#FASuccess Ep 144: The Past, Present, And Future Evolution Of The RIA Custody Model, with Tom Bradley Jr.

Executive Summary

Welcome back to the 144th episode of Financial Advisor Success Podcast!

My guest on today’s podcast is Tom Bradley. Tom is the former president of TD Ameritrade Institutional, one of the leading RIA custodial platforms serving nearly 7,000 independent RIAs with almost $600 billion of assets held in custody.

What’s unique about Tom, though, is that he led the original Waterhouse Advisor Services platform when it was first started back in 1992, and has been a part of the growth and evolution of financial advisors operating as independent RIAs on the custodial platform for more than 25 years.

In this episode, we talk in depth about the evolution of the RIA custody model itself. From the early days when advisors had no direct means to actually trade across multiple client accounts and had to manually enter transactions off paper trade confirmations into their portfolio performance reporting systems, to the development of the first wave of RIA custodial tech integrations when few advisors had more than $20 million of AUM and couldn’t demand much of their providers, to TD Ameritrade’s unique pivot into an open architecture system with its Veo Open Access platform, because their acquisition by Ameritrade in 2006 gave them a unique opportunity to leverage the first wave of APIs that other RIA custodians hadn’t fully developed yet.

We also talk about the nature of the RIA custodial business itself. The not always apparent ways that RIA custodians generate their revenue from advisors and their clients, why the RIA custodial options for how cash is invested has become such a hot-button issue, what it really costs an RIA custodian to service an advisor on average and what clients actually pay as a percentage of their assets, and what it would take to develop an RIA custodial platform that itself operated on a truly fee-only basis.

And be certain to listen to the end, where Tom shares his perspective on the future of the RIA custodial business. The gaps he still sees in how advisory firms manage succession plans and the transition of clients after a founder passes away, and why in the end, the fact that RIA custodians may also compete with their RIAs for end investors in their retail brokerage businesses can still be a net benefit to most advisors because it brings down the cost of the custodial platform in the first place.

Michael Kitces

Author: Michael Kitces

Team Kitces

Michael Kitces is a Partner and the Director of Wealth Management for Pinnacle Advisory Group, a private wealth management firm located in Columbia, Maryland that oversees approximately $2.0 billion of client assets.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

What You’ll Learn In This Podcast Episode

  • How The Custody Business Took Shape To Serve The Budding RIA Channel [05:51]
  • Where Early Custodian Clients Came From [16:24]
  • How The RIA Custodian Model Evolved In The Early 2000s [27:04]
  • How Tom’s Team Navigated The Ameritrade-TD Integration [42:04]
  • How TD-Ameritrade Came Through The Financial Crisis [50:30]
  • Tom’s Transition From Institutional To Retail [59:02]
  • Tom’s Take On A Basis-Point Model For Custodians [1:12:14]
  • How Tom Sees The Custodian Model Moving Forward [1:25:23]
  • What’s Surprised Tom About How Advisors Have Built Their Businesses [1:37:11]
  • What’s Next For Tom [1:44:56]

Resources Featured In This Episode:

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Full Transcript:

Michael: Welcome, Tom Bradley, to the “Financial Advisor Success” podcast.

Tom: Hi, Michael. Nice to be here.

Michael: I’m really excited for the discussion today to talk about just the whole world of RIA custody and what it means for these platforms that we as advisors, at least on the RIA side, build our whole businesses on, build our own foundations on to the point that, I hate to acknowledge it, but that I feel like we kind of take for granted. I don’t know very many people ever call their custodian like, “Hey, that non-ACAT transfer only took 10 days instead of 2 weeks. That was totally awesome.” But goodness knows we are on the phones ranting as soon as anything goes wrong. So it’s kind of, I feel like it must be a thankless business sometimes.

And you have lived it from pretty much the start. I know you were involved with TD Ameritrade’s advisor services division when it was first getting started in the early ’90s, which I think was before it was TD Ameritrade, and even before it was TD Waterhouse. I think it was just Waterhouse then.

Tom: That’s right.

Michael: And have really seen the evolution of just the whole RIA custody model and what it means and what it does and the advisor world that’s built on top of it for the better part of 25 years now. And so I’m really just excited to talk about the whole evolution of the RIA custody model and how we got to this strange point that we’re at today.

Tom: Yeah. Well, Michael, I’m thrilled that you want to talk about it because it’s really, when you think about the custodians, you’re not wrong on that, I think advisors do appreciate the custodians, but maybe they’re not ones to give too many pats on the backs, but the custodians know that. They understand that. And for the most part, at least when I was there on the seat, I really didn’t care about that. What I cared about was that we were providing great service to advisors and that advisors were doing business with us because they wanted to do business with us.

And I think when you go back, yes, to the early ’90s, we kicked it off in about ’91, and at some point in ’91, they pulled me in in ’92, and it was just, we saw that there were a bunch of individuals that had power of attorney trading authority on accounts, and they didn’t seem to be related to the accounts. And then we saw that one of our competitors was observing the same thing, it was actually in the business, and had put together a business in a more formal way. And so we decided to put a team together, see what we could do for these individuals, because we saw they had unique needs.

And so where the business has come from from the early ’90s to today is just, it’s just unbelievable. And not just the custodians, but the custodians have enabled really the independent RIA model to flourish. And to see where that has grown from well under $1 trillion in the early ’90s to, depending on what study you look at, let’s call it $4 trillion today. It’s just been a remarkable growth.

How The Custody Business Took Shape To Serve The Budding RIA Channel [05:51]

Michael: Yeah, I’m fascinated by how this evolved. And I think I want to start there, right? Just understanding like, what was going on in the early ’90s when this model was coming forth. So as you said, there were some clients, I was going to say retail clients, but there was no retail versus RIA clients, just clients were clients. There were retail clients, there were direct investors who had powers of attorney documents on file with, I was going to say TD, but I guess with Waterhouse, that said, “Hey, this other person is allowed to…is authorized to do things in my account.” But the POA wasn’t because a daughter was helping out or dad was helping out or a brother was helping out, it was this unrelated third party, oh, it looks like it’s an advisor who has a power of attorney to trade in a retail client’s account, in a world where everybody else was a broker at a broker-dealer. So this whole idea of like, there’s a third party that’s authorized to do things in your investment account was a very alien concept at the time.

Tom: Right, very alien. Investment advisors existed, but for the most part, when we thought about an investment advisor, you thought about someone that was managing a mutual fund. And so these folks were are a whole different animal. And they started to either start businesses on their own or break away from other firms, and they wanted to do things differently. And they wanted to charge based on a fee. And they wanted to provide advice that was unconflicted to their clients. They didn’t want to sell them something other than sell them good, solid advice for a fee.

And so we would get phone calls from these folks and they’d say, “Listen, I need to buy a particular security, and I need to do it in 50 accounts at once.” And so we developed a…we had to come up with block trading. And of course, back then it was all on paper. We had tickets, and we would…the advisor would place the order with us, and then by the end of the day, they would call us up and rattle off the account numbers and the shares that were to go into each account.

Michael: I love that. Just it’s a phone call explaining to a person like, “This many shares in this account, this many shares in this account.” I guess like phone calls and follow-up fax for confirmation or something.

Tom: That’s what it was. And then we had people that would sit there and just keep punching into a system to our back-office system. It was very antiquated. And even the area that we were in, it was kind of funny because before they pulled me over to the advisor custody business, I was running customer service for the company. It was on the same floor. We were at 44 Wall Street, and that was on the same floor. And they said, “All right, Tom, we’re going to pull you off this and we’re going to put you in with this new unit.” And there were actually a couple other units attached to it unrelated to the custody business. But, “We’re going to pull you into this unit.” And it was kind of in the corner of a floor beyond the air conditioning vents with a fan blowing, blowing. I’m like, “I’m going to do what?”

Michael: So you were just looking as like, “Man, what did I do to get a demotion?” Like, “I got demoted already? They put me in the corner.”

Tom: I said, “Oh, my gosh, what am I going to do?” And I didn’t really know what I was getting myself into. But I’d say I look back on that moment and I quickly realized, “Wow, this really has potential. This is a really interesting business, and it has potential.” And it didn’t take me too long to get over the fact that we were stuffed in a corner, and it didn’t take me too long to get super excited about the business.

Michael: Yeah, it’s just, again, this level of infrastructure that we have today that I feel like we sort of take for granted because it’s just been so natural for so long is fascinating to me when you dial the clock back to what it was like then. RIAs were primarily essentially institutional investment managers. The technical structure of how an asset manager got paid to manage a mutual fund was like the mutual fund was the chassis, and it would hire an RIA that might even be an internal or affiliated party to manage the mutual fund on a pooled basis. And so A, there were virtually no RIAs to individuals, aside from maybe huge family offices. And virtually all other RIAs either managed one client with a giant pile of money, or they managed a whole bunch of clients on a pooled basis.

So the whole phenomenon of like, I’m going to have 50 clients that have 50 accounts or 100 or 150 accounts, because they got multiple accounts per household, so you’ve got to create block trades and allocate them, that just didn’t exist until RIA showed up and say, “Hey we need this thing because we’re managing a bunch of clients at once.” And that stuff all had to get built in the ’90s.

Tom: That’s right. That’s right. It did. And when you look back on it, it was just like the classic startup, the classic entrepreneurial startup, where we were going along, and we were going 100 miles an hour because the business was just starting to grow so quickly. And when you look back on it, we thought we knew what we were doing, but we didn’t really know exactly what we were doing. We were kind of making things up on the fly. We didn’t even have an agreement with the advisor at the time. The only agreement we had was really from the client that said, “This person has authority to trade on my account.” And we said, “Well, okay, the client wants this person to trade on their account, that’s their prerogative. So we’ll take limited powers of attorney.” And that’s what we did.

But over time, as the business started to grow, we realized how critical, how important technology was, and what technology could bring to the table. And the first real technology thing that came to this industry was an electronic interface between the brokerage firm and the portfolio management system, the Advents and the Centerpieces of the world. That really was a critical period of time, when the custodians developed those downloads. So before, advisors, we were keypunching trades in, and advisors were doing the same thing. Advisors would get executions, in fact, they’d get stacks of confirmations from the brokerage firms, and then they would sit there and keypunch all that information into their portfolio management system.

Michael: Yeah, even when I started 20 years ago, one of the jobs I had, and I guess like my second firm, so this was probably 2001, we were on one of the…well, one of the competitors to that, which is a company called Techfi that ultimately got bought I think by Advent. And one of my jobs was to take all the paper trade confirms that came in and track and reconcile them against the data that we had in Techfi to make sure the performance reports were right. It was all manual with paper…

Tom: All manual. All manual.

