Bill McNabb, pictured above, ran the now $7 trillion in assets Vanguard Group from 2008 through 2017.
Qilai Shen/BloombergWhat is the ex-CEO of the world’s second-largest asset manager doing on the board of directors of a fintech startup that launched in 2018?
That’s how most people might react to the news this January that Bill McNabb, who ran the now $7 trillion in assets Vanguard Group from 2008 through 2017, joined the board of Altruist, a custodian and digital investing platform for financial advisers.
But Altruist is no ordinary app maker. Founder and CEO Jason Wenk calls it the Shopify (ticker: SHOP) of registered investment advisers, or RIAs. The service allows those advisers to set up their entire business on its cloud-based platform like Shopify’s customers can set up online stores.
Historically, independent financial advisers who weren’t selling products on commission for big full-service brokers like Merrill Lynch have had little in the way of technical support for services such as performance reporting for client accounts and billing at do-it-yourself discount brokers. Vanguard found handling the extra paperwork and back-office work for independent RIAs difficult enough that it pulled the plug on its RIA custody service in 2003. Altruist’s aim is to be a one-stop shop for advisers, custodying their assets, allowing free trades, and providing them the software they need to manage clients’ accounts.
The current model is for advisers to employ various outside software programs to manage client accounts at custodians. Programs work on some custodial platforms but not others and they don’t always work well together, says Bright Road Wealth Management’s President Brian Pinkston, who began migrating his advisory business from TD Ameritrade to Altruist late last year. “More importantly from an RIA standpoint, every separate piece of tech represents an additional fee.”
Technology costs for advisers can be expensive. “When you take into account computers, client-relationship management software, portfolio management software, trading software—those are big line items,” says adviser Peter Lazaroff of Plancorp, which manages $5 billion.
Altruist’s CEO says he can save advisers 90% of the all-in tech and custodian costs of running their practices. “We have over 500 active RIA firms, and we’re growing by over 100 firms per month. We only came out of beta [testing the software with advisers] about four months ago.” Small adviser shops may find the cost savings particularly attractive. Pricing is free for the first 100 Altruist accounts, then $1 per month per account after that.
McNabb joined Altruist’s board and has invested his own money in the company. While he’s on Fortune 500 boards like UnitedHealth Group’s (ticker: UNH) and IBM’s (IBM), Altruist is the only start-up he’s working with, Wenk says. McNabb declined to comment.
But McNabb’s addition also raises the question of whether Vanguard itself might have its sights on Altruist as either a strategic partner or acquisition after leaving the RIA custodian business behind years ago. There is an unnamed investor in Altruist that has yet to reveal itself and Wenk can’t disclose, but it probably isn’t Vanguard. “Vanguard is not a custodian nor do we have plans to enter the custody industry at this time,” Vanguard spokesperson Freddy Martino tells Barron’s in an email.
This February, Altruist began offering Vanguard and Dimensional Fund Advisors’ funds as part of model portfolios for advisers, creating a turnkey system for those who don’t want to make the allocation decisions for their clients. “To have model portfolios with Vanguard and DFA is pretty clever,” says Insight Financial Strategists adviser Chris Chen who recently began using Altruist’s software but hasn’t moved client assets over yet. “Because in the investment business Vanguard and DFA are two cults. Advisers who use them really believe in them.”
Altruist’s real target long-term may be Schwab. The financial behemoth closed on its merger with TD Ameritrade, a favorite home for RIAs, last October, and there have been some advisers unhappy with the outcome. “As the integration with Schwab has progressed, the service levels we have experienced at TD have declined dramatically,” says Pinkston.
While for now, Schwab has kept both custodial platforms separate, Lazaroff and other advisers suspect that at some point the platforms will be merged, requiring additional paperwork for clients. If the transition isn’t smooth, it could prove a “perfect storm” for Schwab, Lazaroff says, and an opportunity for Altruist “with a pool of assets up for grabs.”
Schwab, for its part, says it will take 18 to 36 months to integrate the two firms, with the goal of making the transition as painless as possible. Schwab promised in a public pledge to RIAs an account opening process “that is digital and streamlined, so you can bring clients on board securely with just a few clicks.” While Schwab has over 160 outside tech platforms that integrate with its digital custodian, it has also developed in-house software for RIAs such as Portfolio Connect, a basic portfolio management tool, as well as iRebal, a model portfolio tool which it’s adopting from TD Ameritrade.
The custodial business is a tough one to compete in. ”Moving client assets is difficult,” says adviser Jim Kinney of Financial Pathway Advisors. “Advisors have to chase down clients to have them sign paperwork to open new accounts. We may not be happy with the Schwab / TD merger, but the pain of starting over with someone new is significant.”
Perhaps knowing that the ex-CEO of one of the world’s largest asset managers is on Altruist’s board will alleviate some of that pain.
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