Custodians tap into a rising tide in the RIA industry

RIA service providers are notching strong growth in clients and assets under custody, according to a review of publicly available data, as well as information provided directly by firms in the annual InvestmentNews Custody & Clearing surveys. The breakneck pace of RIA growth has allowed new players to enter the landscape even as the largest incumbent players have so far maintained their relative dominance.

All of the custodial firms that submitted to this year’s survey reported year-over-year growth in RIA assets under custody. While the market’s gains have helped, several firms reported asset growth exceeding that of the major stock indices, which points to strong organic growth since advisers and their custodians hold a mix of equity and other assets.

LPL Financial, which repositioned its custodial offering over the past year in response to growth in the RIA channel, led the pack with 53% growth in assets under custody. The firm had provided custodial services mostly for hybrid firms since 2008 but instantly found success with a full-service offering for pure-play RIAs.

“We recognized a unique opportunity for a custodian to provide an integrated experience and deliver upon the promise of partnership, service and support,” said Rich Steinmeier, LPL’s managing director and divisional president of business development. “LPL is taking an intentional approach with supporting RIAs and, as a result, we’re seeing a material inflow of new clients, opportunities and positive market reaction.”

RBC Clearing & Custody and Axos Advisor Services, two smaller custodial firms by asset size, also posted strong growth of 22% and 15%, respectively, according to the survey. Axos is also relatively new to the custodial space, entering through its 2021 acquisition of ETrade Advisor Services from Morgan Stanley.


*SEC registered RIAs with more than one custodian holding at least 10% of assets


CONSOLIDATION AT THE TOP

Of the major custodians, Fidelity, which has not broken out its custodial and clearing businesses since combining them in 2015, was the largest firm to submit information to this year’s survey.

Yet a review of filings with the Securities and Exchange Commission shows that the four largest traditional custodians, which also include Pershing Advisor Solutions and Charles Schwab Corp. as it integrates the recently acquired TD Ameritrade, have maintained their market share over the past two years.

The SEC data cover only advisers that have registered with the SEC, typically once they reach the $100 million under management that triggers federal reporting requirements. Second, these advisers are only required to report custodians who hold more than 10% of their managed assets. Taken together, the regulatory data provide a snapshot of major custodial accounts — those representing a significant portion of a relatively large advisory’s business.

These data show the market share of the top four custodians among major accounts rose slightly to 36.1% at the end of June from 34.6% two years earlier. Combined, that represents annualized growth of 12% in major account assets under custody since 2019. The data likely understate the total market share of the major custodians, since it excludes their smaller clients.

*InvestmentNews Adviser Benchmarking, 2016-2020


But the steady growth is notable since many observers speculated that the 2019 merger of Schwab with TD Ameritrade could provide openings for new custodial competitors, as the combined company would have difficulty maintaining service levels, particularly for smaller RIA clients.

According to Schwab’s latest quarterly earnings report, assets in its Advisor Services segment were up 82% year over year to $3.4 trillion at the end of June, more than accounting for the TD acquisition. The combined company, still about a year away from full integration, has also made assurances that it does not expect to cut any client-facing jobs over that time.

Still, there are plenty of competitors waiting in the wings if the custodial giant falters in its integration of new advisory clients.

“At the very least, the merged Schwabitrade entity has its work cut out to retain a high percentage of the acquired RIA relationships,” Michael Kitces, head of planning strategy at Buckingham Strategic Partners, wrote in a blog post in April, acknowledging that the firm had gotten off to a good start.

“But advisors will need to hear more reassuring things about the environment they’re being forced to move into — and they will be reassured to know that if they don’t like the answers to their questions, they have alternative custodial options who will be actively competing for their business,” Kitces wrote.