Michael: …to do that and track that data and information. So I guess that’s part of just, I don’t know, the fortuitousness, or I guess, in practice, kind of the enablement of the rise of the internet itself, that just suddenly, you could use this internet infrastructure thing that was coming into existence to say, “Hey, what if we just use the World Wide Web to send you a data file instead of sending you a stack of paper to manually key?”

Tom: Right, right. And so it’s also, it’s enabled…technology period and that in the early days, in the ’90s enabled advisory firms to grow and achieve greater scale. A large advisor back then was…in fact, the first interface that we had was to Advent. And the only way that I was able to convince our founders who I was reporting directly to at the time, Larry Waterhouse and Ed Nicoll, to develop this Advent interface and spend the money on, on the development, was to get a big advisor to agree to come over to us. And this huge fish that we had was the largest advisor that we would have at the time, a $60 million advisor. Now, $60 million is a lot of money, but in today’s world, that’s not necessarily considered a large advisor. But I was able to get this advisor to agree to come over on the condition that we built an Advent interface. And that’s how I got the company to invest.

Michael: Because again, you go back and look at industry benchmarking studies back then, because this was just the time that Mark Tibergien at Moss Adams started with this crazy idea of, “Hey, these RIAs seem to be emerging and growing, what if we did like a practice management benchmarking study and started tracking them?” So he started doing that in the, I think mid to late ’90s. And I’ve seen some of the early studies back then, it was like, the average RIA had $17.2 million of AUM and an assistant. And that was the business.

Tom: That’s right.

Michael: That was a typical firm. And granted, there’s still a lot out there today at that size, but now we have $100 million firms, $1 billion firms, $10 billion firms. It’s amazing how much the space has moved, that the $60 million advisor was like the mega-whale you needed to push through the Advent integration the first time.

Tom: That’s right. That’s exactly right. In fact, the way we really thought about growing the business back then, because most advisors seemed to be around the same size, was we just thought about adding more advisors. In fact, in 1996, we decided that we needed to make a splash. We had achieved about $1 billion in assets under management from advisors, $1 billion. It was a lot of money. Well, it’s still a lot of money, a lot of money back then, but today, it’s nothing compared to what the custodians control and the advisors on the custodians control. But we said, “We need to make a splash, and we need to show that we can really grow this business, so let’s try and double the business in a year.”

And the way that we did that, the key to the strategy was to focus on adding more advisors. So we did that. We took it from $1 billion to $2 billion. And in 1997, we had a huge party in Windows on the World at the top of the World Trade Center to celebrate that incredible achievement of doubling the business in one year. But it was all because we were able to add more advisors.

Where Early Custodian Clients Came From [16:24]

Michael: So where were they coming from at that point? Because it’s not like you were necessarily winning a whole bunch of business away from the competing custodians, because hardly anyone else was in the business, right? I’m trying to think back. I guess Schwab was in it. Because Schwab launched Advisor Services right around the same time, in ’92, ’93 timeframe. Was it basically just you and Schwab at that point, and were you competing mostly for advisors against each other or advisors outside of your ecosystem you were trying to bring in to this world?

Tom: I think it was really a combination, but for the most part, it was and still is very difficult to get an advisor to move client assets or for custodian to another custodian. That’s always been kind of an uphill battle.

Michael: We all hate repapering.

Tom: Right. It’s not a revenue-generating activity. And so what we did back then is we had different sources of lists of advisors. So we would go to all the conferences and the NAPFA, the FPA conference. We would go to those conferences and compile lists. We had different sources, but this was even before, I think maybe it was around the late ’90s that we got the brilliant idea to go directly to the SEC to see if we can get raw data from the SEC. And we were able to get a disc that had lists of advisors. And then we’d have salespeople that would pound the pavement and get on the phones and…

Michael: Right. Because it’s not like there’s an online IAPD search with an API. We’re in the ’90s. The internet is still coming forward. I don’t even know if the SEC had a website yet. So interesting thought of just, “Hey, all these advisors have to file their ADVs. You guys have all this data at the SEC. It’s theory, it’s public data, can we have a copy?”

Tom: Yeah. And so what we did is we actually got a disc from the SEC. That’s how we did it. And then we loaded up the disc, and we hired some young, super-smart kid to see if they could make sense of what was on the disc.

Michael: So if you’re getting SEC data and calling on RIAs, where would they have been or what were they doing at the time before you called them? Were these basically, have all been advisors that were still doing I guess, well, the “old model” from 5 to 10 years prior? Like, “Are you an RIA that’s still getting POAs to trade your clients in a retail account? We have an advisor account. Come check out advisor services.” Was that the sale? Was that the dynamic at the time?

Tom: Yeah, where the advisors were coming from was really a mix. Some were in financial services, some were just hobbyists on their own, where they like to manage their own money, and which became much easier to do after May Day in 1975 when commissions were deregulated. And there was really a mix. Some were financial planners that were getting into the money management business. And so it was really all over the map. A lot of them were part-timers. And the part-timers were sometimes tough to deal with because they weren’t all in. So we tried to focus on the firms that were more on the all-in side. And we were able to find those firms especially going to the conferences. And when you went to the conferences, those typically were the people that…that’s what they were doing, and that’s what they were doing for a living.

Michael: And I guess particularly if you’re going to events like NAPFA and Financial Planning Association, that’s where the planning, more holistically-oriented advisors were going. So if you’re going there and they’re doing that stuff and they’re not charging on assets, like, “Hey, I’d like to introduce you to this cool new model where you can do assets under management, and we could support you on our platform.”

Tom: That’s right. That’s right. And that’s kind of how we got started. So that was kind of the early into the later ’90s. But then the business still was, really, it was a retail-based company. And we made a couple acquisitions in the late ’90s. And so they asked me to go off and do something with one of the companies that we had just acquired. And I did that, the list, in 1998 and 1999. And then they pulled me back in in the early 2000s. And Frank Petrilli was running…he was the CEO at the time. And Frank Petrilli had really taken an interest in this business and really wanted to make an investment and take it to the next level. And so he asked me to come back in early 2000. And we had a chat about it and we both agreed that, “Listen, we either are going to be in or we’re going to be…if we’re going to be in, we’ve got to go 100%. We need to make investments in technology. We need to make this a real focus of the company.” And Frank absolutely supported that and agreed to it. And I was able to come in and make a few key strategy changes, as well as get funds to invest in technology.

And we had just launched…when I came back in 2000, we had just launched our platform called Veo. Before we had Veo, we had another system called Waterhouse Online for Advisors, nickname WOLA. But that was not a web-based system. And it was a decent system when it was up, but back then the technology was sketchy. So it would go up and it would go down. It wasn’t really sufficient to anything that advisors use today. But in 2000, when we had Veo and made additional investments in Veo, and that was our web-based platform, that really helped us and helped advisors take it to the next level.

And the other key strategy change that we made was we started to go after larger firms. Up to that point, it was all about “Let’s just get as many advisors as we can.” But in 2000, you had more larger firms. And so we said, “Let’s try and get in with these larger firms. And of course, we love for them to move their funds from another custodian, but we know that’ll be tough, but let’s get in there and try and introduce the technology that we have, and show them that, ‘Hey, we’re an alternative.’” And at the time, there was a mood, and I think to this day there still is, there’s a mood amongst the advisory community to not necessarily have all their eggs in one basket. So they’re willing to talk to us.

And we would introduce our platform and say, “We understand that it might be a challenge to move all your clients over to us. We’d love for you to do that. But why don’t you just give us a shot by starting to give us some of your new business?” And that foot-in-the-door strategy really worked well for us. And we took the business, at that time we had about $9 billion in AUM, and we really…the growth trajectory, once we used that strategy, the business really started to take off.

Michael: And so when you’re looking at “larger” firms by this time, what were larger firms at this point? Are you now looking for $100 million firms? Was that large at the time to say, “You’ve got $100 million at Schwab, you want to go multi-custodial with us?”

Tom: Absolutely, $100 million, $150 million firm. That’s it.

Michael: Interesting. You pointed out then and I think still true today, there does seem to be this effect that if you’re so independent-minded that you break away from some broker-dealer or insurance platform to go independent, to hang your own shingle as an independent RIA, part of that independence mindset really often is I don’t want to be solely dependent or captive on one platform. Which means even when we’re independent with our custodians, there seems to just be a lot of natural inclination for most of us on the independent advisor side to say, “Well, then I’m going to be multi-custodial. I’m not even going to be tied to one independent firm. I’ve got to have two or more independent firms systems, inefficiencies be darned.”

Tom: Right. You want optionality, right? They don’t want to be locked into a particular firm. If they get upset with one custodian, they can just turn the spigot off to that custodian and turn it on higher to the other custodian, especially with a larger firm.

Michael: It’s an interesting dynamic. I even remember it for our advisory firm, I think in the early 2000s, we were multi-custodial as well, Schwab and I think actually TD at the time, and I want to even say we had a couple of dollars, like, First Clearing, on like an early version of the First Clearing platform. And it was so operationally inefficient that we dialed all that down. And I think by about 2002 or 2003 just went 100% to one custodian because we were $100 million or $200 million and finding it just too administratively and operationally inefficient to be multi-custodial. But then both as the business grew and the technology has gotten better, it’s become easier to be multi-custodial again. And now that pendulum seems to be swinging back the other way.

Tom: Yeah, I think…my observation was, especially with the larger firms, they’re almost exclusively multi-custodial. And one of the biggest hurdles you run into, of course, is the back office. It’s not necessarily the principal, the owner, the founder, they might agree to go with you, but then you have to deal with operational staff.

Michael: Oh, yeah, it’s just staff. Like, “What have you done to us?”

Tom: Right, “What have you done to us?” And they will sabotage, right? Because they’re like, “Are you kidding me, I have to learn another system? I have to get to know these other people? You have totally screwed up my life.” And so we have to go in there. We had a whole strategy around winning over the operational staff. And that worked quite well for us. But when you think about it, early on before we figured out, “Oh, boy, we’ve got to do something here with the folks running these offices,” they would go back to the principals and just say, “No, we can’t work with this firm. These guys aren’t any good.” And so we had to get over that. We had to get beyond that. And we did. And that worked out well for us, too.

