Vanguard Group's planned purchase of Altruist promises to disrupt the RIA custody market, giving RIAs access to an innovative alternative.
That was various industry consultants' response Wednesday to Vanguard's plans to buy the custody and fintech firm Altruist in a deal reported by the Wall Street Journal to be worth more than $4 billion. The acquisition, the largest in Vanguard's history, will provide a direct link not only to Altruist's custody services but also a stable of 6,500 financial advisors who are served by Altruist and can help distribute Vanguard index funds to investors.
Mike Papedis, the founder and CEO of Fusion Financial Partners, said the most notable part of the acquisition is the heft it puts behind Altruist's truly distinct custodial offering. Of the advisors Papedis and his firm work with to set up their own RIAs, most have clients who want to entrust their assets to one of the "big four" custodians: Charles Schwab, Fidelity, Pershing or Goldman Sachs.
Compared with those firms, Altruist — which was founded in 2018 — is a newcomer.
"We happen to work with larger teams, maybe with more upmarket clientele, and the traditional custodians are typically where those go," Papedis said.
Altruist's association with Vanguard, one of the best known financial firms in the world, will give high net worth clients a brand most can feel comfortable with. Meanwhile, Papedis said, Vanguard will get truly distinct custodial services built by a firm that puts technological innovation first.
The differences between custodians
Most large brokerages view their custodial arm as a basic business offering to which advanced services, like tax planning and cash management, can be added over time.
Altruist, Papedis said, has taken the opposite approach.
"I think what Altruist has done is they've really kind of flipped the model and said, 'Why don't we choose the operating system and the technology systems first?'" Papedis said. "And then custody becomes a byproduct of that selection. That's why I say that we could be entering a new competitive era."
Justin Whitehead, the CEO and co-founder of the portfolio analytics firm Pebble Finance, said the custodial business in wealth management has in large part become "commoditized" — meaning little distinguishes one firm's services from another's. He agreed that the Altruist purchase will bring Vanguard a custody option that will stand out as a distinct choice from competitors' offerings.
"I think this is a clean win for Vanguard," Whitehead said. "They're skipping the stage of just building a boring custody business."
The threat to firms' cash-management profits
Altruist has already proved itself as a threat to firms' business models. Its release in February of an automated tax planner driven by its Hazel AI system briefly sent shares in Schwab, LPL Financial, Raymond James and other brokerage giants plummeting.
Executives at those rival firms were quick to dismiss any perceived threat. Analysts, meanwhile, noted another way Altruist's automation ambitions could affect brokerages' bottom lines: by taking away their profitable business in managing clients' uninvested cash.
Many firms use a process known as "cash sweeps" to move uninvested money over from brokerage accounts to banks to be lent out. Firms pay some of the resulting returns to clients but often keep a large portion for themselves.
The practice is lucrative. Schwab made nearly $3.4 billion in net interest revenue in its latest quarter, much of it on nearly $485.7 billion held in sweeps accounts. LPL made $443.5 million on its holdings of $57 billion in client cash.
Will Trout, the director of securities and investments at Datos Insights, said Altruist offers yields on client cash that are higher on average than the returns provided by competitors. Vanguard's purchase of Altruist puts it in a position "to compete away" other firms' cash sweeps business, Trout said.
"Vanguard now owns that model with the capital to scale it," he said. "A true 'cash sorter,' one that actively routes client cash to the best yield instead of defaulting to a low-rate sweep, is a natural next build for a firm built on stripping out costs that don't benefit the investor."
Trout said it's notable that Vanguard has decided to leave Altruist as a standalone business rather than absorb it into its own brand. That separation should ensure Altruist has room to continue innovating, he said.
"Vanguard needs Altruist's product speed intact, not slowed by folding into a 50-year-old index shop," he said.
Vanguard's wealth management ambitions
Vanguard's purchase of Altruist comes amid a general push to expand the firm's wealth management business under CEO Salim Ramji.
For much of its history, Vanguard has built its business on working with financial advisors seeking to offer Vanguard's mutual funds and exchange-traded funds to their clients. One missing component has been a custodial service for safekeeping client assetsi and arranging trades.
As part of its wealth management push, Vanguard first invested in Altruist in 2020. In a statement on the impending purchase, Vanguard said, "Vanguard is committed to improving financial outcomes for our 50 million investor-owners, including the many millions who choose to work with RIAs. With Altruist we can meaningfully deliver on our shared goal of making investing and advice more affordable and accessible."
The addition of Altruist won't transform the custody business overnight. The Culver City, California-based firm does not disclose its total for custodial assets. Whatever the number is, it almost certainly lags behind its biggest industry rivals. Schwab, for instance, has more than $5.7 trillion in RIA assets in custody. Schwab works with roughly 16,000 RIAs through its Schwab Advisory Services division.
Trout said the Altruist acquisition gives Vanguard a direct connection to RIAs and their clients. No longer will it merely be distributing index funds to them and collecting the resulting revenue.
"Vanguard is signaling it wants its scale to generate revenue beyond fund fees, the same way Schwab and Fidelity do with cash and lending," Trout said.
Trout also believes Vanguard could now be in a position to undermine fundamental parts of its rivals' businesses.
"The stock reaction at Schwab, LPL and Raymond James signaled the market believed AI could compress a labor-intensive advisor task into minutes," he said about Altruist's February release of its AI-driven tax services. "Vanguard is buying that [research and development] lead outright instead of building or licensing it."
