along with regional sales executives Josh Reich and Mark Weinstein, as well as senior business development director Kerry McDermott, senior director of growth and strategy execution Danny Smith, and senior director of marketing and planning Michael Colon, according to the sources, who said the terminations were without cause.
All six had all been hired under the leadership of Matt Wilson, the former E*Trade Advisor Services president, who had taken the reins in April 2018 following E*Trade’s $275-million purchase of RIA custodian Trust Company of America (TCA). Wilson defected to J.P. Morgan for a wealth management leadership role ahead of closing of the deal with Axos, according to an announcement this month from J.P. Morgan.
Meanwhile, many of the custodian’s largest RIA clients are “in play,” as custodial heavyweights Charles Schwab Corp., Fidelity Investments and Pershing Advisor Services attempt to cherry pick, according to one former E*Trade Advisor Services employee who asked not to be identified. It is the fourth owner for some TCA veteran RIA firms that moved to E*Trade, Morgan Stanley and now Axos.
“They’re shell-shocked and exhausted,” the former employee said of the firm’s RIA clients who held around $23 billion in customer assets on the platform.
The acquisition adjustments underscore the challenge Axos will face in growing the unit, particularly given shrinking margins and competitive pressures on pricing in the custodian business, said Mark Tibergien, Pershing’s longtime head of custody who retired last year. It’s already a hard road for “small players” as they can only become “niche providers or stripped down versions” of the big three custodians who have the upper hand when it comes to cost and speed.
“Custody is not a sexy business,” Tibergien said. “If you don’t have a balance sheet like Pershing, Schwab and Fidelity, you are at a special disadvantage.”
A spokesman for Axos did not respond to multiple requests for comment on the terminations or the company’s strategy for the business unit.
“We believe that our entrepreneurial culture, commitment to servicing clients with no conflict of interest, and our ability to provide additional technological and banking services to these RIAs advisors and their clients make us an ideal strategic acquirer for EAS,” Axos Financial CEO Greg Garrabrants said on the company’s fourth quarter earnings call July 29. “We have made significant progress over the past three months across a variety of conversion and integration activities.”
Some of E*Trade’s largest custody clients include Mason, Ohio-based Matson Money, Roswell, Georgia-based Howard Capital Management and Beverly Hills, California-based Checchi Capital Advisers, according to former E*Trade employees.
Multiple RIAs with $1 billion or more in assets under management, including those above, did not respond to requests for comment about their intentions to leave or stay with the Axos-controlled business.
But any time there is a custodial transition, RIAs also tend to re-evaluate if they will stay, open all new business at a different custodian or move their existing business as well, said Tim Welsh, a former Schwab RIA official who runs consulting firm Nexus Strategy.
“Particularly in the established RIA marketplace, it is a zero-sum game, so competitive offers will always come circling whenever ownership changes,” Welsh said.
To be sure, the Axos-acquired E*Trade unit also has its loyalists.
Adam Quiring, founding partner of Birmingham, Michigan-based Q3 Asset Management, a $537 million-AUM RIA that also custodies with Schwab and TD Ameritrade, said his firm has a “long-term relationship” with E*Trade and that it’s not considering moving its business.
“They’ve been a great partner to us over the years and we’re optimistic that this acquisition will be a positive,” he said.
A Schwab spokeswoman did not respond to a request for comment and a Pershing spokeswoman declined to comment on whether the firms were actively making offers to E*Trade’s RIA clients.
A Fidelity spokeswoman declined to comment specifically on whether it was pursuing former E*Trade RIAs specifically but said it is having “conversations with firms of all sizes–from large breakaway advisors to smaller growing advisors.”
Referrals and cross-selling
One ex-E*Trade advisor, who left the firm while it was still under Morgan Stanley’s ownership and spoke on condition of anonymity, said one issue for those remaining is the loss of E*Trade’s RIA referral program, which had been scrapped shortly after Morgan Stanley’s acquisition of the business.
Prior to the deal, the advisor and his colleagues received leads from well-to-do self-directed customers who needed investment advice. They had also received stock bonuses for helping those customers manage their money, the source said.
Morgan Stanley, the ex-E*Trade advisor said, had replaced the RIA referral program with its own program, known internally as “Morgan Stanley Quick Wins,” which directed referrals to the firm’s employee advisors.
Other former E*Trade Advisor Services employees said that Axos, which launched its own self-directed trading platform in June, may refer some banking customers but that RIAs were not optimistic that it would be as fruitful.
Another catch: the potential for cross-selling pressure while under the wing of a banking parent, the sources said. That might be a pain-point for RIAs who tend to pride themselves on their independence.
Garrabrants had said on the company’s earnings call that he was “excited” about the “cross-sell potential” across Axos’ three businesses: consumer banking, commercial banking, and securities.
“The pending EAS acquisition will accelerate our time to scale and profitability in a growing market segment and provide an excellent source of customers for Axos banking products,” he said.