How The RIA Custodian Model Evolved In The Early 2000s [27:04]

Michael: Interesting. So in the early 2000s, you’ve got traction with a volume advisors, you’re $9 billion of AUM on the platform, you start going after some larger firms to be multi-custodial, so what happened next in the evolution of the platform, the evolution of this RIA custody model for you?

Tom: Well, we continued to build out and make Veo better and better. There was one point I think that was critical in the history of Veo where we went to an open platform. And today that’s called Veo Open Access. But there was a point where the custodians were all trying to solve the advisor problem of the lack of integration amongst the systems that they used, the desktops. And so we looked at that and said, “Geez, to go out and try and get an advisor to…” If we were to build out the best portfolio management system, for example, we might think it’s the best, but you get 100 different advisors in a room and you ask them, “What do you think is the best portfolio management system?” You’ll come out with 110 different answers. So we said, “Let’s go with an open strategy and allow technology providers to write into us.” That’s worked very well today. You have all the custodians are doing or at least trying to go with a strategy like that.

Michael: So when did that shift happen?

Tom: That was around 2006, 2007, right around the time we were… And there were a handful of things going on there. One, TD Waterhouse…TD bought Waterhouse in 1996, and then Ameritrade bought TD Waterhouse in 2006. So that was going on as well. And of course, you had the broker-dealer exemption rule that was going on. And in the 2000s, we were able to…we were unconflicted, so we were able to take a position that was on the side of the independent advisors around the broker-dealer exemption rule. And that also put us on the map, where advisors, I think up until that point, might have looked at the custodians with a leery eye, and maybe they still do, but I think that really gained a lot of loyalty for the company because we took the side of advisors. They really appreciated that. And that helped put us on the map as well.

Michael: Yeah. So for those who aren’t familiar, there was…our modern controversial regulatory stuff is Regulation Best Interest and Department of Labor’s fiduciary rule over the past couple of years. But the big regulatory issue of the early 2000s was this thing called the broker-dealer exemption, or known as the Merrill Lynch rule for short because Merrill was one of the firms that had lobbied for it. It was an exemption the SEC put forth in 2000, sorry, in 1999, I think, that basically said wirehouses and other broker-dealers could start offering these fee-based wrap accounts and receive what essentially looks like an AUM fee but not have to register as investment advisors. And essentially allow them to avoid fiduciary duty while offering these fee-based accounts. And it was controversial in the industry because it was the debate at the time of, are broker-dealers basically doing the fiduciary model without needing to register as investment advisors and be fiduciaries?

And the Financial Planning Association sued the SEC, challenged the rule, won and had it vacated ultimately in 2007. But it was this big, battling controversy for a number of years about, on the one hand, people saying, “Look, broker-dealers going more fee-based is a heck of a lot better than the old purely commission-based world where all the churning stuff happens.” But then the fiduciary and the RIA side of the industry saying, “No, no, no, no, that’s not fair. If they’re going to charge fees, they have to be treated as fiduciaries like all the rest of us that are charging fees.” And it was a major industry battle with sort of the classic dividing lines, the “industry,” predominantly broker-dealers on one side and kind of the consumer advocates and a fiduciary fringe on the other side. So would have been a very big deal at the time that TD could actually take the fiduciary RIA position and not be fighting for the broker-dealer exemption.

Tom: Yeah. So that really put us on the map with RIAs. And still to this day when I talk to RIAs and bump into RIAs, they still go back and talk about how we took that stance, and they really appreciated it.

Another interesting thing that happened, when you think about, we’ll call it around the circa 2007, and this will give you an idea in terms of how advisors started to grow, you started to get more $1 billion advisors. And what was happening is these advisors that most of them were doing quarterly rebalancing, and the ones that were hitting, bumping up on $1 billion, their quarterly rebalancing as they went through their client base was taking a quarter. And they couldn’t let it get to the point where it was going to take longer than a quarter. And so they came up with this system called iRebal. And iRebal was introduced to me by a handful of advisors that founded it. And I was based in New Jersey at the time, so I went to see the guy who…Gobind Daryanani, who was behind that. Gobind has since passed away. Super, super guy, but he was operating with one…I thought it was a company, a major company. I went to see him in Morristown, on the second floor of Morristown…building in Morristown, New Jersey.

Michael: So it was Gobind and a fellow engineer.

Tom: It was Gobind and engineer. But I didn’t know it at the time when I walked in there. And I walked down a hall to Gobind’s office. And then I saw one guy in one office and the other offices were empty. And I walked in, I said, “Where is everybody?” I said, “Where is everybody?” He said, “This is everybody.” And I sat down and got to know Gobind. And I quickly realized, “Oh, boy,” I said, “You’ve got a technology that some of the largest advisors in the industry are running their businesses off this technology.” And God forbid, Gobind goes across the street to get a sandwich and he gets hit by a bus. And so we moved fairly quickly to acquire iRebal. We were able to come to an agreement and make that acquisition and integrate it into our system. So it’s things like that. When you look back what has enabled advisors really to scale their businesses, a lot of it has been the investments that the custodians have made in technologies and systems have enabled them to do that.

Michael: So I’m curious about a little bit more of this, the decision to launch Veo Open Access. Because the custody model in the mid-2000s, and I guess really even late 1990s into the 2000s, as you noted, this trend was happening where advisors are starting to go multi-custodial. Everybody was worried that at a minimum, you don’t want to lose your advisors because they switch and deal with the pain of repapering. Ideally, if you’re the one that already has the bulk of the assets, you don’t even want someone to put a part of their money elsewhere, because it’s potentially the first foot out the door. And so, so much of the focus at the time was proprietary technology. It seemed like the dominant model at the time was have technology that inextricably binds your advisors to you. So Schwab had bought PortfolioCenter back in the late 1990s and Fidelity was making a lot of proprietary software at the time. Just their version of trying to make advisors more sticky.

And so then TD Ameritrade comes out with this exact opposite version. Like, “What happens if we open-access everything rather than trying to make everything more internal and proprietary?” So I’m just…take me through some of the thought process or the discussion that’s happening at the time of how you end out going a direction that’s so different than what everybody else was kind of doing as the dominant model at the time.

Tom: Yeah, right. So it was a combination really of…I’d like to sit back and say it was complete and total brilliance on the part of my team. And maybe there was some brilliance in there, but it was also just really experience with working with investment advisors and knowing and understanding how they think. And then there was some luck involved, because it all happened right around the time that we were acquired or just after we were acquired by Ameritrade. And so when you think about how advisors think, that example I gave you before, 100 advisors at a room, ask them an opinion on something, you’ll come out with multiple answers. And so we knew that.

And then the other side of that was, okay, so if we try and develop a system that we think is the best thing for advisors, well, first of all, they’re not going to agree with us that it’s the best thing, and we’re going to have to do all this customization, and it’s going to be a massive investment and a massive amount of work for us. Well, at the same time, you had other companies that were coming out with systems. It used to be just Advent and Centerpiece, then you had all these other systems that started to come out. And the technology platform on Ameritrade had something that we didn’t have at the time: off the Waterhouse technology platform, and those were APIs. And the APIs with different formats gave us greater flexibility and allowed us to…allowed companies, outside technology companies to write into our systems.

And so we said, “Geez, we know we’re kind of fighting an uphill battle if we try and build a system out on our own and to try and get these advisors to bring that on into their businesses or practices.” And so we said, “Why don’t we just put our APIs out there and come up with a system of screening these companies and allowing them to write to us? And then the advisors can pick whatever technology they want, and these technology companies can plug into us, and it would be fantastic.” And that’s what we did. And right off the bat, advisors absolutely loved it.

Michael: Interesting. So there was just this, like, key technology difference, I guess, around the underlying infrastructure, that just Waterhouse had not architected itself with APIs and Ameritrade had, I guess. Because I’m trying to remember, Ameritrade did a whole bunch of acquisitions during the tech boom, like Datek and MyDiscountBroker and a whole bunch of these other dot-coms. So I would imagine that they just…they ended out buying some trading platforms that were built in the late ’90s and 2000s when everybody else was still running on technology they built in the ’70s and ’80s. That they just had this more modern infrastructure that you didn’t necessarily have previously that made open architecture possible, when I guess basically, all of the other custodians were still on their legacy technology at the time. They weren’t architected for APIs.

Tom: That’s correct.

Michael: They literally couldn’t do it and compete against you at the time.

Tom: That’s correct. So we had a competitive advantage there, a structural competitive advantage, and we jumped on it.

Michael: Interesting. Interesting. And so that more than anything was driving the open access structure. I don’t mean to make it sound greedy for Ameritrade or anything, but like, “Hey, wouldn’t it be cool if we made the open access platform and then everybody else can make the software, and then we don’t actually have to make it, we just facilitate the connections? Then 100 advisors can have 100 different things, and we don’t have to make 1000 different things.”

Tom: That’s right. What’s best of breed? Let the independent advisor determine what’s best of breed, right? Independent advisors, underline the “independent,” right, and call it…you can add a “fiercely” before the word “independent” too. And that’s the way most RIAs are in this industry. And we recognized that. And we knew that it would be very difficult to develop and maintain our own core systems like that, like portfolio management. And so we had an opportunity, we said, “Let them choose, and we’ll just let these folks plug into us.” Worked out great.

Michael: Well, and I know in practice, the rest of the industry has all, at least partially, come to that approach and worldview. Some of the platforms are a little bit more proprietary and closed than others, but all of them now have built APIs and do at least some level of open architecture to structure. Because, particularly now, when everybody is 5X or 10X larger than they were even 10 to 15 years ago, just there’s so many different advisors that want so many different things. You can’t build one all-in-one thing that serves all of them. So either you can be a niche solution and be an all-in-one for a particular group. But for custodial platforms who measure themselves in hundreds of billions or trillions of dollars, you can’t be a niche, and you can’t be everything to everyone, so you kind of end out with this structure that you guys figured out a long time ago, “Okay, let’s build the thing we’re good at, we’ll just let everybody buy the rest around it.”

Tom: That’s right. That’s it. And all the custodians, the custodians are…they’re all smart. They all recognize that in this industry, if an advisor…the way an advisor looks at it, well, if somebody is telling me I have to use this type of technology and I can only use it at their firm, well, then am I really an independent advisor or am I a captive advisor? And I got away from being a captive advisor, and so I want optionality. I want flexibility. And so they love when firms give them that optionality.

