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Tech stack decisions for independent advisors: Choosing a custodian

If you’re launching an RIA and your clients will be buying and selling assets based on your advice, you’re going to need a custodian.

Under the custody rule of the Investment Advisers Act of 1940, RIAs must hold custody of assets only with a “qualified custodian” as defined. In my opinion, the two most commonly used custodians by RIAs are banks or “similar” institutions and registered broker-dealers. 

In addition to handling transactions, custodians hold and clear client assets. They can also provide a wide range of products and services, including billing, operational support, technology, compliance, client management, and performance reporting.

Some good news for advisors: because of their size and scale, large custodians charge very little for work involving client assets. Custodians make money indirectly from ticket charges, asset-based wrap fees, 12b-1 revenue-sharing fees and interest they collect on money clients hold in their cash accounts.

Critical decisions

But advisors still face a host of critical decisions: who to work with; what the firm’s priorities are beyond clearing and trade execution; what to look for and how to evaluate.

“Choosing a custodian is one of the most important decisions an RIA will make,” says Tom Myers, CEO at Bordeaux Wealth Advisors in Menlo Park, California. “No vendor will have more control over your business and how you interact with clients. It’s a decision that will be as or more important than your key hires.”

Charles Schwab, Fidelity and Pershing Advisor Solutions are the three largest custodians for RIAs. Schwab, having just acquired its largest competitor, TD Ameritrade, is the 500-pound gorilla of the business with a roster of over 10,000 advisors holding over $5 trillion in assets. Fidelity competes on service and a comprehensive tech platform and Pershing targets large, growth-oriented firms serving wealthy clients.

RIAs with $250 million in AUM or less may want to consider the next tier of custodians who, unlike the Big Three, actively solicit business from smaller firms. This group includes LPL Financial, Goldman Sachs, Shareholder Service Group (SSG), TradePMR, RBC Clearing and Custody, Interactive Brokers, SEI, Altruist and Axos.

Before interviewing potential partners, make a list of what your firm wants and what it absolutely needs from a custodian, says Jeff Fuhrman, president of Coastal Bridge Advisors in Westport, Connecticut. “Then take the list of what you need and rank on that basis first,” Fuhrman says.

Myers agrees. “Start with mission-critical and drill down from there,” he says. “Fill out a matrix and score and weigh what’s important. Then see what the major differences are among the custodians for your priorities.”

Integration is key

The ability to integrate your firm’s software with the custodian’s system should be a key factor in deciding which custodian to use. Their core systems need to fit what you do. Firms need a backbone upon which they can customize their software, including CRM, trading, financial planning and portfolio reporting, through the custodians’ application programming interface (API).

Simply put, what integrations does the custodian have that make it easy for you to run your book of business?

“You want a partner that’s keeping pace with a tech landscape that is changing rapidly,” says Fuhrman. “It’s more than likely you’ll be in bed together for a long time, so your partner can’t just be good for you today, you have to ask where they will be down the road.”

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Service level

Custodians by and large are giant institutions. If you’ve never worked with one before it may seem daunting without knowing you have the right level of support to guide you.

The level of your firm’s support and service needs is based on your requirements. Here’s a checklist of things to consider: 

  • Another critical consideration: what kind of service level will the custodian provide?
  • Who will you be dealing with on a day-to-day basis?
  • Will your firm have a dedicated account team? How responsive will they be?
  • How will the custodian handle out-of-the-ordinary situations?
  • What happens if there’s a trading error? Who eats the cost?
  • What’s the custodian’s policy for escalating and resolving errors?
  • Is the level of attention your firm receives tied to its size?

Investment mix

Remember, custodian costs are highly commoditized, so you’re focusing more on fit. Unless your firm is passive-oriented and just focuses on index funds and ETFs, it has its own areas of investment expertise and specialization.

Can the custodian handle alternative investments? Non-marketable securities? Private partnership? Crypto? 

Is there support for open architecture?

Tools to help manage investments?

Are clients’ portfolios reviewed, monitored and analyzed?

What’s your asset mix? Will you be able to access all the stocks, bonds, mutual funds, separate accounts and other securities and products that you need?

Custodians can also provide invaluable practice management help for new RIAs. Breakaway advisors who received support from a large wirehouse may find this service especially helpful. Custodians can assist RIAs market their practice, evaluating technology options, improving operational efficiencies and crafting succession planning scenarios.

Getting it right

After thorough vetting and evaluation, which should include talking to other RIAs using the custodians you’re considering, you’re approaching the moment of truth. 

Getting everything set up is a big deal and not easy to unwind.

“You want to get it right the first time,” Myers says. “Switching costs are super high. But you also want to make sure when you’re negotiating service levels or pricing that you’re not painting yourself into a corner so you can’t move somewhere else.”

What about using multiple custodians?

You can, but caveat emptor: If you spread your money around too much, you may not be important enough for any one custodian. According to the most recent Investment News Custody and Clearing survey, RIAs keep 85% of assets at their primary custodian.

The more assets you have, the more sense it makes to diversify. Only 30% of RIAs with between $100 million and $250 million in AUM use multiple providers, according to the survey, while nearly three-quarters of firms with more than $5 billion in assets do.

Before you make a move, check out an excellent update and comparison of custody options in the wake of the Schwab-Ameritrade merger by Bob Veres on Michael Kitces’ “Nerd’s Eye View” website.

And keep in mind the choice is all about fit. 

“There’s a lot of good options available,” says Fuhrman. “But not every good option is good for your firm.”

This blog is sponsored by AdvisorEngine Inc. and CRM Software LLC. (“AdvisorEngine”) The information, data and opinions in this commentary are as of the publication date, unless otherwise noted, and subject to change. This material is provided for informational purposes only and should not be considered a recommendation to use AdvisorEngine or deemed to be a specific offer to sell or provide, or a specific invitation to apply for, any financial product, instrument or service that may be mentioned. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of AdvisorEngine and are subject to change without notice. AdvisorEngine makes no representations as to the accuracy, completeness and validity of any statements made and will not be liable for any errors, omissions or representations. As a technology company, AdvisorEngine provides access to award-winning tools and will be compensated for providing such access. AdvisorEngine does not provide broker-dealer, custodian, investment advice or related investment services.  AdvisorEngine and Junxure are registered trademarks of AdvisorEngine Inc.

Charles Paikert

Charles Paikert

Charles Paikert has been writing about the financial advisory industry since 2004. Paikert has been an editor for Investment News and Financial Planning and currently contributes to Family Wealth Report, RIABiz and Barron’s. He has also written about the industry for The New York Times and Reuters and has moderated panels at numerous industry conferences, including Schwab IMPACT and Invest. Paikert is the co-author of Madness: The Ten Most Memorable NCAA Basketball Finals.


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