Choos­ing Cus­tody

Ad­vi­sors need to pon­der which RIA cus­to­dian is right for them, given the sub­stan­tial costs of switch­ing from one to another.

Financial Planning - - Contents - BY MICHAEL KITCES

Ad­vi­sors need to pon­der which RIA cus­to­dian is right for them, given the sub­stan­tial costs of switch­ing from one to another.

“What’s the best RIA cus­to­dian to use?” This is one of the most com­mon ques­tions I hear from ad­vi­sors launch­ing RIAS, ex­pe­ri­enced ad­vi­sors break­ing away from bro­ker-deal­ers and even ex­ist­ing RIAS who want to know if there’s a bet­ter op­tion avail­able to them.

Given the sub­stan­tial costs of switch­ing from one RIA cus­to­dian to another, it is worth fig­ur­ing out which cus­to­dian is right for you — not just in the short term, but for the long run.

Of course, if you’re go­ing to op­er­ate solely as a fee-for-ser­vice ad­vice firm and not man­age client port­fo­lios di­rectly, you don’t need a re­la­tion­ship with a cus­to­dian at all; the re­la­tion­ship be­gins once you’ve de­cided to help clients im­ple­ment their port­fo­lios and need a plat­form to ex­e­cute trades and bill for your ser­vices.

But given the con­tin­ued dom­i­nance of the AUM model among RIAS — even with the growth of ad­vi­sors us­ing al­ter­na­tive fee-forser­vice mod­els — most RIAS still have to pick a cus­to­dian. Here are some strate­gies for mak­ing that de­ci­sion.

Sim­i­lar but dif­fer­ent: Most in­de­pen­dent RIAS cus­tody their as­sets at one of four ma­jor firms, ranked here from largest to small­est based on mar­ket share: Sch­wab, Fi­delity, TD Amer­i­trade and Per­sh­ing Ad­vi­sor So­lu­tions.

Yet de­spite their size and mar­ket reach, or per­haps be­cause of it, the four pro­vide sub­stan­tively sim­i­lar ser­vices.

Given the con­tin­ued dom­i­nance of the AUM model among RIAS, most of them still have to pick a cus­to­dian.

They all of­fer the core tech­nol­ogy to trade on be­half of clients. They can hold a wide range of stan­dard in­vest­ment as­sets. They can fa­cil­i­tate billing. And they’re in­cred­i­bly low-cost.

In­deed, none of the ma­jor RIA cus­to­di­ans even charge a plat­form fee or take a per­cent­age of the ad­vi­sor’s rev­enue (as a BD would).

Rather, they use their in­cred­i­ble size and scale to make what amounts to a small scrape from a large num­ber of trans­ac­tions.

Most of these plat­forms earn when­ever your clients trade, $5 or $7 per, or maybe a small as­set-based wrap fee. Some par­tic­i­pate in 12b-1 fees as part of a no-trans­ac­tion-fee plat­form. Some re­ceive a small num­ber of ba­sis points for their role as trans­fer agent, or they make some very small spread on money mar­ket or other cash

po­si­tions held by clients. These are very small amounts, but they add up after the first cou­ple hun­dred bil­lion dol­lars of ad­vi­sor as­sets.

Con­se­quently, most ad­vi­sors don’t pick an RIA cus­to­dian sim­ply by cost and ba­sic ca­pa­bil­i­ties but more for a cus­to­dian’s par­tic­u­lar fo­cus or style. In this con­text, there are some notable dif­fer­ences worth un­der­lin­ing among the top four RIA cus­to­di­ans.

The big four: Per­sh­ing Ad­vi­sor So­lu­tions works pri­mar­ily with larger RIAS that are fo­cused on growing a large busi­ness. It’s not just ori­ented to­ward prof­itable prac­tices, but to­ward those hold­ing hun­dreds of mil­lions or even bil­lions of dol­lars of AUM, that still want to grow big­ger.

This stems in large part from the fact that CEO Mark Tibergien led Moss Adams’ prac­tice man­age­ment con­sult­ing di­vi­sion for over a decade.

That helps ex­plain why Per­sh­ing Ad­vi­sor So­lu­tions is par­tic­u­larly pop­u­lar among break­away teams from wire­houses — larger, in­de­pen­dent BDS teams that value deep prac­tice man­age­ment sup­port in pur­suit of build­ing and scal­ing their busi­ness. And if you’re work­ing in the ul­tra­high-net­worth space, the global bank­ing ca­pa­bil­i­ties that come from Per­sh­ing’s Bank of New York, now BNY Mel­lon, are also a sell­ing point.

Flex­i­bil­ity of Open Struc­ture

TD Amer­i­trade, on the other hand, is best known for its Veo One plat­form, which op­er­ates as an open ar­chi­tec­ture hub that fa­cil­i­tates trad­ing and ac­tiv­ity on its plat­form, with the added flex­i­bil­ity that comes from its open struc­ture that makes it easy for other ad­vi­sor tech­nol­ogy tools to in­te­grate.