How Tom’s Team Navigated The Ameritrade-TD Integration [42:04]

Michael: So talk to us as well about the TD Ameritrade acquisition and integration itself. Because on the one hand, as you said, you got access to some cool new technology that others really didn’t have at the time, right? Ameritrade was more architected for APIs when nobody else was yet, so you could go open access earlier than the rest. But I have some vague memories of this, of stories back at the time, that the actual integration was not smooth at the time, though. The Ameritrade-TD integration, that there were speed bumps and operational hiccups. I still remember one advisor who said he had clients that got statements that showed zero balances. Statements went out and the money wasn’t there because of some reporting snafu that happened right after the integration. So what’s it like going through just massive integrations of that size and dealing with all the speed bumps that come up in a business where we’re not always very forgiving as advisors?

Tom: It was a super interesting time for us. And it was really, it was magnified on the advisory side because the retail side was almost totally unaffected by it. Because on the advisory side, you have…you think about it, you have one person that sits on top of hundreds, and sometimes thousands of accounts. So it just takes one or two incidents to occur within that group, but it’s all coming back to the RIA. And if it happens in one account for an RIA, they assume it must be happening to all my accounts, and, “Oh, my gosh, what’s going on here?”

So there were things that occurred after the integration. And I would say it took one and a half to two years to kind of clear everything out. And it was a very…we thought it was a difficult period at the time. But what you have to do when you go through those tough periods is leadership is really critical. And we just continually reiterated to our team that, “Listen, we’ve got a great business here, we’ve got a great platform, and we will get through this. And when we get to the other side, we will be much stronger than when we went in.” And so while the team went through tough periods, it’s funny, they would say, “Oh, geez, this was a tough week,” or this happened or that happened around statements coming out. And then I would come in on Monday morning and slap a book down on the table and say, “You guys think you have it tough, read this,” and a book about the D-Day or something that some prisoner of war went through in the Vietnam War. And then they would all laugh and we put it into perspective, and we just keep rolling in the same direction.

Michael: That was really part of it at the time, of just keeping the team on board was like, “Let’s keep this pain in perspective because we’ve got to do something to pick people up when they’re getting beaten up about all these operational snafus.”

Tom: That’s right. And I’ll tell you, the team just was absolutely incredible. They were amazing. And everybody pulled together and worked really hard over the next one to two years and made sure that all the bumps were smooth out, and the business did really well. Our selling almost came to a grinding halt during that period. And we utilized our sales teams to really just help us out with our business and make sure that advisors were doing okay, and just to keep the business that we had. And we took our sales team and essentially almost completely stopped selling. So it was an interesting time.

But when you look at, was it worth it? I don’t think I’d want to go through that again, right? I know I wouldn’t want to go through that again. But when you look at, was it worth it? I can remember sitting around prior to that merger and we’re looking at each other trying to do our planning and figuring out, I think at the time it was we were planning for…the next year we were planning for, we were trying to come out with around $100 million in pretax, $100 million in pretax, right? And if you look at what that company is doing today, they’re in 2018, the net revenues were nearly $5.5 billion, and their pretax was just under $1.9 billion. That’s their fiscal year 2018. And that’s after another acquisition as well that they made.

So yeah, it’s sometimes you have to go through some struggles to take it to the next level, to get to the top of the mountain. And we did. And we got there. And the company, you look at the company today and it’s doing incredibly well. And that enables them to take more and continue to invest back into the business to continue to make the platforms even better and better and allow advisors to continue to scale their businesses.

Michael: So I’m curious, what…I’m just wondering, what else were you doing at the time just trying to keep everyone on board during a stressful integration? Because it strikes me, this is frankly similar to what a lot of us go through in the advisor world. You break away and change firms or change platforms, you go through a merger or acquisition integration. Granted, our size and scale is a little bit smaller than Ameritrade buying Waterhouse, but the dynamics for leadership I think are pretty similar. And just what do you do to try to keep a team motivated and on board when they’re just getting slammed from all direction with people who are unhappy because of the speed bumps that just kind of inevitably happen when you try to do that big of an integration or a change? How do you keep your team motivated and on board?

Tom: Well, the first thing you have to do, communication is critical, and the first thing you have to do is you have to identify, “Okay, what’s not going the way we want it to? And what do we need to do to take care of that?” So you have to look at it and you need to say, “Okay, we have a problem in this particular area.”

To give you an example, one of the challenges of that particular merger was that we had…the Waterhouse accounts were being, we’ll call it airlifted and dropped onto, bolted onto the Ameritrade platform. But the Waterhouse business had different products and different other services that Ameritrade didn’t have, like mutual funds, a no-load mutual fund platform. So Ameritrade had to develop a whole new no-load mutual fund platform in order to take the Waterhouse business on. So whenever you develop a new platform, it’s inevitable, you’ll have kinks that have to be worked out. So it was critical that we captured all those kinks from the frontlines. And we created a system to capture those and then get those to our technology team to smooth all those things out.

So it was the mutual fund system and the money transfer system and our statements, because the statements that we had were different from the Ameritrade statements. And I’ve been through a number of statement changes over the years, and I can remember, geez, in the ’90s when we were getting complaints about our statements. So we took all the feedback and we made changes to the statements, and we made the 50% that wasn’t happy happy, but then the 50% that was wasn’t anymore.

Michael: Yeah, we’re fine, but like, “You ruined my statement. What did you do to it?”

Tom: So then finally, we just came out with different versions of our statements to try and make everybody happy.

Michael: Because that’s efficient, boy.

Tom: First of all, you have to recognize where you have your issues, then you have to identify, okay, how are you going to take care of those issues? And then you take care of it and you fix it. And at the same time, you have to communicate to your frontlines and to your clients and to your advisors, your independent advisors that are using your platform, you have to communicate with them exactly what’s going on or what you’re going to do about it. And you have to make sure that you show them that you’re absolutely confident that you’re going to fix it. And this is the timeline we’re going to fix this in. And you have to deliver. And we did. We delivered. We got it done.

How TD-Ameritrade Came Through The Financial Crisis [50:30]

Michael: So you got through the Ameritrade integration and survived with some battle scars, so then it takes a year or two to recover. You finally get your groove back, and then there’s a financial crisis.

Tom: Perfect timing.

Michael: Perfect timing. So what came next for you guys? I know what it’s like from the advisor side, but from the custodian side, what’s it like going through financial crisis world? And what was going on for you guys at the time?

Tom: Wow, it was really, again, it was the pain. What was really interesting was, at that time, we would still hear from some advisors, especially the ones that were breaking away, that, “Well, your company is kind of a small company. It’s not that well known. I want to go to somebody that’s a better-known company.” And most of those companies that they would name would be a company that is no longer in business today or was acquired, even if their name still exists. So, all these companies that were thought of…the towering financial services companies of Wall Street, a lot of them didn’t make it. And so when we came out of that unscathed, that was really a very proud moment for us. It doesn’t mean that it wasn’t difficult to what was going on in financial services, it was an extremely difficult time, but essentially, because we were so conservatively run, we came out of that unscathed.

And I think where most of the pain was really was with the advisors on our platforms. And it didn’t necessarily have anything to do with us, it was because their portfolios and their clients were…it was a really difficult and stressful time. There were periods where even bonds, AAA-rated corporate bonds were down 20%, 25% for short periods of time. So it was just a tough time for advisors. So, advisors kind of went into a mode of working with their clients, communicating, and trying to keep their clients from jumping off the cliff, so to speak. And there were not that many…if you talk across the spectrum of RIAs, most of them I think were very successful in keeping their clients invested, right? And thank goodness for that, because we all know what the markets have done since they hit bottom in March 9th, 2009. But if you talk to advisors where the clients did jump and get out, it’s remarkable how they, almost to the day, timed the market bottom. It really is remarkable.

So, fortunately, I think that’s one of the great differentiators for advisors in terms of what do they do? What value do they provide to their clients? A lot of advisors will tell you, “Well, geez, I keep my clients invested. And I keep them from doing something…what a lot of individuals might be inclined to do. And that’s sell low and buy high. I keep my clients from doing that.” And a lot of advisors really had to go into that mode during the financial crisis to keep their clients down the path focused on the long term. And fortunately, I think most advisors who were successful. But it was a really stressful time.

Michael: So then what came next for you?

Tom: Well, I think after the financial crisis, it was just back into hey, the markets are recovering. Things started to settle down. And it was just going back into full growth mode. And that’s what we did. And that’s what advisors did. One of the other things that we looked at was, how do…? A lot of advisors came to us and said, “We’re being criticized, having gone through the financial crisis, for our portfolios going down. And it’s true that our portfolios may have recovered, but the standard, the deviations may have widened since the financial crisis. And frankly, we don’t look that good. So what do we do?”

So we came up with, at the time we had acquired a company out of Chicago called Thinkorswim. And they were essentially a group of former CBOE traders. And so they knew the options markets quite well. And so we created a group that would train advisors on how to utilize derivatives to protect client portfolios and to generate more income in client portfolios. And that became extremely popular.

And even if advisors didn’t want to utilize those types of strategies, we found that they needed to be able to explain why they didn’t utilize those strategies, because if they didn’t, there was somebody down the street that was. And so they needed to be more fluent in talking about portfolio protection. And then with interest rates also plummeting to zero, they needed to be able to talk about how they might be able to generate more income for clients besides the dividends that may have been on their stocks. And so they were able to learn more about things like writing cover calls, which surprisingly, most professional investment advisors were not focused on on options up until that period. And now I think more are fluent in options and derivatives.

Michael: I still feel like we don’t see a whole lot of people that are…a whole lot of advisors that are actively doing options and options strategies, though. I guess I’m just wondering, why do you think it’s not even more mainstream? Or why has it been so hard to get going and get adoption there in the first place?

Tom: Well, I think it’s like anything. When you go through a storm, it’s…everybody wants to buy hurricane insurance in the middle of the hurricane. And that’s when the insurance will be most expensive, if you can even get it. And so once you come out of the hurricane then people say, “Okay, well, maybe the insurance…we just got hit, what’s the likelihood we’re going to get hit again? Maybe the rates come back down, so maybe now’s the time to buy.” And then you start to forget and you say, “Well, geez, you know what? These portfolios are recovering, so we were right the whole time. So what’s the point in even acquiring portfolio insurance if somebody has a long-term time horizon?”

