Third party custodians provide a critical back-office function for RIAs – and beyond the important job of safeguarding client assets, they have more sway over operations than one might initially expect.
Over the past 15 years or so, custodial offerings have evolved alongside the growing RIA landscape. Today’s custodian is a gateway to investment products and plays a key role in the tech stack, in addition to offering other benefits.
This means RIAs of all sizes have different pricing options, service models and providers to consider. Firm owners should be assessing whether their current custodial arrangement suits the way they want to run and grow their firms, or if it’s time to shake things up.
The following checklist is a good starting point.
Impartial access
Is my custodian’s pricing structure contingent on whether I use its investment products? Custodians that also have fund management businesses may charge lower trading fees – or none at all – on their own products as a way to drive assets into them. While a supermarket of similar products may be available, it’s not a level playing field if the best prices only apply to the “house-brand.”
This isn’t an indictment against the custodian’s offerings, particularly if performance mirrors or is better than their peers. After all, independent RIAs are fiduciaries first, so they should be considering products that offer the greatest returns with the lowest fees for their clients’ portfolios.
This is, however, a call to recognize that in these situations, the RIA custodian isn’t providing impartial access to the products in its supermarket. Advisors should closely examine whether the investment and trading fees they pass along to clients are justified by the services they receive from their custodian versus what they could receive from another vendor.
Best-in-class pricing
The investment product platform isn’t the only area where RIAs should look for the fine print on custodial fees.
Plenty of custodians offer complimentary services to their best (read: largest or most profitable) clients. Firms that don’t meet a certain threshold may find some resources to be off-limits or come at an additional cost.
Case in point: the $100M AUM threshold imposed by some custodians can be needlessly burdensome for growing firms. It can also be a red flag about the services they’ll receive or fees they’ll have to pay if they are below the minimum.
Like anything else, RIA owners should understand what their custodian’s fees cover and what they don’t. Compare the pricing structures and services at multiple custodians based on how the firm operates today and its projected growth to see how the costs net out.
Paying for what you need and use to manage clients makes sense – being charged extra for services you thought were part of the original agreement does not.
Flexibility for your business
Some RIA owners are surprised to discover that their custodian has a say in firm operations.
For example, some custodians make it extremely difficult – if not impossible – to trade international equities. This won’t do for RIAs with offshore clients. They need a platform that makes cross-border trading and transacting easy and seamless.
Advisors who want international access should use platforms that actively enable this capability.
At the end of the day, RIAs need custodians that are flexible enough to support the way they want to run their business and manage client assets. Custodians are integral, but they shouldn’t steer your business.
Are referral networks a ‘must have’?
Referral networks are the holy grail to some, but plenty of RIAs are successful without them. That said, advisors who participate in their custodian’s referral network should ensure they are getting the maximum benefit out of the program. Firms that do not qualify should ensure they are not charged fees to underwrite services they cannot access.
Certainly, referral networks may offer a pipeline of new business for the limited number of firms included in them. But most RIAs never make it into this inner circle and frankly, don’t need the safety net.
Conflicts of interest
Each RIA must decide if they want their custodian as a potential competitor. Most major custodians have in-house teams of financial advisor employees working with individual investors. In many cases, this is how custodians build a prospect funnel for their referral networks.
Advisors who prefer their custodian not compete with them for new business would do well to seek out ones that don’t have these conflicts.
Technology that serves you
Custodians who offer RIAs a robust technology platform lock in the relationship for the long term – or so the thinking goes. Today, the typical offering includes some mix of built-in tools and open architecture, so RIAs can bolt on applications.
The question then becomes: is my custodian’s platform innovative and flexible enough?
Advisors should seek out tools and technology that meet their current needs and can evolve with the firm. This means innovative, automated platforms that simplify trading and make client portfolio management efficient and cost-effective.
Whether the tech stack is free or available with a fee, advisors should be on a platform that works with them, as streamlined and seamlessly as possible.
Often switching to a multi-custodial model helps close gaps that come with using just one custodian. Thanks to advances in digital onboarding, a wholesale switch is less intimidating and easier than it once was. In fact, our recent survey found that 64 percent of advisors use at least two custodians, and more than a third (34 percent) use three or more.
Even established RIAs don’t know what they don’t know about their custodian. A periodic review of the agreements can help RIA owners understand how their custodian’s services and pricing stacks up against competitors.
If the firm’s relationship with its custodian is in great shape, congratulations! RIAs that come up short on services may find it’s time to take a closer look under the hood.
Steve Sanders is Executive Vice President of Marketing & Product Development at Interactive Brokers.
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Third party custodians provide a critical back-office function for RIAs – and beyond the important job of safeguarding client assets, they have more sway over operations than one might initially expect.
