Axos Discloses Custody Fees as Rivals Decline Interviews

Axos Advisor Services has disclosed its standard custody fee schedule, while smaller competitors Hilltop Securities and Innovayte declined to discuss their fees or business models. The schedule is a starting point. Registered investment advisers generally negotiate asset-based fees and transaction prices based on their needs and current costs.

Mike Watson, executive vice president and head of Axos Clearing and Advisor Services, compared the schedule with a hotel’s “rack rate.” Negotiations begin with a review of what a prospective client pays its current custodian and which services it requires.

“It really depends on the firm and how they want to utilize us as a custodian,” Watson said. “A lot of it has to do with what they’re paying where they’re at.”

Hilltop, based in Dallas, and Innovayte, also based in Dallas, declined interviews about their custody businesses. Axos initially declined an interview before agreeing to discuss its fees and business model.

Industry consultants William Trout and Gregory O’Gara of Datos Insights described custodians’ reluctance to discuss pricing as common across the sector. In an email, they wrote that custody fees are negotiated separately with each firm and that cash-sweep arrangements face regulatory scrutiny.

The Securities and Exchange Commission warned in June that some advisers may fail to disclose payments linked to client cash balances. In these arrangements, custodians or clearing firms transfer uninvested cash into money market funds or bank deposit products. The custodian may then share some of the resulting revenue with the adviser or an affiliated broker-dealer.

Axos expanded its custody business after acquiring the operation formerly known as Trust Company of America and E-Trade Advisor Services from Morgan Stanley for $55 million in 2021. The business had $23 billion in assets under custody or administration and about 200 clients at the time. By the end of the second quarter, it reported $47.8 billion and 300 clearing and custody clients.

Net revenue from Axos’ clearing and custody business reached $41.4 million in the second quarter, an increase of more than 350% from the second quarter of 2020, according to the company’s August investor presentation. Watson reported that Axos is holding more discussions with prospective clients following Fidelity Investments’ planned decision to remove registered investment advisers with less than $100 million from its custody platform.

Watson identified three groups that Axos is targeting: firms focused on financial planning, practices serving mass-affluent clients and clients with single-digit millions of dollars, and registered investment advisers with less than $500 million in assets under management. Smaller advisers, he said, often feel underserved by larger custodians.

Hilltop’s custody business is part of the broker-dealer division of Hilltop Holdings, which also operates banking, mortgage, municipal investment, insurance and asset management businesses. The division reported $124 million in net revenue and $12.4 million in pretax profit in the second quarter.

Hilltop Holdings’ annual report said its custody operation served 93 financial organizations at the end of last year. The clients included broker-dealers, registered investment advisers and institutional firms. Services included trade execution, clearing, recordkeeping, trade reporting, accounting, securities lending and custody.

Innovayte launched its custody business in 2023 after ending an outsourced relationship with Axos. The company reported $3.4 billion in assets, primarily in alternative investments, through predecessor businesses that provided custody for self-directed individual retirement accounts. Earlier this month, Innovayte appointed former Apex Fintech Solutions Chief Operating Officer Fritz Louis-Charles as its chief operating officer.

Axos also faces legal exposure connected to its clearing business. A Financial Industry Regulatory Authority arbitration panel ordered Axos Clearing to pay $49.4 million in damages and attorneys’ fees to former clients of a failed brokerage that used Axos’ clearing and back-office services. Axos has asked a federal court to vacate the award. The judge had not ruled on that request or the former clients’ effort to confirm the award.