So I think people kind of go through these different thought processes where they say, “Yeah, I could do this, but do I really need to do it?” And especially portfolio insurance, the desire for it tends to amp up around times of volatility, when really the smartest time to buy the portfolio insurance, to lock in, is when you don’t have the volatility, if you want the portfolio insurance at all. So I’d say really, it’s a case-by-case basis. And we see, at least I would see advisors that would utilize it, not necessarily for their entire client basis, but they would utilize it on a client-by-client basis, depending on what would help that client sleep a little bit better at night. I think it was also…became a little bit more popular for them to utilize it to generate more income in their accounts.

But now that interest…interest rates are still low. They could be going lower, right? We know the Fed pulled back a quarter-point recently, they might do it again. So there’s still pressure on that. Yet you can earn a little bit more on cash these days. In fact, one of the boards I’m on today is a company called MaxMyInterest that focuses on identifying high-yielding savings accounts and moving people’s money around amongst the high-yielding savings accounts and making sure that they are still covered by insurance, by FDIC insurance. But still, even in those high-yielding accounts, you can earn between 2% and 2.5%. Historically, that’s not that much. So it’s on a client-by-client basis. And I agree that they’re not widely used, but they’re used a heck of a lot more today than they were before the financial crisis.

Tom’s Transition From Institutional To Retail [59:02]

Michael: So I know at some point, you made a transition. You went from the institutional side to the other side, to the retail side of the TD Ameritrade business. So help us understand what the retail side of a platform looks like. Because I think from the advisor end, we really only know the platforms that we use and kind of the dynamics and the economics of how they work. What’s the business at your level when you’re in a leadership position looking at this as a business line? What’s the business of retail, as contrasted to the business of institutional?

Tom: For the online brokers, most of the folks on the retail side have some level of self-directed bent. Whether it’s they don’t want to talk to anybody. They just want to use the technology. Don’t call me unless you absolutely have to, or, yeah, I’ll talk to you every now and then. Maybe I’ll stop in a branch every now and then. But essentially, I’m making my own decisions. So they’re self-directed individuals. They want to maintain some level of control in their accounts, at least with the money they have with us.

But what we found on the retail side over the years is that a lot of these individuals have money elsewhere. They may have an advisor at one of the wirehouses managing some if not most of their wealth. And it really became a feeder on the retail side to identify these individuals and to try and introduce them to an independent RIA. And we built up quite a business referring assets to RIAs through our AdvisorDirect referral system. And if you look at the big custodians today, most of them have some type of referral system like that. So it was really an incredible feeder to the advisors that wanted to participate and were able to participate in that program.

But the other thing that the retail business did is it enabled us… When you look at scale, scale is absolutely critical in the brokerage business today. The ability to bring low-cost evaluated services to advisors, we were able to do it in part just because of the scale that we had from the retail business, right, that made it that much bigger. And if you look at the other custodians, it makes them…most of them at least, it makes them that much bigger. And that scale enables you to be even more efficient and provide low-cost services. And that’s a benefit to the RIAs out there and their clients.

Michael: Yeah, that to me is one of the interesting effects that I think is very underappreciated in our advisor world. With more and more custodians at least blurring the lines, maybe some a little bit more than others, about where does retail end and where does the RIA institutional platform begin as more and more advised assets are ending up on the retail side with the rollout of CFPs and wealth management platforms and so-called robo-advisors, and just an ever-widening range and managed accounts, the lines get a little bit blurrier. It’s leading to more and more discussion these days around channel conflict. Like, “Hey, Mr. Custodian, what’s going on? You’re supposed to be here for my RIA business, but you’re also doing all this retail stuff. Are you competing against me?”

And I think sometimes forget that there actually is a need for the platforms to do that, not because they literally want to compete against their advisors, but the custody business is a scale business. And so yeah, when you add hundreds of billions or $1 trillion or $2 on the retail side, it makes the RIA custody platform cheaper, like a lot cheaper. It’s not a coincidence that basically the big four of RIA custody these days are TD Ameritrade and Schwab and Fidelity, which all have huge retail divisions, and Pershing, which has a huge broker-dealer division. And so, every sizable player in the RIA custody business is only a sizable low-cost player in the custody business because they have the retail business.

Tom: That’s absolutely true. That’s right. And when you look at the differences in the retail business and the institutional business or the custody business, you don’t have a lot of disclosure out there, but there is one custodian that breaks out the disclosure. And you can see that they generate many more revenue dollars per asset dollar that they take in than they do in the advisor custody business. So the retail business is generally extremely profitable compared to the RIA business.

The RIA business, the way that custodians earn revenues, it’s pretty simple. You don’t have a lot of margin and margin leads to stock lending, which can be a very profitable business. So you don’t have a lot of that in the RIA space because there isn’t a lot of margin lending. And just margin in and of itself can be an incredibly profitable business. It’s essentially, it’s the transaction fees, it’s the spreads on cash, and it’s fees from products, either proprietary products or third-party products, the shareholder service fees. And those three things generate the bulk of the revenues for the custodians on the RIA side.

Michael: So transaction fees, so that $5 to $7 a trade times a zillion trades still adds up, fees from products. So I guess either proprietary products if you’re using your custodian’s own funds, because obviously Schwab and Fidelity, in particular, have a pretty big base of those, Pershing not at all, TD Ameritrade is not a big player in that. The shareholder servicing fee, so the sub-transfer agent fees that go from mutual funds to whatever platform they’re on when you don’t hold the mutual funds direct. And maybe in an ETF world, just some sponsor back-end access dollar fees that get paid to get onto platforms. And then the cash spreads.

It fascinates me that most of us in advisor world, particularly these days when cash yields are so low, hold virtually nothing in cash. We try really hard not to have anything in cash. You often have to have a couple percent because you’ve got to facilitate fee sweeps. And the client may be in retirement withdrawal modes, and so many of us have retired clients, so you’ve got to hold a couple percent to facilitate their cash distributions. But the average cash holding amongst advisors is usually no more than a few percentage points of a client’s account.

But then when you go look up the profit and loss of custodians, and we tend to pick on Schwab the most, not to literally pick on Schwab, but they’re publicly traded, and their financials have a lot of details, so you can just do the math more easily on Schwab’s P&L. And more than 50% of all of Schwab’s revenue is the spread they make on cash. Like, a few percent of our client’s cash that they sweep over to their affiliated bank and they get to earn margin on it, right? Classic banking business, pay depositors less and you lend more. And to me, it’s just fascinating from a business model perspective, RIA custodians are basically cash management businesses that happen to do trading and custody on the side. Economically, that’s how they work.

Tom: Yeah, very similar. You think about a brokerage account and think about how it’s similar to how a bank manages its balances when they have a lot of checking accounts, right? So you have a checking account, you have a lot of money going in and going out. But when you take the hundreds of thousands of accounts together, banks pretty much know roughly how much they’ll have in total.

Michael: Right, it gets pretty stable.

Tom: It’s pretty stable. That’s right.

Michael: The pattern for the inflows and outflows are very stable. You know when the direct deposits come in. You know when the bill pays tend to go out. It averages out after your first 100,000 clients or so. And you just average out with this ginormous pile of cash, a small dollar per account times a zillion accounts.

Tom: That’s right. And so even though advisors typically don’t keep a lot in cash, because they’re in and out of a transaction, so there’s cash that’s generated from sales. And that cash is there before it’s reinvested. And like you said, some advisors do like to keep a little bit in cash for some of their clients for a variety of reasons. There is an amount that you can tend to get a feel for roughly how much cash you’ll have off your asset base. And it changes, and it changes over time, but you’re able to manage through that. But it’s generally viewed to be transactional cash. And so advisors that will have cash and they’ll have it…they know that they’ll have that money sitting in cash, fund sitting in cash for a longer period of time, they’ll do something else with it. Maybe they’ll put it in a CD or whatever, buy treasuries. But if they’re uncertain on the timeframe, they’re comfortable leaving it there, they’ll leave it there.

And they’re not…they’re less concerned about how much they’re earning. And I think that’s something else that came out of the financial crisis, when advisors were stretching, in some cases for a few more basis points, and advisors, some advisors invested in the reserve fund. And we know what happened with the reserve fund. That broke the buck. So I think advisors, that really made them nervous.

What you’re seeing more of today is advisors are starting to recognize that some of their wealthy clients hold cash away from them. They hold cash away from their brokerage assets. One of the things that’s being pitched today by one of the boards that I’m on is that wealthy investors typically hold about 26% of their assets in cash. Now, that’s not what you see in the investment accounts for RIAs, right? It’s these wealthy investors, they have money held away elsewhere. And so I think a lot of advisors are starting to recognize that, and they’re trying to uncover that amongst that held-away cash on their client basis, and trying to draw that in and get that invested in either higher-yielding instruments or getting into the investment accounts.

Michael: Well, and when you look at, frankly, some of the platforms, that if not compete with us directly, at least compete with the custodians, the retail brokerage platforms. Places like robo-advisors like Wealthfront, they rolled out a high-yield cash option and pulled in $1 billion in less than 3 months, when they’re “only,” they’re “only” a little over $10 billion of AUM. So you imagine what that’s like, like, what would it look like if you could add 10% of your AUM in 3 months by just rolling out a decent-yielding cash option? It’s a heck of a growth opportunity. Even if you’re not necessarily building on cash because you’re not doing anything with it yet, if you hold it on a platform right next to you, there’s probably a more likely chance that you’ll get to help with that at some point. But we all get stuck right now because no one wants to put their cash on brokerage platforms because it doesn’t pay, right? It literally pays to keep the cash elsewhere.

Tom: Right, right. And I think it’s just critically important for advisors today recognize, you really have to pay attention in terms of where you do put your client’s cash. Don’t get yourself caught in another reserve fund-type situation. Don’t get yourself caught with a bad bank or beyond the FDIC insurance. And just be careful. You’ve got to really think about that cash. Because you think it’s safe, you think there isn’t a problem until there is a problem, and then your client’s money, even if it’s insured, your client’s money could be tied up for a period of time.

And all that being said, advisors identify that cash, and people should have cash for different reasons, but at 2.5%, advisors I don’t think they’re earning their fee putting their client’s money…getting returns at 2.5%. So advisors typically, for that reason, they know they have to be…that their clients have to be invested in the market to earn a decent return and to beat inflation. And that’s one of the things they’re getting paid to do.

Tom’s Take On A Basis-Point Model For Custodians [1:12:14]

Michael: Yeah, just the weird effect to me is I feel like we have this fundamental misalignment now between, frankly, the interests of advisors and the interests of the platforms that we’re on. Custodial platforms make more money when we trade more, when we hold more cash, and when we use either more mutual funds or just more products that they can get paid on the front end or the back end, which directly or indirectly is going to increase the cost, because the money has to come from somewhere, it ultimately comes out of the client’s pocket.

