How a Schwab cast-off became a niche custodian for RIAs who like to trade options

MoneyBlock is the new kid on the block and only began actively working with RIAs four years ago.

The Chicago-based online broker-dealer for independent reps and advisors emerged in 2012 when the Charles Schwab Corp. announced it was casting off its 400-advisor-strong BrokersXpress division. See: How Schwab may yet reap value from brokersXpress accounts, advisors, staff and assets.

BrokersXpress didn’t have much time to prove itself within the San Francisco financial services company. In March 2011, Schwab purchased it for $1 billion, but fully assimilating it proved tricky because Schwab Advisor Services — a pure RIA custodian — balked at making IBD reps who were part of BrokersXpress part of its clientele.

“For a year or so Schwab wrestled with how to make it work,” says Gary Martino, formerly of BrokersXpress, who now heads up RIA sales for MoneyBlock. “BrokersXpress had all of these lines of business and Schwab had a finite bubble of RIAs. They wrestled with trying to put this in their bubble and decided it was going to be too difficult.”

New home

After the decision was made in 2012, Schwab spokesman Susan Forman said: “We acquired OptionsXpress to gain access to a retail derivatives product offering. As part of that deal, we also gained BrokersXpress. What we’ve found is that it was difficult to integrate because BrokersXpress does not meet our core business needs,” according to published reports.

Martino was tasked with finding the brokers a new home — a difficult job, he says. Even though Schwab gave the advisors a window of opportunity to shop for new homes, it was a struggle because none of the existing IBDs and custodians were set up to accommodate the admixture of a vanilla brokerage business, RIA custody, and, especially, options trading that these advisors were seeking.

“It was difficult because not a lot of firms have options capabilities,” Martino says. “BrokersXpress had the low cost structure and others didn’t. [Advisors] also wanted something hybrid. It was a challenge to find everything.”

But the void in the marketplace hastened online brokerage TradingBlock, formed in 2003 under Chicago-based AOS, to create MoneyBlock. In 2012, the entity became home for advisors from BrokersXpress and other firms. Six staffers from BrokersXpress, including Martino, joined MoneyBlock and got 27 advisors as charter clients. Now, nearly 60 advisors call BrokersXpress home.

“We sat down with all of the transitioning reps and advisors and tried to get a feel for what they liked about BrokersXpress and figure out how to build from there,” says Martino. “It had similar features. There was an interest in building out BrokersExpress at Trading Block. The management team decided to create MoneyBlock to fill the void that was left in that space.”

Automated yet personalized

Like other micro-custodians, MoneyBlock is “using a combination of technology and its size to welcome advisors cut from other custodians because they proved uneconomical”, says Tom Heffernan, vice president of AOS, Inc. which does business as TradingBlock and MoneyBlock. See: TD, Schwab and Pershing RIA units embrace mini-option mania to hedge Google, Apple, ETFs.

Heffernan says his firm can make profits from these low-producers because so many tasks are automated.

“Automation. I automate as much as I can. I can onboard 1,000 accounts today. Just automate so much of what we do that we don’t have to add staff.”

Heffernan adds that his firm’s ability to out-automate competitors is based in a proprietary advantage.

“We own all of our intellectual property. We can build out the processes because we own our own IP and the others don’t. This gives us a leg up on being able to adapt and be more efficient and take a broader swath of business,” he says. See: How an eclectic trio of RIA custodians are willfully gaining ground with snail-like precision — Part 2 of 3.

But not all is proprietary. Like several robo-advisors, MoneyBlock uses Apex Clearing Corp. as its engine block. Heffernan is adamant that his firm provides all the service to clients. See: With robo-advisors on the rise, robo custodian Apex is rising with them, a diamond mined from the rubble of the Penson Worldwide debacle.

“We’re not selling Apex. We’re selling our services and technology,” he says. “Advisors and their clients log onto our platform. They’re contacting our customer service. They don’t have an interaction through Apex at all. It’s all through us.”

Migration patterns

MoneyBlock is very much a hybrid — part IBD and part custodian. Right now, about 65% of its advisors are RIAs. The others are commission reps. It also allows advisors to custody assets at their own RIA or the company’s corporate RIA. See: How an eclectic trio of RIA custodians are willfully gaining ground with snail-like precision — Part 2 of 3.

While MoneyBlock declines to disclose its assets, it’s fair to say the majority of advisors are state-registered with few holding more than $100 million in assets. See: How many RIAs are there? No, seriously, how many?.

“We’ll have reps who become an RIA and is a hybrid and then will migrate from commission to fee-based full RIA where he resigned his IBD and uses us just as a custodian,” Martino says. See: What swayed me to the hybrid cause after an early indoctrination as a 'pure RIA’ disciple.

Still, commission-based assets are here for the foreseeable future.

“Smaller clients can be better served under commission than through the advisory model,” Heffernan says.

Safe as houses

Furthermore, Heffernan says his hybrid firm benefits from not depending on suspicious and costly products such as non-traded REITs. See: One-Man Think Tank: Inside the due diligence that uncovered serious questions about a REIT.

“The reason IBDs are in trouble is because they’re selling all of these commission products. For us, variable annuities make up less than 5% of our revenue, and we don’t lean on them at all. We don’t do alternatives at all. Options are exchange-traded. The guys we’re primarily servicing are asset-managing RIAs that need some level of sophistication.” See: The top 10 alternatives to alternative investments.

He adds: “We’re seeing advisors looking to differentiate their practices and add value by adopting different techniques whether it is options or something else. A lot of advisors are in their 50s and 60s and looking to sell their businesses at some point and they are heavily relying on a vanilla practice and the value of their practice will get decimated.”