Custodians

Reported number of RIA custody clients

Firm Parent company/website Head of RIA custody business # of clients % change vs. 2020 Assets under custody ($M) % change vs. 2020 Minimum assets of advisers  
Interactive Brokers LLC
1 Pickwick Plaza Greenwich, CT 06831
Interactive Brokers Group, Inc.
interactivebrokers.com
Andrea Nagy
Sales Engineer
5,582 24.0% N/D N/A N/A
SEI
One Freedom Valley Dr. Oaks, PA 19456
SEI Investments
seic.com/advisors
Wayne Withrow
Executive Vice President and Unit Head, Independent Advisor Solutions by SEI
1,489 N/A $3,250,000 N/A $5,000,000
RBC Clearing & Custody
60 S. Sixth St. Minneapolis, MN 55402
RBC (Royal Bank of Canada)
rbcclearingandcustody.com
Brett Thorne
President, RBC Clearing & Custody
185 19.4% $28,000 21.7% N/A
Axos Advisor Services (formerly E*TRADE Advisor Services)
7103 South Revere Parkway Centennial, CO 80112
Axos Financial, Inc.
axosadvisorservices.com
Mike Watson
Head of RIA Custody
192 -4.5% $24,842 14.8% N/A
LPL Financial
1055 LPL Way Ft. Mill, SC 29715
lpl.com Marc Cohen
Executive Vice President, Advisor Solutions
N/D N/D $558,971 53.2% N/A
Fidelity Institutional*
245 Summer Street Boston, MA 02210
Fidelity Investments
fidelityinstitutional.fidelity.com
David Canter
EVP, Head of RIA and Family Office Segment
N/D N/A $3,300,000 43.5% N/D
As of May 31, 2021. N/A = not available. N/D = not disclosed.
*As of June 30, 2021, Fidelity Institutional had 4,196 total clients and $3.3T. Firm did not break out custody clients from clearing clients.
Source: InvestmentNews Research; Data self-reported

ADDING NEWS CUSTODIANS

Indeed, the data show a gradual rise in the number of solutions providers in the industry. 

According to recent data from InvestmentNews benchmarking research, produced in partnership with BNY Mellon Pershing, 7% of firms on average added new custodians each year between 2016 and 2020.

However, just 4% on average actually changed custodians in a given year, moving significant client assets from one provider to another. The low cost of the major custodians combined with the hassle of repapering client accounts seems to lead advisory firms to integrate new solutions rather than reinvent the wheel. On average, RIAs kept 85% of assets at their primary custodian.

Yet custodial relationships are beginning to look different. Tyrone Ross, who ran an RIA before co-founding OnRamp Invest to help advisers integrate digital investments, noted that as much as 70% of the trading activity at an advisory now takes place in portfolio management software. He pointed to his own RIA, which used a single custodian, as an example.

“Even with that, we had so many different platforms that we used to get the trading and the active management done for clients, because no one custodian has everything you need,” Ross said.

The blurring of technology with custody, combined with the massive growth of the RIA channel, has enabled new firms to tweak the custodial model and rapidly build customer bases that could pose a challenge to the existing order over the next few years.

Altruist, for example, has built up a client base of more than 1,000 advisers since its 2020 launch. Although the firm does not formally act as a custodian, its technology platform blends in elements of the custodial experience and is widely seen as a potential disruptor. The firm’s clients run the gamut of size, but its all-in-one tech solution may be particularly appealing to smaller advisers and new breakaways.

“The smaller emerging advisers have clients that are just as important as end clients at the larger firms,” said Pete Dorsey, chief strategy and revenue officer at Altruist. “That emerging adviser space certainly has been very much underserved by the industry over the last 20 years.”

By creating a digital-first, RIA-focused platform, Dorsey said, Altruist has tapped efficiencies that will allow it to stand out in the space amid what is likely to be more disruption and consolidation over the next few years. He predicted the firm would have as many as 1,600 advisers on its platform by year-end.

“When there’s money in motion, if you’re not ready for it, you’ve probably missed that wave,” Dorsey said. “I think there’s a lot of momentum going on right now and I don’t see that slowing down.”

RIAS ADD COMPLEXITY

The scaling up of the independent fee-only model is poised to add more demand for multi-custodial and sub-custodial solutions.The number of fee-only firms with more than $1 billion in assets under management has increased by about one-third over the past two years. These firms are growing faster than the industry at large and tend to service larger clients with more complex needs.

As a result, they tend to diversify their custodial services. According to the SEC data, the use of multiple custodians for at least 10% of assets each increases with firm size. While 30% of RIAs with between $100 million and $250 million in assets under management use multiple providers, 72% of those with more than $5 billion under management do.

While custodians may have competed on the depth and breadth of their own platform in the past, increasingly they may be judged by RIAs on how well they integrate outside solutions. Many advisers will want a backbone upon which to customize their practice’s platform through APIs. The disruptors and the incumbents can coexist, at least at larger practices.

“RIAs are saying, ‘OK, what are the integrations that these custodians have with some of the folks that I use, and does it make it easy for me to run my book of business at that custodian?’” Ross said. “That’s going to win the day over the next couple of years.”

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Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.

Andrew Vincent
Andrew is half-human, half-gamer. He's also a science fiction author writing for BleeBot.
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