And so what’s ended out instead is, we’re getting more tactical and disciplined in our trades. We’re seeking out lower-cost products, including ones that don’t pay the back-end dollars, which of course, is leading to other conflicts between certain asset managers and their platforms. If we’ve got rebalancing software, we program our rebalancing software to make sure that we don’t hold any more in cash than is absolutely unequivocally necessary just to cover whatever the most near-term needs are, because clients don’t want to hold short-term cash.

And it just strikes me that we’re in this position where as advisors, the best way to get a win for our clients is to stick it to a custodian. Not because we’re literally trying to be mean and stick it to the custodian, but because all of the custodian’s profit models come directly out of our client’s pockets, we look good in front of our clients by making our custodians look bad, and dismantling their profit centers as best we can using our technology. It just feels like a very strange and not necessarily sustainable dynamic. Not that custodians aren’t entitled to earn revenue and make a profit for the business service that they provide, but it’s not a great setup when I look good by making my custodian’s profits look worse.

Tom: Yeah. Well, listen, I think you have to be careful there too, right? Because most of the custodians have really reduced dramatically their costs, their trading costs, and they’ve made available all types of low-cost products. And so I took a look at the publicly available information for one custodian that does disclose it. And if you look at their total revenues in their advisor services business and divide that by the assets that they control on the advisor services business, you come out to about 18 basis points, 18 basis points.

Michael: So that’s what the custody business drives at the end of the day. You put all the different stuff in there and all the different buckets, $5 to $7 here on a trade, little bit of 12b-1 fees from that fund I hold, a couple percent on a couple percent of cash, you average it out, it’s 18 basis points on advisor’s custody assets.

Tom: That’s right, at that one custodian at least. Yeah.

Michael: And I would imagine that’s probably not entirely unique across the platforms that they’re doing 15 to 20 or 15 to 25 basis points as an average yield of advisor assets?

Tom: I think you can take that custodian and look across the platforms. And if you think that the other platforms are dealing with similar types of advisors, I think it’ll probably put you in the ballpark.

Michael: Yeah. So just it makes me wonder like, what happens if at some point custodians just roll out a basis-point model? Like, hey, instead of pay as you go out of your client’s pocket for what is essentially are front-end or back-end commissions on all the things that we use and implement with our clients, what happens if someone just says, “Hey, we’ll just do a 20 basis point fee. But in exchange for the 20 basis point fee, transactions are free. We’ll actually give you a money market that pays 2.5%, or whatever the going rate is at the time. We’ll give you the cheapest of the clean, cheap shares, because we’re not going to take anything on the back end because we’re charging upfront. You don’t get to double-dip, because obviously everybody will be pissed about that.”

But what happens if custodians go to a basis-point model where now we all win when the assets get bigger and we all lose when the assets get smaller? And we don’t have the tension of, my clients do better if I can stick it to you on the cash yields and cut the transaction fees and cut out your sub-TA fees and your shareholder servicing fees, which is kind of the game that we play today.

Tom: Yeah. I think it’s an absolutely perfectly reasonable thing to ask your custodian, to go back to them. And if that’s what you’d like to do for your business and for your clients, I think it’s perfectly reasonable to go back to the custodians and ask them that question. And using publicly available information and saying, “Listen, I can see that this is roughly what you’re generating, maybe can we take out the conflict of all these other things and commissions and cash spreads and all that and you just charge me a basis point fee and see where it goes?” But I think it’s something that…personally, I think it’s something that advisors should be thinking about, should maybe be talking to their custodians about. And I think it’s something the custodians should be thinking about, too.

Michael: But just, I know a few people that have talked about this already, and the first response is something…it’s usually either one of two things. Like, “Why would I pay for all this stuff that I get for free?” But I still hear that sometimes, and then I have to do the whole like, “Well, it’s not free, your client is paying for it. They may not see that they’re paying for it, but that’s how commissions work.” Right? We don’t always see that the commission is there, but the commission comes off the back end, and the client still pays at the end of the day. The back end of the custody platform is still at its core, it’s an old-fashioned brokerage model. And not to knock it, just that’s the mechanics of how it works. But they make their money all the ways the brokerage firms make money, which is commissions and implementation and proprietary products. And just like, that’s the fundamental model.

So on the one hand, I see some firms that say, “Well, why would I pay for something that’s free?” And it’s like our advisor version of the same conversation we all have with clients, particularly on the RIA side. When the client comes in, it’s like, “Well, I can’t pay you a 1% AUM fee, my current advisor is free.” And we have to like, “Well, let me just tell you a little bit more about the proprietary products and the commissions that your old advisor is making and all the ways that they make on the back end.” That’s always been the conversation that RIA advisors have to have with clients who previously worked with commission-based advisors. And I feel like now we’re getting into the same conversation with our platforms about the same discussion. Like, “Oh, you’ve been working with a commission-based RIA custodian, have you ever considered a fee-based RIA custodian, what that might look like instead?”

Tom: Right. And again, I think advisors should be thinking about this. And the custodian should as well.

Michael: Yeah. Was this ever a conversation that came up when you were in this world? I know you’ve been out of the custody business now for a couple of years, but was this even a thing that floated around in the ’90s and 2000s or has this just kind of been a more recent discussion that seems to be starting to crop up in the industry?

Tom: Well, I think you’ve brought some attention to it. I’ve read some of your articles and seen some of your commentary about it over the last…a year or so. I don’t remember exactly when you first started talking about it. But I think if you go out there and talk to some of the larger advisors today, I think you actually might find that…you might find some of these folks that have this type of an arrangement with some of the custodians.

Michael: I know some have done at least wrap accounts, fee-based wrap accounts for their trading. It doesn’t necessarily mean they get the higher-yielding cash kinds of stuff and the other things you might put with it, but they at least have collapsed their trading fees into a basis point structure. I know there are some firms out there that have that arrangement.

Tom: Yeah. I think to me, if I was running a custody business today, it would be about options, optionality, I should say. And if an advisor wanted to come in and they wanted their clients to pay on a commission basis, we’ve got this model. If you want to do it in a wrap fee arrangement, we’ve got this model over here. And let the advisor choose. Let the advisor decide what’s best for his or her clients.

Michael: Yeah. Interesting. It’s kind of the advisor version of what the advisor choose if they want to work on a commission basis or a fee basis.

Tom: Let them decide. Let them decide. Listen, you’ll have some advisors that think that, “Geez, that fee-for-platform is a…that sounds like a great way to go.” And you’ll have others that say, “No, I think I can do better than that. I’ll trade less. I’ll keep less in cash. I’ll try and make sure you make as least amount of money as possible off of me.” But that’s not an easy thing to do when you have to start asking yourself. When you’re down to 18 basis points in revenues and of course, there’s a whole cost underneath this too, right? Could you imagine an RIA trying to take on all that the custodians do? The same custodian I told you was generating revenues of 18 basis points off the AUM on their RIA platform, on their advisor custody platform, the expenses, if you do the same math with the expenses, you come up to 9 basis points. And there’s just no way a small independent advisor can come anywhere even close to replicating what essentially a custodian… a custodian is a broker-dealer, what they’re doing.

Michael: Yeah. Well, and I’m not even sure it’s possible for another custodian to replicate that pricing without, as we said earlier, without being able to piggyback it on, that’s not just RIA advisor services infrastructure, that’s hundreds of billions or $1 trillion of retail business that amortizes some of the same technology and infrastructure costs that lets you get that price down, right? I’m sure there’s some, call it shared services overhead that the retail business helps to carry that makes the economics feasible for, on the one hand, custody to be as insanely low as it is, right? When you think about it, for just the sheer amount of technology that’s actually there, the trading platform and the reporting and the data feeds and the trading execution, just all the stuff that’s there to deliver at an average cost of nine basis points is just mind-blowing scale.

Tom: Right. It’s incredible. And so you look at all the major custodians today, they all have scale. And if you look at some of the smaller custodians today, they’ve tapped into firms that have scale. So there’s just no way you can go out there and just start up a custody business from scratch and not at the very least tap into somebody that has…that’s one of the big players that has scale.

Michael: Right. Well, Trust Company of America is now backed by E*TRADE. TradePMR is a smaller player, but they’re actually built on the back end of the First Clearing platform from Wells Fargo. Shareholders Service Group works in a small RIA space, but their back-end infrastructure is built off of Pershing. Like, everybody has to tap into some versions of that scale or the math just doesn’t work, and you can’t get the costs low enough.

Tom: That’s right. And frankly, going back to my Waterhouse days, that’s what enabled us really to push hard in this business was the scale that we have from the retail business. Our founders never would have started a business from scratch in the RIA custody space. They allowed us to get into it and allowed us to continue on. And they had the patience for us to grow that business and achieve kind of scale on its own only because we were tapped into the scale from the retail business.

Michael: Yeah. Well, as you said, you were what, you got $1 billion after the first 3 years, then you had a big sales push and doubled it to $2 billion in the fourth year. But for the staff and infrastructure and what it takes to run an entire platform, you weren’t making bank or probably even profit if you were…if you just gathered that $2 billion on your own in a standalone startup RIA custody business. The math worked because it was all marginal revenue for marginal profit on top of the Waterhouse infrastructure. And I think same thing for Schwab Advisor Services when they launched in the early ’90s in the same manner, it was a bolt onto the scale that they already had at the time in the retail discount brokerage business.

How Tom Sees The Custodian Model Moving Forward [1:25:23]

Michael: So as you look at it, where do you think the whole custody business goes from here? We talk a lot about the future of advisors. It seems not so much these days about the future of advisor platforms, even though platforms are growing, RIAs are growing. We kind of have to have a custodian unless we’re running a purely planning-only, no-investments model. So how do you look at the future of the custody business having been deep in it for the better part of 25 years?

Tom: First of all, because the custody business is riding the wave of the RIA business, and the RIA business is just doing incredibly well. It’s where a majority of the growth is coming from, a lot of these platforms that you look at. And while the retail business is a great business for these companies, where you can see it, where they’re publicly traded and they’re disclosing it, the growth…there’s incredible growth coming out of the RIA space because the advisors are doing so well.

