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.
