Altruist’s Grand Ambitions Rouse Skeptics

Altruist, a new digital, commission-free custodian for RIAs, has boldly begun playing one of the biggest games of scale in finance.

(Illustration by RIA Intel)

(Illustration by RIA Intel)

The top three ranked men’s tennis players, Novak Djokovic, Rafael Nadal and Roger Federer, have won a combined 55 major championships, including the last 12 singles Grand Slam titles. Facing the old guard is a daunting task. Even when they aren’t playing well, they find ways deep into tournaments.

Nadal, 33, won the United States Open and his 20th major championship earlier this month in that manner. He didn’t play his best but played well enough to outlast a rising-star opponent in an exhausting match that dragged on nearly five hours.

It might be a stretch, but a similar narrative exists in the RIA custody business.

Charles Schwab, Fidelity, TD Ameritrade and BNY Mellon’s Pershing are the caretakers of about half of the more than $6 trillion managed by RIAs and their market share is increasing, according to a September note from JMP Securities. Schwab alone has approximately 30% of the market, analysts estimate. The other half of the market is fragmented and largely serviced by sub-scale custodians that “cannot compete on product, service, or economics.”

The juggernauts dominate the custody business and observers wonder if Altruist, the new digital, commission-free custodian unveiled this month, will be capable of competing or be outlasted.

Launching a new custodian is an undertaking that requires considerable capital and skill. Beyond the costs associated with developing the technology, reaching the necessary scale in a reasonable amount of time requires a salesforce and marketing organization, Tim Welsh, the president of consulting firm Nexus Strategy, said. Welsh was previously a director of Business Consulting Services at Schwab Institutional.

“The cost of acquisition is significant, which will make profitability elusive for a number of years,” Welsh said. “Do they have the capital and patience to fund that?”

Other industry consultants and executives raised similar questions but asked to remain anonymous because they were unauthorized to speak directly about another company or were either largely unfamiliar with Altruist.

Altruist founder Jason Wenk insists the company will succeed. It’s already raised $8.5 million in seed funding from Venrock, a Palo Alto venture capital firm, and that money will be able to fund the company through next year, he said.

Altruist will need to eventually raise more but plans to do so only when it makes sense, Wenk told RIA Intel. He suspects additional capital will be needed to fund strategic and business opportunities that will help Altruist scale faster. Wenk did not share any details about those opportunities.

“What we’re building is no small task and we fully expect to have a lot of detractors. Our motivation though, is the impact we can have on people’s lives,” Wenk said.

A company t-shirt states “The financial industry is bullsh**t. Let’s fix it.”

Those messages have already resonated with some advisors and turned them into die-hard fans extolling Altruist on social media and at industry conferences. The company is eager to interact with them and get the word out but Wenk says the product itself will ultimately draw RIAs to the custodian. Advisors are frustrated with other custodians and intermediaries because they are being forced to purchase products they don’t need or want at puzzling prices, he asserts.

“If you ask advisors about what they struggle with and what they need, and actually listen, growing the user base is not that difficult.”

In the long-term, Altruist will have the most control and achieve the best economics if it becomes a self-clearing custodian. But that process is expensive and will take years, according to Wenk.

The company plans to register as a broker-dealer and qualified custodian as soon as November and expects it will be able to support most account types and securities at the start of next year clearing with DriveWealth and Citi. “It’s something we’re keen to tackle down the road, but we are really happy with the partners we have right now,” Wenk said.

The application process to become a self-clearing firm often comes with bumps in the road, according to Michael Watling, a partner at King & Spalding who previously spent almost seven years working for the Financial Industry Regulatory Authority, or FINRA.

Generally, firms that meet the necessary qualifications can become self-clearing, said Watling, who was not familiar with Altruist.

But the outspoken new company also says its success does not depend on replacing the big custodians. Altruist doesn’t offer as many account or security types and it doesn’t have any branches or retail business. Therefore, it will never have the brand recognition Schwab and others do, Wenk said.

Altruist aims to fill a void where the largest custodians have struggled. While a dozen RIAs managing over $1 billion have signed up for the new custodian’s public beta version of its advisor portal launching in October, the average RIA has $140 million under management and half the firms have less than $100 million.

“The tech companies, on the other hand, they are in trouble,” Wenk said.

Wenk argues that most offer poor user experiences, for advisors and clients alike, and are overpriced. If Altruist replaces much of the existing software needed to run an advisory business, as it plans to, many of the technology intermediaries will become irrelevant.

Some though will be spared. Altruist is not a meaningful threat to the largest service providers to RIAs, like SS&C’s Black Diamond and Orion. Its trading software will only work with its brokerage, which precludes it from working with some of the largest wealth managers or turnkey asset management platforms (TAMPs).

Advisors who use Altruist will still need some additional software to create financial plans and build and manage model portfolios. RIAs will need bookkeeping software, too.

Still, Donald Windle, the founder of Oklahoma City-based Windle Wealth, one of the first 10 beta users of Altruist’s portal, estimates he’s going to save $46,000 per year on software alone.

“The primary barrier to entry is scale. Major players in the RIA custody space have the advantage of scale—and that gives them an edge in terms of brand awareness, pricing, and most importantly, ability to offer value-add services,” Marina Shtyrkov, an analyst at Cerulli Associates, said.

Being the guardian of RIA assets is not the primary differentiator, asserts Shtyrkov. Instead, it’s using the resources that the huge custodians have to provide and develop ancillary services other custodians can’t.

“Nobody has ever accused Jason of being unambitious, and taking on all of the custodians and all of the reporting and billing platforms all at the same time is a fascinating challenge,” Aaron Klein, CEO of Riskalyze, said.

“I’ll say this — the industry needs better, faster and more accessible data, and if Jason can help set a new standard for our industry on how custodian data should work, that will be a win in and of itself.”

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