And if you think about it from the seat that I was in, I had a salesforce of thousands of advisors out there that were trying to grow their businesses or practices, whatever they wanted to call them in different philosophies out there, as you and I know. For some it’s a practice, for some it’s a business. But whatever it is, typically most of them are trying to grow. They’re trying to add clients on. And so it brings tremendous asset dollars into the custodians. And you have an industry that’s going more and more towards fee-based. So even at the traditional, we used to call them full-commission brokers, the old-line wirehouses, you have most of the reps there are registered as RIAs, under an RIA umbrella. And they’re Series 7 as well, but they’re also under the RIA. And a decent amount of their business is going fee. And then what you’ll have is some of them will stay, but some of them will decide that they want to break away.

And so I see tremendous growth in the independent RIA space continuing for many years to come. Because I just think it’s really a phenomenal model. I think it’s a better model. And it doesn’t mean that the commission model should go away. It doesn’t mean that the commission model doesn’t work in some cases for some investors in some situations. And I don’t think it should completely go away. But for a lot of people, they just kind of recognize the fact that… You can never take all the conflicts of interest out, but you get a lot of the conflicts of interest out with a fee-based RIA model. Especially when they have that fiduciary, legally, they’re deemed to be fiduciaries. And it doesn’t mean that the guys in the other end are all crooks, but I think the advisors themselves are starting to recognize whether you’re an FC at one of the big, old wirehouses or whether you’re an independent RIA and you’ve been one for 20 years, I think everybody just kind of recognizes in most cases, it’s just a better model for everybody. So I see continued growth there.

I see the custodians continuing to facilitate that growth. So one of the strategies was really key to growing our business was to do all that we could do to assist advisors to run more effective operations and to run more effective back offices to the extent that we could help them deploy technologies to their operations to make them more efficient and more effective. Our objective, and I think you see that across all the custodians, was always to try and help the advisors spend more time with their clients. And that required getting them out of their back-office operations. So what could we do to assist them with that? And I think you’ll see the custodians continue to push on that. And that’ll help advisors grow faster, and that helps the custodians grow faster.

Michael: Which is basically just all an ongoing technology discussion and continuous reinvestments in the technology.

Tom: A lot of it is technology, yes. But a lot of it is just basic processing too and systems, and making sure you have good processes and good systems. One year, we would have advisors that would get mad at us and the principal would call us up and they’d say, “Hey, my people in operations say you guys screwed up XYZ.” So yeah, I was a big fact-gathering guy. So my…direct my team to go gather all the facts, and we sit there and look at it, and we find out well, geez, they sent an application and that was only…that was missing 15% of the items, or the Social Security number was wrong, or the customer didn’t sign it.

Michael: You’re like, “Don’t blame us because we do the due diligence on the form that you didn’t fully fill out properly.” Which you then have to say in a really nice way.

Tom: Right, the customer is always right, so you had to be careful on how you dealt with that. So what we did is we started…we came up with a scorecard. I believe that they still…my old firm still has those scorecards today. But we came up with a scorecard. And we would send the scorecard to the advisor. And we’d show the advisor, for example…

Michael: Like, “Here’s how many apps we processed, here’s how many of them you gave us not in good order in the first place.” And just being able to show that back to them?

Tom: That’s it. They’d have not-in-good-order percentages. And really, all of a sudden, you know what, it created a much stronger, a much tighter partnership. So instead of having this headbanging back and forth, who did what, it was all of a sudden you became partners. And we would sit there and go down the scorecard and say, “All right, listen, this is what went right and this is what didn’t go right. And this is what we screwed up, and this is what we think you could help us and you could help yourselves if you did a better job with this.” So it was just absolutely fantastic. It really changed the whole relationship.

Michael: Interesting. Right, because now you’re creating an environment where you’re partners to say, “Okay, you don’t like the paperwork bouncing. We certainly don’t like bouncing the paperwork to you. So here’s the NIGO rate. Let’s figure out together how we’re going to get this number down.”

Tom: Exactly. And now what you’ll see with technology is that technology will help with the NIGO rates because a lot of the…when we started this, everything was on paper. Well, now things are going online. You have more electronic forms and applications out there. And so as these forms get better and better, they’ll self-correct. So if you forget to put a Social Security number on an application, well, that’s your kick-out. You should never be able to send that to a custodian. And then you want to even get it to the point where if you put an incorrect Social Security number on there, how do we find that out upfront before that gets to the custodian? That might be a little bit tough. So how do you look at all these different things so that the operations, that you eliminate the NIGOs and then everybody’s operations run more smoothly? And then the custodians, right, the costs are reduced to the custodians. And as they continue to grow their businesses and reduce their costs, then they’re potentially able to reduce the cost back to the clients or the advisor.

Michael: Right. At some point, if your cost of delivery ratio gets down to 15 bps, 13 bps, 12, 10, 9, 8, right, you just divide operating expenses of the custody platform into total assets, the lower that number goes, the good news is the bigger your gross profit margins, the bad news is you can’t keep big profit margins forever, because other people come and compete with you for them. So at some point, you get room to cut your prices and maintain your margins. And that’s just, I think part of the natural evolution of technology drives costs lower for providers, and lower costs for providers eventually get passed through as lower costs for consumers. Because if you don’t cut your end pricing for consumers as your costs come down, someone else is just going to come and eat your lunch and do it for you.

Tom: That’s right. And just look at the business when I got into the business. I actually got in in 1986. I started for Waterhouse Securities. And our average commission back then was probably $60, $70. And that was an incredible bargain compared to what the full-commission brokers were charging at the time. We used to advertise “How to save 70% off your stock commissions.” And in some cases, the savings were 90%. There was an incredible savings, yet the average commission was still in the $60 to $70-plus range. You look at today, we all know what the custodians are charging today, it’s under $10. Well under $10. And it’s all because everybody is, not just you’ve gotten scale, but you’ve gotten scale by leveraging technologies, developing and leveraging better technologies and creating better processes in your back offices.

Michael: So classically, we still think of these as financial services businesses, financial services firms. So is there some point where we just have to start reclassifying either brokerage firms or at least the RIA custody side of firms to say like, “These aren’t financial services firms anymore, these are tech companies?” Do you cross that divide at some point?

Tom: There have been different times and periods where I’ve seen companies refer to themselves as technology companies. But I’ve heard of brokers referring to themselves as marketing companies. And listen, at the end of the day, technology plays a huge role in everything that we do, right? I don’t consider myself to be a technologist, but hey, listen, what we’re doing today and the means that you’re recording this, that’s pretty cool technology, right? I’m not a technologist, that doesn’t make me technologist, but I use technology every day. I spend a lot of time on my iPhone, probably more time than I should spend on my iPhone. I manage money on my iPhone. It’s incredible the technology that we have today. It doesn’t make us technologists.

And I don’t view the custodians…personally, I don’t view the custodians, I don’t even view online brokers as technology companies, yet, technology plays an incredible role in everything that they do. It’s absolutely critical to everything that they do and the services that they provide their underlying clients, whether it’s retail or on the advisor side. But there’s also a lot of marketing that they do. I don’t say they’re just marketing companies, but they spend a lot of money, hundreds of millions of dollars, in some cases, on marketing. But it’s just a part of what they do. At their core, they’re still brokerage firms, and they are providing a means to an end. Advisors need to give…one, are giving their…investors need to accumulate wealth and build wealth for their future and their retirement and other things. Advisors are helping them to do that and guiding them and advising them. And they need a way to get that done. And that’s through brokerage firms that execute those transactions and safeguard their assets.

What’s Surprised Tom About How Advisors Have Built Their Businesses [1:37:11]

Michael: So as you look back at kind of observing the industry over the past several decades now, what surprised you the most in how advisors build their businesses and what they do?

Tom: So many things I guess I could say about that. But I think what’s really surprised me is, I always knew it was a better model, but you never think and you always said, “This is a better model than the old-fashioned commission-based model. But geez, how are you going to get the word out? This is such a small group, how are you going to get the word out?” And now all of a sudden, right, I think most investors still don’t really understand the difference between fiduciary and…even if it’s best interest, that might help or might make it worse. But more people because of the DOL rule that came out and was eventually struck down, but because of all the noise around that, more individuals understand what fiduciary independent investment advisor does and what that means to the individual.

And you look at the growth going from well under $1 trillion to $4 trillion in AUM, I think it’s been very rewarding to grow up in this industry and to see the incredible growth that continues to this day. But when you’re kind of in it and you’re in the thick of things, you’re not really sure it’s ever going to happen, but all of a sudden, you wake up one day and it’s happened. So that’s been extremely pleasant and rewarding surprise for me personally.

I think the other thing is, when you think about that incredible growth and you look at how poor most advisors are at marketing their businesses or their practices or their services, again, whatever you want to call, you have some that are unbelievable, right? You have marketing machines out there, Fisher Investments Marketing Machine. You have Fishers. They have the Edelmans now, Edelman Financial Engines. And the firm that Peter Mallouk was just in the paper, that his firm is in excess of $40 billion. I saw in “InvestmentNews.” So you have firms that have grown their businesses either through acquisition or organically, but some of the ones I just mentioned have done it organically.

Yet most advisors, that’s not what they do. I was out to dinner with an advisor down in Florida a couple of months ago. And I asked Frank, I said, “Well, how did you grow your business?” And he’s up just under $1 billion. And I said, “And how do you get new clients?” And he said, “The book.” He wrote a book. He wrote a book in the early 2000s. And people somehow get a hold of the book, and they like what they’re reading, and they call him up. And of course, client referrals are always big, too. But you can call advisors a lot of things, but for most advisory firms, you will not call them marketing and sales machines. And despite that, look at how the industry has grown. It’s unbelievable. And I think everybody in the industry, and I know I am, I’m super excited about it. I get really excited to see how the industry is doing. And I love it. I care deeply about it. And I think it’s just fantastic to see where this industry has come and where I think it’s going to continue to go.

Michael: So what was the low point for your own career on this journey?

Tom: Wow. I was so fortunate to just have really an incredible career and the opportunity to lead some incredibly strong teams. And I always said one of the best things I did was I was able to pick the right people and get people that were super smart and super dedicated, and surround myself with those people and let them go. And that’s always how I try to operate. Get great people around you, lead and motivate them, coach them. I always considered myself to be more of a coach than anything. But let them go. Give them runway. And maybe you have to put some rails, and sometimes maybe you have to pull them back a little bit or get them back on track, but hire great people and let them go.

So when I look back at “low points,” I didn’t have any dramatic low points in my career. You have bumps in the road, you have difficult times. We talked about the one around the financial crisis. That was a really tough time. But somehow I personally, whatever my personality is, I tended to thrive during those periods. I always loved the good challenge. When you think about the custody business that we…we were going up against some big, well-established players for many years. And so we were a bit of an underdog for many years. And now I think I don’t think you can call us an underdog, my old firm an underdog anymore.

