Last April, E*Trade (NASDAQ: ETFC) completed the acquisition of the Trust Company of America – adding 200 registered investment advisors (RIAs) and $18.3 billion in assets under custody to its operations. With this move, E*Trade forayed into the advisor services market which has been led by Schwab (NYSE: SCHW), Fidelity, and TD Ameritrade (NASDAQ: AMTD). To put things in perspective, total assets under custody for Schwab, Fidelity, and TD Ameritrade were $1.5 trillion, $800 billion, and $540 billion, respectively in 2017.
Below we discuss the growing investment advisory market and the potential benefit E*Trade could achieve by achieving a sizeable share of this market. The Trefis price estimate for E-Trade stands at $50 per share, which is in-line with the market price. You can view our interactive dashboard on How Has E*Trade Fared In Recent Quarters And What’s The Outlook For The Full Year? to observe the quarterly revenue trends and modify our earnings expectations to gauge the impact on the stock price. Additionally, you can see more of our financial services company data here.
Recent trends in the RIA market
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Per the Investment Advisor’s Act of 1940, a person or a firm that provides investment advice for a fee needs to be registered with the SEC and is known as a Registered Investment Advisor. The number of RIAs and RAUM (Registered Assets Under Management) have grown at a CAGR of 3% and 9% to 12,578 and $82.5 trillion, respectively, in the last six years. Per the report Evolution Revolution, the RAUM is equally distribution between individuals and institutions. Moreover, the custodian for nearly two-thirds of these assets are broker-dealers. E*Trade’s strong presence in the brokerage industry, hence, should make it easy for the company to ramp up its presence in the custody business.
Growing managed products and custody assets
E*Trade’s recent earnings have been driven by an increase in net interest income and services revenues, although a steady decline in trading fees has partially impacted the benefit of these gains on the top line. Fee and Service charges majorly comprise of order flow revenues, sweep deposits, advisor fees, and mutual fund service fees (additional details about the revenue breakup can be viewed in our interactive dashboard) and have been growing steadily in the last few years.
Advisor management and custody revenues, which contribute 15% of the Fee and Service charges, came in at $18 million for the quarter ending March’19 and remained flat sequentially. However, the assets under custody grew by 2% to $19.2 billion over the quarter ending in December’18 the asset base spiking 10% sequentially. Although, E*Trade’s custody business is extremely small compared to Schwab’s or Fidelity’s, it also has the potential to boost other income streams such as order flow revenues and mutual funds. Additionally, a presence in the RIA market would reduce the company’s dependence on trading commissions that have been observing stiff competition by fintech startups and other brokerages.
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