E-Trade's recent acquisitions of investment advisory firms, including a deal announced this week, are giving it access to a wealthy market segment and helping to further evolve its product and service offerings.
"We've built a customer-focused brand, but what we were missing was a solution for folks who needed a professional adviser to help them make complex financial decisions," said Jon Foster, the head of wealth management at E-Trade Financial Corp.
The New York brokerage company announced plans Tuesday to buy Dallas-based Retirement Advisors of America, or RAA, a registered investment adviser that manages more than $1 billion of assets. The deal is expected to close in the third quarter and would give E-Trade four advisory firms with nearly $3 billion of assets under management.
The company has three types of customer, said Mr. Foster: do-it-yourselfers, those who want limited advice, and those who want a professional adviser who may even have discretion over their portfolio. The advisory-firm acquisitions are aimed at the third category, he said.
Financial institutions are aiming at baby boomers and the generation behind them who have $250,000 to $10 million and are seeking sophisticated money management guidance, said Lauren Bender, the manager of the retail securities and investments practice at Celent LLC, a Boston consulting firm.
One key to E-Trade's success will be serving as a "referral engine" to the newly acquired advisory firms while keeping the identity of each intact, she added. "They have to leverage the relationship in a way that doesn't dilute the message of E-Trade or RAA or other firms they buy," she said.
"We have every confidence that, over time, E-Trade Financial will be a great referral engine to our wholly owned advisers," Mr. Foster said. He added that he expects lead generation to grow "in a natural way."
Another key is identifying advisory clients who do little or no business with E-Trade but are open to using it for things like mortgages, investing, and banking, Ms. Bender said.
"You have to educate them to instill confidence in bringing their money to E-Trade," she said. "It's all about being subtle and referring business when appropriate."
Mr. Foster said E-Trade's customers have already expressed a need for discretionary advice and the deals for the regional firms answer that need. "A hard sell is not in our business plan," he said.
E-Trade will "continue to honor the fiduciary role of advisers," he said. This means its products and services will not be foisted upon them. "E-Trade expects to be a significant custodian of client assets, but we will win all these opportunities on merit," he said.
The company will continue buying regional advisory firms in markets with a high concentration of E-Trade retail and "corporate services" clients (for whom E-Trade administers stock option plans), said Mr. Foster. The plan is to be able to refer mass-affluent customers with at least $250,000 of investable assets from E-Trade's phone centers and 18 branch offices to high-quality advisers in their regions.
Last year E-Trade Wealth Management added to its stable Howard Capital Management, with offices in Los Angeles and New York; Kobren Insight Management in Boston; and Harrisdirect LLC's investment adviser group. The deals, including the one for RAA, call for the advisory firms to continue doing business under their own names and for the firms' principals to remain in place.
In announcing the RAA deal, E-Trade said it is also looking to buy wealth management firms in New York City; Philadelphia; the District of Columbia area; Atlanta; Orlando; Chicago; Denver; Scottsdale, Ariz.; and San Diego, Silicon Valley, and San Francisco in California.
E-Trade, which rose to success in the 1990s as a discount brokerage, now offers everything from traditional banking products to complex financial planning.
"They've positioned themselves over the last couple of years as a financial services firm, not as a brokerage firm," said Ms. Bender.
One reason the acquisitions make sense is that brokerage profit margins have been declining for years - thanks in no small part to discounters like E-Trade itself, she said.
"The whole financial advice side of the business has been a huge engine [for] growth in the retail brokerage arena," she said. "The [trading] commission revenue is still there, but it has become a much smaller piece of overall revenue."
Asked whether a difference in profitability has helped motivate E-Trade's buying spree, Mr. Foster said: "There is no question that adding to our revenue mix a reliable source of fee-based income is very good for the franchise."
E-Trade said it expects the latest deal to bring in about $9.3 million of revenue in its 2006 fiscal year.
