This is the latest installment of a regular column to answer questions from advisors who are considering transitioning to an RIA model. To see Brad’s previous articles, click here. To submit your question, please email Brad here.
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When guiding advisors on how to transition their practices to the RIA model, this is a question I commonly address.
It applies to existing RIAs as well.
With an exception for a few business models (fee-for-service only), RIAs need at least one custodial partner. These firms provide custody of your client’s assets.
Unlike a broker/dealer relationship in which you are formally “affiliated” or “registered” with the broker/dealer, a custodian is a solution provider to the RIA (providing custodial services). There is no affiliation or shared ownership between the two parties. Nor would you want there to be, to protect the integrity of the RIA/custodian relationship.
In the broker/dealer space, you would be registered with one broker/dealer at a time. There is no path where you would be a registered representative of, for example, two wirehouse firms at once, both for competitive reasons and due to various regulatory challenges of such an arrangement.
In the RIA/custodial relationship, this is a moot point. An RIA is not affiliated with the custodian. The latter is one of the solution providers an RIA uses. Technology vendors, compliance consultants, etc., are other examples.
There is no regulatory limitation on using more than one custodian at a time, commonly referred to as being “multi-custodial.”
The question therefore is, should you be a “single-custodial” or “multi-custodial” RIA?
Custodians typically align their value proposition to cater to advisors seeking either a single- or multi- custodial approach, so this is an important consideration when selecting custodian(s) to use.
Let’s start with why you might want to be single custodial.
The custodians that align with such an approach typically work to provide a “fully integrated” platform. With one “plug-and-play” solution, you can access a full tech stack, TAMP resources, wealth management resources, etc.
Advisors leaving a captive broker/dealer environment are already familiar with this approach. It is, in theory, there for you in one offering and arguably much easier for a transition.
If you are satisfied with the offering and remain so, there are compelling reasons to consider such an approach.
Likewise, there are challenges with putting “all your eggs in one basket.”
What happens if:
- the provided technology is no longer on par with other solutions in the marketplace?
- you want to utilize managed money solutions not available on the provided TAMP platform?
- the custodian doesn’t make available certain mutual funds, ETFs, Alternatives, etc., that you desire to use with your clients?
- the custodian is acquired, and now you’re solely doing business with a firm you didn’t originally choose?
- your client needs a margin or non-purpose loan, and the custodian either cannot accommodate the need or cannot do so at a competitive rate?
- your custodian adversely changes their pricing?
- while rare, your custodian changes their mind and no longer desires to be a custodial provider for you?
These are examples of why RIAs choose to be multi-custodial. Both to provide extra flexibility to their practice and to hedge against possible challenges with any one provider.
The prior points are generally reactive scenarios, but there are proactive reasons to consider a multi-approach.
Whether you are single or multi custodial, there might come a time you acquire a practice that uses a different custodian than you. While you have the option to move those assets from their custodian to your existing provider(s), the desired approach is generally to leave the assets where they are and simply look to add that custodian to your list of solution providers.
I have talked to advisors who feel it is important to give a choice of custodians to their clients. While most clients inevitably lean on their advisor to help them make such a selection, the sheer ability to offer such flexibility is important to some advisors in demonstrating the independent value proposition they provide to their clients.
As with everything, though, there is no free lunch.
Being multi-custodial adds additional operational complexity to a practice. Some RIAs also aren’t large enough to either meet the minimum AUM requirements of particular custodians or even if they exceed the minimums, don’t have enough AUM to spread around to make each relationship meaningful enough to be a win-win partnership for each party.
Likewise, many smaller RIAs should consider a single custodian approach either out of necessity or efficiency.
A consideration for joining an existing RIA platform is that you can instantly piggyback on their existing multi-custodial relationships and scale.
Which approach do I generally suggest advisors transitioning to the model pursue?
For advisors/teams of size or who aspire to be of meaningful size, I encourage them to start with a single custodian but build their RIA structure in a way that is conducive to adding custodian(s) at some future point.
There are many variables associated with a transition and trying to learn/accommodate multiple custodial platforms from the jump is an unneeded complexity in that process.
It’s better to start single but with an eye on eventually becoming multi.
That vision drives custodian selection, and your approach to which, among other things, technology and TAMP solutions you plan to use. You don’t want to implement an initial foundation for your RIA that will make your ability to expand to multi-custodial down the line difficult, if not impossible.
These are just a few considerations to be mindful of when embarking on a transition into the RIA model.
Brad Wales is the founder of Transition To RIA, a consulting firm uniquely focused on helping established financial advisors understand everything there is to know about WHY and HOW to transition their practice to the RIA model. Brad utilizes his nearly 20 years of industry experience, including direct RIA related roles in compliance, finance and business development to provide independent advice regarding how advisors can benefit from the advantages of the RIA model.
Read more articles by Brad Wales
This is the latest installment of a regular column to answer questions from advisors who are considering transitioning to an RIA model. To see Brad’s previous articles, click here. To submit your question, please email Brad here.