This means TD Amer­i­trade is the best fit for ad­vi­sors with a vi­sion of some par­tic­u­lar tech stack com­bi­na­tion that they want to have, or more gen­er­ally, for those who value se­lect­ing their own tech com­po­nents one by one, plug­ging them in and main­tain­ing them with­out re­ly­ing heav­ily on the cus­to­dian’s pro­pri­etary plat­form.

That said, TD Amer­i­trade ac­tu­ally does have some very good pro­pri­etary tech­nol­ogy around in­vest­ment ca­pa­bil­i­ties, in­clud­ing a free on­line ver­sion of ire­bal for TD Amer­i­trade ad­vi­sors — the orig­i­nal and still one of the most pop­u­lar re­bal­anc­ing soft­ware so­lu­tions.

Fi­delity’s Wealth­scape plat­form, mean­while, is in­creas­ingly be­ing po­si­tioned as a true all-in-one, es­pe­cially for com­pre­hen­sive wealth man­age­ment firms.

Sec­ond-tier cus­to­di­ans usu­ally de­velop some kind of niche or spe­cial­iza­tion to serve one type of ad­vi­sor par­tic­u­larly well.

The firm’s de­ci­sion about three years ago to buy emoney Ad­vi­sor, a lead­ing plan­ning soft­ware so­lu­tion for ad­vi­sors, which is in­creas­ingly be­ing in­te­grated into Wealth­scape. This makes Fi­delity’s so­lu­tion a very ap­peal­ing long-term so­lu­tion for plan­ning-cen­tric firms that want to build to­ward a holis­tic wealth man­age­ment of­fer­ing.

By anal­ogy, if you like Ap­ple’s hard­ware, soft­ware and con­nected ser­vices where ev­ery­thing is man­aged by Ap­ple and it just works, you’re prob­a­bly go­ing to like Fi­delity.

If you pre­fer An­droid de­vices, where you main­tain some in­de­pen­dence and con­trol over soft­ware and set­tings to con­fig­ure your own way, you’re prob­a­bly go­ing to grav­i­tate to­ward TD Amer­i­trade’s open ar­chi­tec­ture so­lu­tion.

Now, the big­gest of the four is Sch­wab. And I‘d ar­gue that it’s the least dif­fer­en­ti­ated. That’s par­tially at­trib­ut­able the challenge that comes with size; it’s hard to have a fo­cus after the first nearly-$1.5 tril­lion of ad­vi­sor as­sets that Sch­wab al­ready serves.

Sch­wab is usu­ally the most com­pet­i­tive on price. And it has in­cred­i­ble ser­vice depth and ser­vice team ex­pe­ri­ence, in part be­cause it has been do­ing it longer than any of the other RIA cus­to­di­ans since it en­tered the RIA mar­ket­place back in the early 1990s.

Sec­ond-tier cus­to­di­ans: It’s worth not­ing that there is a siz­able range of what are called sec­ond-tier RIA cus­to­di­ans. To be fair, “sec­ond tier” doesn’t nec­es­sar­ily mean in­fe­rior, just smaller — as they’re typ­i­cally con­sid­er­ably smaller than any of the big four.

In prac­tice, this means the plat­forms are of­ten a bit more ex­pen­sive. And be­cause they don’t have the re­sources to be good at ev­ery­thing, they also usu­ally de­velop some kind of niche or spe­cial­iza­tion to serve one type of ad­vi­sor par­tic­u­larly well. This can, how­ever, make them a much bet­ter fit for cer­tain ad­vi­sors.

Case Study

A good case study is Share­hold­ers Ser­vice Group. The SSG plat­form is ac­tu­ally built on top of the Per­sh­ing plat­form, so you’ll see the same Per­sh­ing tech­nol­ogy, but SSG specif­i­cally spe­cial­izes in the small RIA mar­ket­place, i.e., firms with un­der $100 mil­lion. SSG isn’t nec­es­sar­ily the cheap­est, but that doesn’t mean ad­vi­sors pay much of a plat­form fee.

Rather, it sim­ply means that you may find some­what higher ticket charges when buy­ing a stock, ETF or mu­tual fund on the SSG plat­form.

Ad­di­tion­ally, SSG is still one of the only RIA cus­to­di­ans that doesn’t have an as­set min­i­mum to get onto its plat­form, as con­trasted with all the big four that usu­ally have some­where around a $10 mil­lion to $20 mil­lion AUM min­i­mum at any given time.

Be­cause of those as­set min­i­mum lim­i­ta­tions, SSG is by far the most com­mon plat­form among startup RIAS,

es­pe­cially since all the other star­tupfriendly RIA cus­to­di­ans in the past — among them Tradepmr and Scot­trade — have been in­sti­tut­ing as­set min­i­mums for new ad­vi­sors and pe­ri­od­i­cally lift­ing them. And of course, Scot­trade was sold last year to TD Amer­i­trade and is now go­ing to be rolling into the TD Amer­i­trade plat­form, prob­a­bly with the same min­i­mums as its new home.

Work­ing Vir­tu­ally

Many sec­ond-tier RIA cus­to­di­ans try to stand out through their tech­nol­ogy. For in­stance, Tradepmr is known for its Earn­wise mo­bile so­lu­tion, which al­lows ad­vi­sors to man­age vir­tu­ally all their in­vest­ment needs di­rectly through a smart­phone or tablet. If you’re of­ten on the go, work­ing vir­tu­ally with clients and like track­ing and man­ag­ing client ac­counts from your smart­phone, it’s a sound choice.