Michael: Not as much now, but there was definitely for a bunch of years there. It reminded me of the Avis versus Hertz dynamic for a long time.

Tom: We try harder.

Michael: Avis was the big number one in rental cars. Yeah, Avis was number two. And so they just decided to own it years ago and went with the slogan that just said, “We’re number two, we try harder.”

Tom: Yeah, that’s right. That’s right.

Michael: And they just owned it.

Tom: That’s right. And I think advisors kind of viewed us as that player. And it was probably accurate. But I really thrive in a role like that. I thrived when things got tough. Frankly, when things are going really well, it’s boring. It’s really boring. Things need to be happening. So you always try to make…you want positive things to happen, but you always try to continue to push yourself.

And what was always critical to me is, again, I think, and this goes to a lot of entrepreneurs’ personalities and which you see all across the independent RIA space, and I must have had a bit of this in my personality is I was never fully satisfied. One of the things that I struggle with as a leader, that I always had to remind myself to do was to celebrate successes. Because my tendency was always, once you get to the top of the mountain, okay, where’s the next highest one? Yeah, that was great. Okay, where’s the next mountain that we’re going to climb? And what you have to do as a leader is you have to pause for a minute and celebrate that success, and then go on to the next mountain.

So we just…I had people that really love to push themselves and love to not just work hard, yes, work hard, but also the work smart, and were passionate. You have to have a passion. I always had that for our industry, and especially that niche that we were in, whether it was just discount brokerage and then…which became for a big part of my career the independent RIA space. I always had a passion for it. And that’s critical, I think, to success. So I was very fortunate throughout my career. You always have ups and you always have downs. You have good days and you have bad days. But whenever you’re having a crappy day, you go home, and you know that the next day is going to be better. And it always is. And that’s kind of how my career went.

What’s Next For Tom [1:44:56]

Michael: So what are you working on now? What comes next for you?

Tom: Oh, there’s so many exciting things going on in the space. You can see how hot the space is just in terms of people that want to make investments in RIAs. You saw Goldman made a major acquisition. There are other players that are rumored to be out there for sale. But the private equity space is all over the RIA industry. And it’s a little scary because you wonder if it hasn’t gotten a little too frothy. And I think in many cases it has. The businesses are doing great, but the market is high. And it just takes one pullback. And then fees are, of course, tied to the market, and then maybe valuations come back a little bit.

So I think some of the players are nervous, yet the investors are really interested in this space. They’ve gained an appreciation for it, as they should, because these businesses are generally great businesses. If you have a market pullback, well, yeah, you might have a pullback in your revenues, but it’s not going to be the end of the world. Now, we all know that the market zigs and zags over many years, but the long-term trend line is headed in the right direction, and that’s up. And so I think while you do worry that it’s getting a little too frothy, I think the excitement around this business is warranted. And I think it’s probably a long time coming.

So I’m doing work with some private equity firms that have asked for my help in some areas. I also joined…

Michael: In terms of just consulting with them and helping them try and understand the space?

Tom: Consulting, helping them understand the space, but also, I’ve worked with a couple that have looked at some specific deals as well, and to help them understand the deal. So when the private equity firms are sitting across the table from an advisory team and they’re listening to their pitch, they don’t know if…

Michael: And they don’t know how to assess, “Is this real?”

Tom: They look over to me, or they huddle with me afterwards and say, “Okay, Tom, here’s my list of questions for you.” And I can basically give them the nod that, “Yeah, what that guy said is right.” Or, “Well, I would take a look at it a little bit differently.” And so they know I know the space really well, and so they tap into me for my expertise there.

I also joined two boards. I thought I would join more boards after I left TDA, but I quickly decided that I probably…I don’t want to get it over my head on boards and meetings overlap and all that. So I joined two. I’ve got a couple other on-deck possibilities over the coming months. And I was extremely picky about where I joined, too. So the one I mentioned earlier, which is MaxMyInterest, I thought…I met with their team and I thought they had an interesting angle as a FinTech. And I thought that it was something that, geez, this could really benefit RIAs, and they really get the fiduciary model. So I teamed up with them.

Michael: And so they’re the ones that help you to manage and move dollars around across outside cash accounts so clients get the maximum yield. Basically, I guess they shop banks for you to try to find the bank with the best online yield?

Tom: Like their highest-yielding bank right now, even after the 25 basis point cut, I think is 230-some, 230-some-odd basis points, 236 or something like that. And so they’ll have a list of banks that are high-yielding. What their system does is it will connect to your checking account, and it will draw excess funds off your checking account. And you determine what excess funds are, and then it will distribute those amongst high-yielding savings accounts.

Michael: So you don’t have to sit around and shop for your…which bank is offering the highest yield. They’ll just figure it out and tell you or figure it out and move it for you.

Tom: Exactly. They can breach the FDIC if you want, but most people, there’s no need to do that. And so they’ll fill up the bucket up to the FDIC insurance. And then if you have excess over that, they’ll start filling up the next highest-yielding bucket. And then what they also do is, for the banks that are on their platform, if somebody lowers their rate or another bank comes on that has a higher rate, they will drain the lower-yielding account and fill the bucket up, the higher-yielding bucket up. So it’s really, it’s a really cool system.

And their pitch, they’re also trying to work with… going back to the custodians, with a lot of the different custodians, and they’ve tapped into some. And I think initially the custodians were maybe concerned, they were trying to skim off their cash on their platform.

Michael: Well, I was going to say that’s kind of the gravy train for the custodial model.

Tom: Right. But as we know, when you’re looking at account-by-account basis, that’s not where most of the cash is held for these wealthy individuals. It’s already held off. So a lot of smart advisors out there, and that’s the bulk of their business is coming from the RIA space, a lot of smart advisors out there are using this as a pitch to go to their clients and say, “Hey, listen, I’m working with a new company. This is what they do. Let me tell you a little bit about what they do. Do you have any excess cash that we haven’t talked about that’s sitting in savings accounts or a low-yielding checking account or a CD or something?” And they’re discovering that there’s a lot of cash out there that they didn’t even know about. So they’re helping to pull that cash in and get that under their umbrella. So I think it’s a really interesting company and really smart people that are there, that are running that. So we’ll see what happens with that.

The other company I joined essentially is a company that provides turnkey 401(k) solutions to advisors so that advisors can manage a 401(k) plan within their infrastructure. So a lot of advisors have individuals that have their own businesses, and they have 401(k)s. But the 401(k) can be more of a hassle to manage than in the individual brokerage account. Well, this company called PCS Retirement out of Philadelphia, they have a turnkey system, essentially, that allows advisors to manage in an efficient, effective way 401(k)s, and to expand their businesses through that or practices through that particular channel. And that’s a company is based on fiduciary principles, fully disclosed fees. And they’re really a phenomenal firm. Actually, they just made an acquisition. So they’re doing really well. They have private equity that’s attached to them that has made an investment in them as well. So they’re very well-capitalized. Yeah, it’s really a phenomenal business.

Michael: And so for listeners, this is episode 144. So if you go to kitces.com/144, we’ll have links in the show notes section if you want to check out any of these further.

What Success Means For Tom [1:52:15]

So Tom, as we wrap up, this is a podcast about success, and one of the themes that always comes up is just the word “success” means different things to different people. And so you’ve had this incredibly successful career already, drove tremendous growth in the RIA business at TD in particular, and then on in the retail side and now into all sorts of cool new companies. So you’ve certainly had the, call it the objectively successful career, but I’m wondering, how do you define success for yourself at this point?

Tom: One of the ways that I always defined success for myself was how did my teammates do? How did my players do? How did the people that were on my team do? And I always got an incredible kick out of watching the people that are on my team grow. And so when you look, for example, at the senior operating committee from my old shop and you look at the custody business today at my old shop, it’s run by a guy that was on my team for many years, a guy that I hired in the early ’90s. And you look at his team and it’s people that have been with us for a long time and kind of grew up in the business and have all gone from being kids like me, I was a kid, and all of a sudden these unmarried kids who are married, and they have families, and they have successful careers and made a tremendous impact on financial services and on the lives of so many investors by being a part of this incredible new model called the independent Registered Investment Advisor model. And to be a part of that, that gives me incredible satisfaction.

So when I think about future success, I think as long as this…if this continues to grow and do well and make a difference in people’s lives, I look back on that and I say, “Wow, I had something to do…I was a part of that. I was a part of the large team, which was the custodians and the independent advisors, and all the other players involved in the business. I was a part of that.” And that really, really is incredibly gratifying. And I look forward and I say, “Well, geez, now, what else can I do to help in this particular industry?” Because it does so many great things for individual investors, and it helps them achieve their financial goals and dreams, which are directly tied usually to your life’s goals and dreams. What else can I do to help facilitate that?

So what you’ll see from me going forward, Michael is a continued look at what are some of the challenges and problems that advisors are faced with every day? And what can I do, if anything, to get involved in helping to solve some of those problems? Like one of them today is that the advisors are aging. We’ve been talking about this forever. But you know what? They really are getting older. We all are. And for the first time, I’m hearing from some advisors like, “You know what? I’m actually starting to get tired.” And I talked to some of the advisors that have sold their businesses and I said, “So what are you going to do now?” They said, “I’m not going to do anything.” I said, “You don’t want to get back in it. What is your non-compete in?” “No, no, no, no, Tom, I’m done.” So for the first time, I’m starting to hear that. And that’s an issue for the advisory industry.

And I think the answer shouldn’t just be to sell to the person that comes along with the biggest check. And that’s not the way advisors think either. Advisors care deeply about their clients. They’re friends with many of their clients. And so we need to, as an industry, figure out, all right, we’ve got all these independent firms out there, what are we going to do to help facilitate the transition to the next generation? And that may mean different things to different firms. In some cases, it may mean selling it to another advisor that they trust, will take great care of their clients. In some cases, it may mean selling it to internal people. It depends. So what I’m looking at now is how can I get further involved in that? And helping to facilitate that, to transfer all these wonderful clients to the next generation of advisors.

Michael: Well, very cool. Well, I will look forward to seeing whatever the news headline ends out being of wherever you go next to figure out how to do that.

Tom: Thanks, Michael. I really appreciate it. I enjoyed this conversation. All the best to you.

Michael: Well, likewise. Thank you, Tom, for joining us on the “Financial Advisor Success” podcast.

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