Guarding the Assets
Much has been made (even in the pages of this publication) of adviser movements from the structure (and relative security) of a wirehouse to independent status, and from a commissions-based compensation approach to a fee-only model. However, as any adviser who has contemplated striking out on his own can tell you, there are plenty of decisions to be made, one of which is at what custodian to house your assets.
In some ways, picking a custodian is much like picking a broker/dealer or picking a strategic partner; advisers have to consider many factors about their business needs and the regulatory environment—and you have to understand the value proposition offered by the custodians. That can be hard to quantify, but advisers definitely should evaluate the cultural fit, says Brian Stimpfl, Managing Director, Advisor Advocacy & Industry Affairs at TD AMERITRADE Institutional. They also should be looking for those who are advocates for advisers. “[For example, at TD AMERITRADE,] we care about the things that are important to [the advisers],” he comments, citing the company’s decision to take a public stance against the Merrill Lynch role, including an advertising campaign and public support of the Financial Planning Association lawsuit. While some advisers may look at the custodian decision as simply finding someone to physically hold and bookkeep the assets, Jim Dario, Managing Director at Pershing Advisor Solutions, says there are many products that differentiate one company from another. Advisers need a custodian who is independent, open, and provides “best-of-breed” services, Dario says.
What To Look For
When performing their due diligence, there are a few major categories of inquiry around which registered investment advisers (RIAs) should focus their research, according to experts. First off, in the wake of the Madoff and related scandals, plan sponsor clients are elevating the discussion around safety and security, says Dario, and any RIA looking for a custodian should be asking how the firm they select can help them to deliver their best services to their clients.
Advisers should know what products, investments, and services will be available from the custodian, and how they can meet the needs of advisers’ clients. “You’re got to really make sure that the custodian can handle your business,” Stimpfl says, “Are there any unconventional capabilities or investments that you need?”
There are a number of things custodians can to do help advisers strengthen their relationships with clients, Dario notes. An essential aid to advisers focused on building their client lists or their investment management needs should be looking for a custodian to help provide operational and cost efficiencies to help the adviser build and execute his business plan. Advisers also should ask what types of help the custodian can offer when it comes to new client acquisition and retaining clients, Dario says. For example, he says, Pershing has helped advisers put client surveys in place, providing valuable insights and enhancing the sense of connection with those clients.
A big question for the adviser to ask is whether he feels competition from the custodian for the client. “You want a custodian that will promote you and your brand,” Dario says, “and some advisers may feel they do not get that if there is too much business-to-consumer instead of business-to-business work. [At Pershing,] our goal is not to be noticed by our advisers’ clients,” he explains.
Supporting Fee-Based Services
It is important to point out that there are a number of different models for offering fee-based services and there is no one model that is right, Dario says. “We try to help each adviser find the right path to independence.” While it once was the case that advisers going their own way as RIAs generally came from the independent broker/dealer channel and were somewhat used to having their own business, new trends have emerged. Today, with more advisers moving from the wirehouse channel to RIA status, they sometimes need more help.
“We work quite a bit connecting prospects with current clients,” Stimpfl says. Advisers thinking about making the transition want to connect to people like them who already have made the move to understand what the experience will be like and how it will go.
TD AMERITRADE tries to connect with those clients and understand their technology needs, Stimpfl explains. The company does a lot of demonstrations to prospective advisers so they get to know the programs offered.
Pershing has introduced a practice management program called “Advisor in Transition’ designed to help wirehouse advisers explore alternative affiliation models—like joining or starting a broker/dealer firm, RIA practice, or hybrid firm that offers both commission and fee-based service—and provide them with tools to make that transition.
When it comes to growing their businesses, advisers also should be aware of the services a custodian offers in helping them recruit others to their practices. TD AMERITRADE is planning to help advisers with succession planning—and Stimpfl says the company is planning to roll out a program that helps advisers buy and sell practices.
At Pershing, Dario says, “You want to help them build capacity.” Not only is there human capital to help them understand how to attract and keep team members and design compensation programs, but also seminars on topics such as M&A.
A subset of the question about business growth is that of technology and programs. Custodians can offer not only their own proprietary solutions, but also third-party programs, Stimpfl says. For example, advisers moving from a wirehouse to the RIA space generally need a total technology solution. Pershing is able to help them evaluate vendors and oversee the transition process for the adviser, Dario notes.
Pricing at a custodial firm is different from what those coming from a wirehouse background might be accustomed. All the revenue is yours, says Stimpfl, but you pay the bills—and the custodian. Although as recently as five years ago, price was a differentiator, he says, now even that is somewhat commoditized. Today, what people are looking at as the differentiator are the value-added and value-creating solutions. That is where the pricing differences may apply, Stimpfl comments; some custodians may subsidize or pay for solutions completely, while others may make the advisers who use each service pay for or buy it. When selecting a custodian, advisers must consider not only where they are today, he says, but also where they want to go.
Illustration by Shout