The RIA Uncertainty in Morgan Stanley’s $13 Billion E*Trade Deal

Morgan Stanley is acquiring a valuable discount broker and stock-plan administrator. What will come of its 225 RIAs and their $19.4 billion?

(JB Reed/ Bloomberg News)

(JB Reed/ Bloomberg News)

Morgan Stanley is buying E*Trade in one of the largest deals by a big U.S. bank since 2008, a less-than-surprising move to further its plans for wealth management. What the deal will eventually mean for the RIAs that custody with E*Trade is unclear.

The bank announced Thursday it agreed to acquire E*Trade, the discount brokerage with over $360 billion in retail client assets, in an all-stock transaction worth approximately $13 billion. E*Trade shareholders will get a little more than one share of Morgan Stanley for each E*Trade share. The deal is expected to close in the fourth quarter.

In recent trading, shares of E*Trade (ticker: ETFC) were 22% higher to $54.88 while Morgan Stanley (MS) was 4.8% lower to $53.60 on news of the deal, first reported by The Wall Street Journal.

The addition of E*Trade increases the scale and breadth of Morgan Stanley’s wealth management business and makes it an industry leader across all channels and wealth segments, according to the bank. E*Trade is often associated with do-it-yourself traders and its memorable ads featuring a baby, but the discount brokerage with $360 billion in retail client assets across 5.2 million client accounts also has business-to-business services.

It is a custodian to independent wealth managers and an administrator to the stock plans of more than 20% of S&P 500 companies. Its corporate service business includes two million stock plan participants and a total of $254.3 billion in assets.

“The E*Trade stock plan services business is a very attractive opportunity for Morgan Stanley to expand its workplace and benefits business, and gain access to a new pool of executive-level high-net-worth clients,” Rob Foregger, cofounder of NextCapital, told RIA Intel.

Morgan Stanley has been outspoken about its plans to make more stock plan participants wealth management clients. It acquired another stock plan business called Solium Capital early last year.

“We’ll take on Schwab. We’ll take on Fidelity. This isn’t about legacy-building; it’s about getting [Morgan Stanley] ready for prime time,” Morgan Stanley CEO Gorman told The Journal in an interview.

Mike Pizzi, the CEO of E*Trade, will join Morgan Stanley and continue to run the business through its integration of the companies. The bank estimates cost savings from the deal, including the combination of the bank entities, will be $400 million. Optimizing E*Trade’s $56 billion of deposits could save another $150 million. Morgan Stanley also believes E*Trade’s technology and services will help it capture a combined $7.3 trillion in assets held away by its current customers.

E*Trade’s discount brokerage and stock-plan business are the most meaningful parts of the company today, in terms of revenue.

After Charles Schwab’s acquisition of TD Ameritrade in November, analysts honed in on E*Trade’s future, including a potential sale.

“We believe E*Trade would be more likely to be put up for sale, unless management was willing to wait a couple of years for the Schwab-TD Ameritrade integration to be complete,” Chris Shutler, an equity researcher at William Blair, wrote in a note Nov. 21.

But as talk of a sale was swirling, Gabriel Garcia, who left BNY Mellon Pershing to lead Business Management and Strategy for E*Trade Advisor Services, said the future of its business with RIAs was bright. “There are some great incumbents in the space that have served the RIA community well but there are some gaps, frankly,” Garcia told RIA Intel Nov. 11.

E*Trade’s custody business is tiny, with 225 RIAs managing $19.4 billion in assets. Charles Schwab, Fidelity, TD Ameritrade, and BNY Mellon’s Pershing are the collective 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.

What Morgan Stanley’s ownership could mean for E*Trade’s RIAs is unknown. In the short term, it will likely mean nothing, since the deal is not expected to close until the fourth quarter and E*Trade is maintaining its brand after the acquisition.

Custodians often have referral programs that help customers seeking a financial advisor get in touch with independent RIAs. It is unclear if E*Trade has a similar program and what will happen to it now that Morgan Stanley has made clear that it plans to connect its own network of more than 15,500 advisors with E*Trade’s other businesses.

E*Trade could not be reached to comment.

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