The Little Discount Brokerage That Could

Almost across the board, custodial firms grew assets at a lackluster rate last year.

With one exception: Scottrade. The discount DIY brokerage’s registered investment advisor platform, launched seven years ago, grew assets by 45 percent from the prior year to $35 billion, according to an Aite Group report.

While it’s not hard to put up big percentage increases when you’re starting from a smaller base, Scottrade’s performance was still the biggest percentage increase among six leading custodians Aite tracked.

“It’s staggering, absolutely staggering,” says Aite analyst Alois Pirker. “One theory I have is that with wires pushing average production levels higher and higher, there’s some small folks that don’t want to go as high as the firms want to see them go. So they’ll go independent.”

The runner-up in asset growth was TD Ameritrade, with $142 billion in assets from about 4,000 RIAs, a 22.8 percent asset increase. “They also play in the small firm space,” he said. “Maybe also the larger custodians are focusing on larger firms.”

Last week Brian A. Davis, director of Scottrade Advisor Services, declined to confirm or deny Aite’s $35 billion advisor asset figure last week but did say the average assets held by advisors on the firm ranged from $30 to $50 million. He predicted Scottrade would add another 250 RIAs this year, with asset growth of 35 to 40 percent.

Scottrade’s advisors tend toward relatively low assets, according to data tracked by research firm Meridian-IQ. (Rep.’s owner, Penton Media, has an equity stake in Meridian-IQ.) Of the 800 RIAs that use Scottrade as a custodian and are tracked by Meridian, only about 80 have assets of $30 million or more, although a handful have assets of more than $1 billion.

This week Scottrade spokesman Whitney Ellis said Aite’s $35 billion asset figure was inaccurate but he would not disclose a different number, saying the company was privately held. He said the firm stood by its $30 million to $50 million average AUM figure. Meridian data omitted information from 200 new advisors and another 150 unreported advisors, he said. Some AUM figures from advisors who migrate from other channels aren't updated until they have successfully transitioned their clients, he added; other advisors don't report asset figures if they lack full discretion over the assets, he said.

Scottrade’s entry into the advisor services market is “a natural extension of our core business,” Davis says.

“At the end of the day when you add the advisors into the equation, you’re still providing online discount brokerage services. It’s just you’re servicing a different client, and you need to understand the needs of that client.”

Advisors are small businesspeople who are looking for custodians to provide ways for them to operate more efficiently, Davis says. The firm has advisors of “all shapes and sizes” but caters to the state registered RIAs, those with less than $100 million in AUM, he said.

Scottrade’s advisors are not newbies, Davis says. About half have come from the independent broker/dealer side, while the rest are already established RIAs who are switching or adding custodians. He disagrees with the view that Scottrade caters to small practitioners.

“It depends what you’re calling small,” Davis says. “But it’s all relative to the point of view. But I think naturally when firms are getting started or have smaller assets that it makes business sense to have the number of custodians consolidated to one or two.”

He agreed that some advisors at wirehouses may not be growing at a pace that’s being set by corporate goals. “That advisor might be quite happy with living on a $50- or $100 million book of business and not have to meet additional requirements,” he says. “That’s another freedom of the RIA model. They have full flexibility to run the business their way, and if they want to grow it at 10 percent versus the company goal of 20 percent, that’s their choice.”

He attributed the growth in the past year to advisors feeling more comfortable about making business decisions than they did in earlier years. There also are more outsourcing services—in marketing and technology, for example—that help advisors transition to independence.

“There weren’t necessarily the same tools that were in their toolbox just two or three years ago,” Davis says.

Scottrade’s own retail brokerage has 500 offices across the country, another marketing tool for advisors. The retail offices aren’t providing investment management and financial planning services, so they’re not competing with Scottrade’s advisors, Davis says.

There aren’t any minimum asset requirements at Scottrade. That can help an advisor who’s leaving a brokerage but isn’t sure how much of his clients’ money he will be able to bring over to his new business, Davis says. There are minimal commissions as well, including $7 trades for stocks and ETFs and $17 for mutual funds if they contain a transaction fee.

Scottrade has a team of 50 that’s dedicated to its advisors, to help with trading, operational issues, and updates on monthly training sessions.

“It’s really a one-stop service model,” he says.