This is the eighth installment in a Financial Planning series by Chief Correspondent Tobias Salinger on how to build a successful RIA. See the previous stories here, or find them by following Salinger on LinkedIn.
The choice of Charles Schwab, Fidelity Investments, BNY’s Pershing or another custodian represents one of the most important vendor decisions for registered investment advisory firms.
To oversee client assets and execute trades, RIAs must pick among the clearing and custody units of those three giants and other large firms like LPL Financial, Raymond James, Wells Fargo or Goldman Sachs or an expanding group of small to midsize rivals. Most RIAs select just one, but a rising number have two or more. And disruptors such as Altruist are gaining ground on the traditional incumbents with a pitch based on flexibility and newer technology.
Questions about custodial tech loom large when financial advisors decide to switch firms, launch an RIA or learn that the brokerage or RIA firm that currently employs them has sold to a competitor. Advisors need to weigh custodians’ offers of transitional assistance, tech capabilities and other resources against the potential challenges posed by a possible change in providers — an infamous process often referred to as “repapering” because of the requirement for clients to complete new contracts or other forms.
But that “overblown” concern stems from moves 10 or 15 years ago, an era “before we had such really good digital onboarding tools as we have today,” said Shelby Nicholl, founder of advisor recruiting and consulting firm Muriel Consulting. Those labor-intensive tasks came during “a really emotional, high-intensity time” involving advisors leaving, say, a wirehouse brokerage that had previously employed them their entire careers, she noted.
“That move was really hard. You maybe couldn’t leave with any client information. You had to recreate all your client recordkeeping,” Nicholl said, drawing a contrast with procedures today marked by the prepopulation of easy online forms for customers. “They’re getting one email with all their papers and hitting Docusign. It’s all really simple, so we shouldn’t be as afraid of repapering as we are. The switching costs have come way down.”
READ MORE: Move from Ameritrade a long and bumpy road for RIAs and Schwab
Other factors in play when selecting a custodian
Nicholl recommended that RIAs consider three criteria: their functional necessities, financial considerations and whether the prospective custodian’s existing base of advisory team clients reflects their firm’s characteristics.
In the due diligence phase, it’s important for RIAs to “do a couple of demos with some of the better-known players and just get a feel” for clients’ experiences logging in and getting some information, according to Simon Hoyle, founder of advisor recruiting and consulting firm RIA Choice. Simple inertia may play an outsize role for teams with a lot of older clients who just “don’t like change, to a large extent,” Hoyle noted.
“You really analyze everything that you need today and take a look at where your business will be in five to 10 years,” he said. “The good news is that the custodial space is extremely competitive, and they’ve all got some specialties.”
Brad Wales, the founder of consulting firm Transition to RIA, frequently tells advisors that 85% of the custodians’ services are pretty much equal to each other, with the rest of their decision coming down to “what’s important to a particular advisory team,” he said. Some custodians may take themselves out of the running with minimum asset levels for an advisory practice to gain access, while certain advisors care more about one factor than others, he noted.
“It can be a difficult process to make that decision. No one custodian clears a trade better than another,” Wales said. “There’s no consistency. Some advisors are sensitive to one thing, and others are not at all sensitive to it.”
READ MORE: Pershing, Northwestern Mutual and the industry’s fierce custodial fight
Pick your fighter
A dearth of available statistics about the size of custodians’ business adds to the murkiness, but the industry typically refers to Schwab, Fidelity and Pershing as the largest players, in that order. Out of those three, only Pershing regularly states its exact assets under custody or administration and accounts in the quarterly earnings reports by its megabank parent.
The “self-clearing” firms such as LPL and Raymond James pitch the services of their custodial units as part of their value proposition on the recruiting trail, and the implications of M&A deals and moves can create winners and losers if advisors must switch to a new custodian upon close of the transaction or completion of a team’s exit. The Schwab and Fidelity referral networks also amount to expensive but much-coveted perks for some RIAs.
M&A deals involving custodians themselves have been driving further shifts in recent years. The biggest example, of course, came with Schwab’s purchase of TD Ameritrade, but others have reshaped the channel as well, such as Goldman Sachs’ acquisition of Folio Financial, Altruist’s rollup of Shareholders Service Group, Robinhood’s buy of TradePMR and Axos Clearing’s deal for E-Trade Advisor Services (a firm once known as Trust Company of America and now called Axos Advisor Services). If that weren’t enough, players like Wells Fargo, Interactive Brokers, RBC, Apex Clearing and SEI do substantial business across the industry, and still other firms are breaking into the custodian arena in one way or another. With the continuing record volume and size of RIAs, clearing and custody represent one more way for firms to do business with them.
READ MORE: A brand-new client is onboarding — what should you tell them to bring?
Issues of inertia and expense
However, 80% of RIAs made no move whatsoever with their custodian last year, according to an annual trends report compiled by industry research firm AdvizorPro. Nearly 12% added a new custodian to their existing vendor, 5% removed one or more firms from its list and 3% both eliminated or picked up a new clearing and custody provider. The number of RIAs with multiple custodians rose 5% year over year to 6,253 in 2024. Schwab gained the most RIA clients for the year, followed by Altruist, Fidelity, Interactive Brokers, LPL, JPMorgan Chase, Ascencus and Goldman. The growing footprint of Altruist and migrations toward multiple custodians stood out in the AdvizorPro analysis of RIA filings with the Securities and Exchange Commission.
“With a 111.7% increase, Altruist’s expansion is indicative of RIAs’ growing preference for custodians that offer integrated technology solutions, aligning with the industry’s digital transformation,” according to the report. “The increase in RIAs using multiple custodians reflects a strategic approach to diversify service offerings and mitigate risks associated with relying on a single provider. … The frequent combination of Schwab and Fidelity suggests that RIAs value the complementary strengths of these custodians.”
In every decision, costs play some role, whether in terms of transaction or asset-based fees or the expenses of switching custodians, according to Wales. Advisory teams should know going into the decision that “one could be significantly more profitable for a custodian than another one,” so they “may or may not be a very good revenue generator for them,” he said. But incoming teams of a certain size could pick up some financial assistance from their new custodian toward the cost of the move.
“They typically will try to put together some sort of an offer to help you make the transition,” Wales said. “It’s usually very defined what that money can be spent on, so it’s not, ‘Hey, here’s a check, go do what you want with it.'”
READ MORE: Charles Schwab plans to hike its referral fees. How will RIAs respond?
Key takeaways
Beyond the fees and technology, RIAs will want to evaluate whether a prospective custodian enables or hinders the delivery of particular products such as alternative investments or whether that firm would enhance or harm services to an advisory practice’s niche of clients, Hoyle said.
“Make sure that they have what you’re going to need,” Hoyle said. “It really comes down to making sure you’re taking a look at your business first and then back into who might be a good partner for you.”
That choice reflects any number of specific circumstances, Nicholl said. That could include access to alternative products, the fact that one advisory firm’s clients have a lot of holdings in Fidelity 401(k) accounts that would fit that company’s custodian best, an RIA’s preference to tap into a single provider with “an integrated tech stack,” or another advisory team’s proclivity to have more banking services at the ready, she noted. And there are independent consultants available to work through the options with advisors considering a new custodian.
“One of the things that’s very difficult for advisors is sorting through the pitches of the various custodians or broker-dealers,” Nicholl said. “We’ve seen their dog and pony show previously, we know what’s behind the curtains and we can guide you through that process.”
