The spread of the coronavirus into a pandemic — which has killed at least 7,400 people, closed borders, and locked down cities — led to the fastest-ever bear market. In response, the Federal Reserve lowered its benchmark rate to almost zero on Sunday, causing equity analysts to reexamine companies with revenue streams reliant on earning interest.
Among the companies researchers expect to be hit hardest are Charles Schwab and TD Ameritrade, where net interest income made up about 60% of their revenue at the end of 2019. Morningstar estimates Schwab’s 2020 revenue will fall by $1 billion, or 9.2% year-over-year, to just over $9.7 billion. It estimates adjusted net income will fall 28% year-over-year to $3.8 billion.
Analysts also expect TD Ameritrade, which Schwab agreed to purchase in November for $26 billion, and other companies that lean on interest income will suffer this year.
But a new custodian to RIAs says low interest rates won’t materially impact it this year, for a few reasons.
Altruist, a new digital, commission-free custodian for RIAs that launched earlier this month, has promised to save financial advisors thousands of dollars in software costs, shown it can onboard clients in less than two minutes, and built a fandom on social media. Jason Wenk, the founder and CEO of Altruist, says his company is “500% more efficient” than existing custodians, can serve more clients with few employees, and its balance sheet looks different as a result.
“The Fed news doesn't really affect us much at all. It was such a small part of our revenue model. I wouldn't say it’s inconsequential, but it was pretty meaningless,” Wenk told RIA Intel.
Schwab, for example, is a financial services supermarket that makes money in different ways, including asset management, trading, and administration fees. (Last fall, the company stopped charging commissions to trade stock, ETFs and options but still charges to trade bonds and other securities.) But those sources only generate about 30% of its total revenue, compared to net interest income, which contributes 60%, according to Morningstar.
Altruist generates revenue in the same way that Schwab and other custodians do. It receives payment for order flow, engages in securities lending, and charges RIAs monthly $1 per account after the first 100. It also earns interest on clients’ cash, although there is less of it sitting in accounts since Altruist trades fractional shares. Altruist does not participate in revenue sharing, an agreement in which a custodian gets a cut of the revenue generated from a mutual fund on its platform.
“We always intended on paying more of the cash spread to the client anyway. It's a nicety if rates stay high, but if rates are at zero, it sure hurts everyone else, probably four to five times more than it hurts us. Maybe 10 times,” Wenk said.
“There's a lot of other things that are part of brokerage revenue. And those elements are very healthy right now.”
Still, in the case of Schwab, client asset growth is “the only other major revenue lever” other than the expansion of net interest margin, Michael Wong, a sector director at Morningstar, said in a report published Monday.
It’s unlikely that other custodians are adding enough clients and assets to compensate for lost revenue elsewhere, Wenk says. Altruist is adding about 15 new RIAs to its platform every day, and has more than 220 waiting, but it just launched. It is much harder to move that needle for a company the size of Schwab, which has a $43 billion market capitalization. It last reported having more than $3.86 trillion in client assets and is the custodian to more than 7,500 RIAs.
“Most advisors aren't meeting with new clients. They're just sort of taking care of existing clients. And I can imagine, as an advisor, you're probably not going to a client right now and saying, ‘Hey, you know, what we should do is we should switch to a new custodian’ right in the middle of all that,” he said.
Most of the new accounts come from advisors rolling over 401(k)s or moving client cash. Some are transferring existing investment accounts elsewhere to Altruist, but it’s not the majority — advisors likely want to test-drive the new company and it doesn’t support as many different types of securities as others (it plans to add more in the second quarter).
Wenk insists he doesn't like to broadcast that his company is faring well given the circumstances and expressed concern it could be viewed as inappropriate. “The fact is, from a business model perspective, we're unusually well-suited for this,” he said.
Altruist is also a venture-backed startup, without the onlookers of publicly-traded companies. “I'd say one of the biggest benefits is that if you have the right investors, they don't look at the market on a day to day basis. They look at things almost within infinite time horizons,” Wenk said.
Last year, Venrock, a Palo Alto venture capital firm, led a seed round of $8.5 million in funding for Altruist. The money will be able to fund the custodian through 2020 but it will have to eventually raise more, Wenk said at the time.
Still, Altruist isn’t out to steal clients from Schwab or others. Wenk said there are now roughly 1,500 new RIAs focused on private wealth management setting up shop every year — those are the advisors Altruist is seeking to win.
“I have been trying to be very cautious about appearing opportunistic. To me, the responsible thing to do is to try to help people focus on their personal, family, and community health. That's far more important than business,” Wenk said.
“At the same time, if all of us come to a screeching halt, that's what actually kills the economy. The capitalist in me would say, ‘This is all great news for us.' We're probably the only company really uniquely suited to benefit from all of the things that have happened in the past year.”