By con­trast, Trust Com­pany of Amer­ica is best known for re­ally ef­fi­cient model-based trad­ing tech­nol­ogy, mak­ing it easy to keep clients in­vested in a model and al­lo­cated prop­erly. It’s also ap­peal­ing for RIAS who like to use model port­fo­lios for their whole client base. For that rea­son, TCA is pop­u­lar among TAMPS.

Fo­lio In­sti­tu­tional, another player in the sec­ond-tier RIA cus­to­dian space, is also fa­vored by tech-savvy ad­vi­sors who want to go com­pletely pa­per­less.

Fo­lio can han­dle frac­tional shares, en­dear­ing them­selves to smaller firms that may want to add small slices to clients’ di­ver­si­fied port­fo­lios. The plat­form also has more API in­te­gra­tion ca­pa­bil­i­ties than Tradepmr or TCA, a plus for larger firms that want to in­vest into layering their own more cus­tom­ized tech­nol­ogy atop their cus­to­dian’s plat­form.

Then there is Apex Clear­ing, which is ba­si­cally a gi­ant lat­tice­work of APIS that com­mu­ni­cate among them­selves to han­dle all the core func­tions of a cus­tody and clear­ing plat­form — al­beit with­out much of an in­ter­face layer on top.

As a re­sult, most in­de­pen­dent RIAS who choose Apex will go through a mid­dle­ware provider to get the kind of ad­vi­sor dash­board and work­sta­tion that most other RIA cus­to­di­ans al­ready pro­vide. In our space, that would be so­lu­tions like Ro­bust­wealth, Ad­vi­sorengine and In­vest­cloud.

Nonethe­less, be­cause Apex is the new­est of the tech-savvy RIA cus­to­di­ans, it’s built with the most re­cent ca­pa­bil­i­ties and, frankly, makes some of the other RIA cus­to­di­ans look a lit­tle Ne­an­derthal.

To wit, Apex’s soft­ware im­me­di­ately val­i­dates the in­for­ma­tion you en­ter into ac­count ap­pli­ca­tion and trans­fer forms. Imagine a world where your NIGO rate is 0% be­cause the soft­ware helps you fix every prob­lem on the spot, be­fore the pa­per­work is even sub­mit­ted. Con­trast this with other cus­to­dian plat­forms that process your pa­per­work, only to bounce it back days later when a hu­man no­tices a mis­take or omis­sion.

Other Note­wor­thy Cus­to­di­ans

There are a few other cus­to­di­ans worth not­ing as well. Mil­len­nium Trust is par­tic­u­larly pop­u­lar among ad­vi­sors who do a lot of in­vest­ing with al­ter­na­tives, and who want a cus­to­dian that knows how to han­dle non­tra­di­tional as­sets be­yond good old-fash­ioned stocks, bonds, mu­tual funds and ETFS.

And those ad­vi­sors who do a lot of trust busi­ness with clients may be in­ter­ested in Na­tional Ad­vi­sors Trust, which pro­vides not only RIA cus­to­dial ser­vices but cor­po­rate trustee ser­vices as well.

The Na­tional Ad­vi­sors Trust plat­form is also unique in that most RIAS that use it ac­tu­ally be­come share­hold­ers. It’s a kind of RIA cus­to­dian co-op struc­ture. That means you don’t have to worry about the cus­to­dian trust com­pany mak­ing de­ci­sions that po­ten­tially harm you and your clients for the sake of ful­fill­ing its duty to share­hold­ers.

It’s im­por­tant to look closely at RIA cus­to­di­ans’ tech­nol­ogy and in­vest­ment op­tions, and what you can do on their plat­form.

For many ad­vi­sors, the ap­peal of sec­ond-tier cus­to­di­ans is that most of them are in the busi­ness of serv­ing only ad­vi­sors and RIAS, and don’t even have re­tail di­vi­sions. Un­like work­ing with Sch­wab, Fi­delity or TD Amer­i­trade, you never have that awk­ward feel­ing that you’re com­pet­ing for the same client that may also be get­ting so­licited through the cus­to­dian’s re­tail branches.

On the other hand, many ad­vi­sors ac­tu­ally pre­fer Sch­wab, Fi­delity and TD Amer­i­trade pre­cisely be­cause they have a na­tional, big re­tail pres­ence.

Once you nar­row down your po­ten­tial RIA cus­to­dian op­tions, it is im­por­tant to look closely at their tech­nol­ogy, at their in­vest­ment op­tions and at plat­form’s ca­pa­bil­i­ties. En­sure that their core sys­tems re­ally do fit what you do, how you serve clients and how you want to do busi­ness.

But again, with the core tech­nol­ogy it­self in­creas­ingly com­modi­tized in to­day’s mar­ket­place, the savvy ad­vi­sor must pick a cus­to­dial plat­form that’s not only a fit for to­day, but one that can align to what­ever long-term vi­sion you’re set­ting for your prac­tice.

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