Big banks redrawing custodial landscape

JPMorgan Chase & Co. and Bank of America Corp. may be giants of the financial services world, but they're retrenching when it comes to serving independent advisers.

JPMorgan Chase & Co. and Bank of America Corp. may be giants of the financial services world, but they’re retrenching when it comes to serving independent advisers.

JPMorgan last week said it will sell its investment adviser custody unit to Royal Bank of Canada for an undisclosed sum, while BofA confirmed that the BroadcortAdvisor unit it acquired along with Merrill Lynch & Co. Inc. stopped accepting new clients months ago, pending a strategic review of the business.

John Tyers, the head of BroadcortAdvisor, which was formerly known as Merrill Lynch Money Management Services, last week assumed broader responsibilities within Merrill’s retail-brokerage division.

The pullback surprised some advisers, given the growth of the independent channel and the two banks’ fairly recent pronouncements of interest in serving RIAs, but consultants said the moves are understandable.

“Big banks are looking to cut expenses where they can, so they are shedding non-core businesses,” said Bing Waldert, a director at Cerulli Associates Inc., noting that Bank of America last week also sold its Columbia Management Group LLC arm for $1 billion in cash.

Neither bank is among the top tier of custodians — a group dominated by firms such as The Charles Schwab Corp. and Fidelity Investments. However, the JPMorgan unit specialized in high-end advisers who wanted the cachet of the bank’s alternative-investment menu and sophisticated reporting services for their very wealthy clients, Mr. Waldert said.

JPMorgan inherited its RIA unit last year when it absorbed the failing Bear Stearns Cos. Inc. in a government-sponsored takeover. The banking giant continues to expand Bear’s correspondent-clearing arm for broker-dealers but didn’t consider the RIA custody business “a core competency,” said spokeswoman Mary Sedarat.

Merrill until recently was bullish about the RIA business, promoting its services to Schwab RIA clients after Schwab began restricting acceptance of alternative investments. Merrill in June 2008 hired Mr. Tyers, a former Bear Stearns/ JPMorgan clearing executive, as president of Broadcort, saying it was committed to offering “clearing services to broker-dealers and wealth management solutions to independent advisers,” and “to winning in this space.”

However, the Broadcort business was disbanded in the spring when the broker-dealer clearing arm was absorbed into its global capital markets arm and the RIA unit was put under review.

BroadcortAdvisor, whose website says it is “empowering advisers with the total resources of Merrill Lynch,” is serving existing adviser clients and their accounts, “but we have stopped [accepting] new RIA clients,” said Selena Morris, a Merrill spokeswoman.

Sallie Krawcheck, the newly appointed head of Merrill and all of BofA’s global wealth businesses, last week assigned Mr. Tyers to oversee managed-account products for the brokerage network, reporting to global investment solutions head Chris Dupuy.

Ms. Morris wouldn’t comment on “what is happening to employees in the business” but said that Mr. Tyers continues to also oversee the clearing unit.

Some independent advisers said they are disappointed by Merrill’s pullback.

“I was extremely impressed with their technology,” said Sean Cook, a principal at DCA Global, an RIA with $180 million of assets under management. He keeps most of his client assets at Schwab, but has been investigating rivals.

“I’m disappointed to have apparently lost that option,” Mr. Cook said.

He lauded the link BroadcortAdvisor provided into Merrill’s cash management accounts that allows advisers to track payees on client checks. He characterized the feature as an unusually strong tool to help manage clients’ spending that traditional custodians don’t offer.

Some observers think that the custodial world will continue to contract as second-tier broker-dealers do cost-benefit analyses.

“Maybe there’s room for the top five, but it seems like everyone else is picking up the table scraps,” said Sean Cunniff, research director at The Tower Group Inc.

RBC, for its part, expects the independent sector to keep growing and believes its renamed RBC Advisor Services unit can differentiate itself from the current custodial leaders. The deal is expected to close in the second quarter of 2010.

“We do not start from a discount-broker, online-trading perspective,” said Mike Kavanagh, head of U.S. independent business channels at the Canadian bank’s RBC Wealth Management broker-dealer division. “We work with high-end brokers and sophisticated money managers.”

RBC currently offers custody to about 65 hybrid RIAs who clear their brokerage business through RBC Correspondent Services, Mr. Kavanagh said. The average RIA there and at JPMorgan has more than $200 million of assets under management, compared with less than $75 million industrywide, he said.

RBC also believes that its model will attract refugees from big brokerage firms who are going independent. “What we have will be more familiar to breakaway brokers and sophisticated money managers,” Mr. Kavanagh said.

He wouldn’t disclose the number of RIAs or RIA assets currently held by RBC or JPMorgan, but said the combined firm should rank as the fifth-largest custodian by assets, after Schwab, Fidelity, TD Ameritrade Holding Corp. and Pershing LLC.

RBC this year has recruited about 30 high-producing brokers from wirehouse competitors for its core broker-dealer, and also has quietly positioned itself in another way to benefit from the growth of independent advisers. This year, it established a broker-dealer called FC Select that Mr. Kavanagh described as “quasi-independent.”

Mr. Waldert said the moves appears to serve as a “passive retention tool” to keep the assets of RBC brokers who decide to go independent.

Not everyone agrees with the RBC strategy. “The high-end guy leaving Merrill doesn’t want to go to RBC or another big bank when he goes independent,” said David W. Pequet, president of MPI Investment Management Inc., a fixed-income money manager and RIA that keeps most of its clients’ $250 million of assets under custody with Schwab.

“The problem with big banks and brokers after last year is headline risk. I’ve enjoyed using custodians that aren’t in the headlines.”

Matt Bienfang, a consultant at Tower Group, is even more skeptical.

“I believe that the initial wave of big breakaway brokers moving into the RIA business has passed,” he said in explaining the RIA abdications by Bank of America and JPMorgan. “It will continue, but it will probably be a lesser quality adviser coming over.”

He also thinks that custodians will be increasingly liable to litigation from RIA clients if regulatory-reform measures now being considered by Congress put advisers under the sway of a brokerage-oriented self-regulatory group.

E-mail Jed Horowitz at [email protected].