Brooke’s Note: This article is the fourth profile in the Asset Custody Project series.
Derek Kennedy likes a number of things about Scottrade – after all, the Knoxville, Tenn., advisor custodies his client assets there, having moved them from Fidelity and Schwab.
Scottrade human touch is one thing. As a custodian, the company is a small, boutique shop with dedicated service reps for advisory practices.
The second thing that Kennedy likes is Scottrade’s bricks and mortar. The custodian is part of the nation’s largest discount brokerage, so there are 450 branches around the country. An RIA’s clients can find a branch almost anywhere to conduct business with someone fact-to-face.
“It’s not that I had lengthy list of negative experiences at Fidelity and Schwab [where he formerly held his assets],” Kennedy says. “It’s more that I’m getting that extra level of authenticity at Scottrade.”
Scottrade has just begun building its business on advisors like Kennedy. The company got in the custodian business in 2005, but only the past year or so has it been able to win significant numbers of advisors with a 44% jump in 2009 alone to 750 RIA clients. By welcoming advisors of all sizes, for instance, it won a flood of small breakaway brokers last year.
Hampered by a vacancy
Though it is still hampered by a vacancy at the top of its advisor services division, it’s now ramping up its marketing. Advisors will likely see Scottrade Advisor Services show up at conferences throughout the spring, after appearing last week at the Technology Tools for Today conference in San Diego.
It also had a presence at the FPA national conference in Anaheim and NAPFA’s conference just outside Washington, D.C.
“We are expecting to experience continued growth and are looking to increased advertising and trade show presence to help sustain momentum from 2009,” says a spokeswoman for the company.
Scottrade brought aboard about one advisor per business day in 2009, and it now serves more than 750 RIAs – many of them in start-up mode or coming aboard with a relatively small amount of assets. In 2007, it served about 350 RIAs.
'Important when I had nothing’
Ken Brackett, principal with Lighthouse Financial, which manages $20 million from Wilmington, Del., says what stands out about the company is service. “I started with Scottrade,” he says. “They made me feel important when I had nothing.”
The other two micro-custodians on similar recruiting tracks are Shareholders Service Group of San Diego and Trade-PMR of Gainesville, Fla. Both companies also claim to have recruited an RIA per day in 2009.
Here’s the key data:
1. Name of custodian: Scottrade Advisor Services
2. Address: 12800 Corporate Hill Drive, St. Louis, MO 63131
3. Phone: 314-965-1555
4. Parent company, if any: Scottrade, Inc.
5. Founded: 2005
6. Total Assets in custody: Not disclosed
7. Number of RIAs using platform: 750+
8. Head of RIA custody business and executive’s starting date: Steve Walkenbach, executive director of Business and Product Development – Scottrade is actively searching for a new head of RIA custody
9. Head of RIA sales and starting date: Brian Davis, business development manager, started at Scottrade, Inc. in 2003; Scottrade Advisor Services was founded in 2005.
10. Name of RIA technology platform: ScottradePro
11. Date of Last major update on tech platform: June 2009
12. Minimum assets for advisors: No minimum asset requirement
13. Custody fees [including fees for RIAs that fall under the minimum]:No Custody Fees
The obvious difference — and perhaps advantage – for Scottrade over these competitors is that it has a nationally recognized brand name. It also has the largest branch network of any of the discount brokers, topping Charles Schwab & Co., TD Ameritrade and Fidelity respectively.
There’s a difference between sending a client into a Scottrade branch versus a Schwab branch, says Brian Davis, manager of business development for Scottrade. Because Schwab sells such high-level advice in its branches, it’s akin to sending the client into the “wolf’s lair,” he adds.
Schwab has a policy that prohibits its branch brokers from soliciting the customers of its RIA clients.
Scottrade’s growth accelerated in February 2009 when a wide swath of brokers on Wall Street with $50 million or less under management got pushed out; many found homes at Scottrade. This breakaway activity accounts for 40% of the new advisors coming to the custodian.
The one obvious void that Scottrade Advisor Services faces is that it lacks a leader. Doug Talir, who had been director of advisor services for 6 years and he departed about three and a half months ago.
The company is actively searching for his replacement, according to the spokeswoman. In the meantime, Steve Walkenbach, executive director of business and product development, is filling in. He was not made available for this article.
Though the vacancy at the top creates a void, it also represents an opportunity to bring a good executive from a competitor’s middle ranks and put him into the top RIA spot at Scottrade, said Steve Goering, managing director of Laramie Group, an executive search firm in Chicago.
But it is not surprising that the search is starting to stretch toward its fourth month, he adds.
“At that level, it could take a while,” Goering says. “On average our searches take 90 days to 120 days.”
Pool turns to a puddle
For an asset custodian, the search could be significantly longer, because the industry is so small. “The pool of candidates about turns into a puddle,” he said.
In addition, it’s almost certain that the candidate needs to pulled out of a job at a competitor, according to Goering. With senior executive schedules being what they are, arranging meetings – especially around this winter’s holidays – can take extra long.
Scottrade is not unused to preying on its larger competitors. About 50% of its new advisors come from existing RIAs. Many of them are moving a small portion of their assets away from other custodians to see what kind of service they can get for $7 a trade at Scottrade.
Other RIAs that now custody with Scottrade say they left because they wanted to avoid the low-balance fees levied by some custodians. Another 10% of new advisors recruited by Scottrade are CPAs and attorneys, who give some financial advice as a sideline to their core profession. The other 40% are breakaway brokers.
Welcoming the smallest
The strategy of welcoming the smallest, least-profitable advisors worked for TD Ameritrade and it can work for Scottrade, said Philip Palaveev, president of Fusion Advisor Network, in an earlier interview.
“Why not,” he added. “It’s a beachhead.”