Asset custody business suddenly attracts major investment

Everyone, it seems, suddenly wants custody of the assets managed by independent advisers.

But with the launch of EAInvest three weeks ago, Silicon Valley venture capitalists are getting in the game for the first time.

Venture capitalists usually invest in companies in hot industries that can bring a huge return on investment. In Silicon Valley, the name of the game is technology, not personal finance.

But the venture capitalists behind EAInvest, a San Francisco startup, think the company can steal a beat on the likes of Charles Schwab Corp. and Fidelity Investments by avoiding conflicts of interest and by creating their own technology.

They also see a hot industry.

“The independent channel has been growing at a dramatic pace in the past five to 10 years,” says venture capitalist Derek Proudian, co-founder of Ironweed Capital in Palo Alto, Calif., which invested $8.3 million in EAInvest in January.

“It’s a pretty significant phenomenon. And there’s a lot of reasons to believe these trends will continue,” he says.

Charles “Chip” Roame of Tiburon (Calif.) Strategic Advisors says EAInvest is the fifth company to enter the market in the past few months, following E*Trade Group Inc., Credit Suisse First Boston, Ameritrade Holding Corp. and Raymond James Financial Inc.

A Merrill Lynch & Co. Inc. spokesman denies that the company is interested in the business, even though some advisers say that Merrill has queried them about features they’d like to see in a similar service that the company plans to offer.

EAInvest also faces established competition that caters exclusively to advisers.

Most notable among them are the top four: Schwab, TD Waterhouse Group Inc., Fidelity Investments and DATAlynx, a division of First Trust Corp., a Denver subsidiary of Fiserv Inc.

“I wouldn’t call it a mature business yet, but it’s definitely headed down that path,” says Mr. Roame.

Part of EAInvest’s plan to break from the pack is to provide an industry-leading ratio of 12 registered principals for each advisory customer. Schwab and others would not comment on their own ratios but said that it did not approach 12-to-1.

EAInvest also plans to attract advisers by offering big savings with what are, in effect, payments from distribution fees collected from mutual funds that keep assets with the company.

The rebates are paid to advisers who can return them to their clients, have them forwarded to a charity of the advisers’ choosing, or simply pocket them.

“We’re not answering calls and talking to consumers, so we can afford to give some back to the adviser,” says Charles Siegel, director of marketing and sales at EAInvest.

Mr. Siegel says his company has no customers yet but has 100 prospects that it considers likely to sign on in the near future.

One prospect, Terry Nelson, principal with Hometown Financial Planning in Roseville, Minn., with $20 million in assets under management, says he will soon funnel all the funds from new accounts into EAInvest.

“They know what the adviser needs, and they can do it online,” he says. “I like Waterhouse, but I liked [predecessor firm] Jack White much better. Waterhouse is less able to serve the needs of the individual adviser in certain situations.”

For instance, he says, EAInvest’s website allows him to show asset-allocation pie charts in client presentations without installing the software.

Harvey A. Rowen, managing director of San Francisco-based Starmont Asset Management LLC with $70 million in assets held now by Charles Schwab and Fidelity Investments, says he is giving his personal account to EAInvest as a test.

He also has been won over by the company’s adviser-specific technology.

“They’re trying to bring on one platform what I now do on multiple platforms,” he says. “If that works well, it’s a real benefit.”