Whether you’re an RIA looking for a more optimal custodial relationship or you’re a registered rep looking to move to the RIA environment, the selection of a custodian is a key business decision. But in today’s marketplace, RIAs are increasingly pressured to deliver a unique client experience while balancing the growing complexity of investor needs. It begs the question, is custody enough, or should RIAs expect more from their partnership? InvestmentNews Create spoke with Steve Earner, Senior Vice President of RIA Affiliation at LPL Financial, the #3 custodian and Fortune 500 firm supporting the independent advice marketplace. Earner shared the key factors RIA firms need to consider when making a change.
InvestmentNews Create: What makes selecting a custodian different today from the process in the past?
Steve Earner: Fee compression and demand for additional services have had a large impact on how the role of the custodian continues to evolve. We’ve seen a lot of consolidation at the custodian level, as well as among RIA firms themselves, while new RIAs are being created at an increasingly rapid pace. The playing field now consists of a few large custodians and a few smaller, more specialized custodians. RIA firms of all sizes looking to switch or add a custodian — or for registered representatives considering launching their own advisory business — now need to consider the role they expect the custodian to play in their practice and evaluate their choice based on value rather than cost.
InvestmentNews Create: What are some of the criteria that go into helping an advisor make the best choice regarding a custodian?
Steve Earner: Custody is a commodity. All custodians can execute trades and perform recordkeeping, so you’ll find there isn’t much of a difference there among the various custodians. Where firms start to differ is actually beyond custody. First, it’s important to understand the custodian’s business model and the various ways they make money. Are they exclusively focused on advisors and RIAs, or do they also have lines of business that could compete with your RIA to attract end investors?
Then consider the level of day-to-day support they provide. Is your level of support contingent on the size of your RIA? Will you have dedicated support from a team that knows your particular business, or will you be contacting an 800 number when you need service?
Beyond just custody, where can they add value as a business partner? How are they helping you provide a seamless client experience? How can they help you manage costs? How can they help you manage different functions of your business that you may need help with? And of course, how can they help you grow?
And finally, where are they making strategic investments? The industry is only going to become more complex and demanding. That’s why at LPL, we’re focused on investing in technology, services, and growth support, like providing capital for RIAs to be able to make investments or acquire businesses. These are top areas that RIAs will need continued support.
InvestmentNews Create: How can a custodian support your firm and its growth?
Steve Earner: As an RIA, you are running a business as well as supporting advisors in the delivery of advice to clients. You have to consider both of those roles and how your custodian can support your comprehensive needs.
The right custodian should be able to support your firm’s organic growth as well as possible growth through acquisition or merger. Regarding the former, does the custodian provide help in selecting or providing the right technology and making sure the team understands it and gets the most out of it? Can they offer a tech stack, help an advisor build their own tools, or create a custom combination depending on what’s right for that advisor’s particular business needs? Do they provide guidance and access to outside providers of certain functions, such as investing or compliance, so advisors can spend more time with clients? Can they provide marketing resources? Do they offer practice management guidance to help the business run more efficiently?
Regarding acquisitions, mergers or tuck-ins, will the custodian act to facilitate advisor matchups and provide financing to assist the transaction?
One big concern for many wirehouse breakaways is their residual brokerage business. Those advisors should ask how the custodian can help them. Would they buy that book of business? Would they support the advisor in operating a hybrid business? Could they support one or two advisors at the new firm who wanted to continue their brokerage relationships? A custodian’s ability to customize their offering and serve the advisor in the specific way needed is an important consideration.
InvestmentNews Create: If there’s anything an advisor dreads most — whether it’s an advisor considering becoming an RIA or one who’s adding a custodian or switching to a new one — it’s the onboarding of clients once a custodian has been selected. What should advisors be asking custodians about the transition process?
Steve Earner: Advisors should really dig deep and learn whether there will be specific people at the custodian dedicated to helping them, both in the transition and afterward. Is the custodian committed to providing that dedicated team of people who really get to know the advisor’s business and whom the advisor and their people can rely on and call, or will there be an undifferentiated mass of “support staff”? Is there a designated relationship manager who leads the custodial team throughout the transition and makes sure everything goes smoothly and that the entire process is communicated thoroughly?
For brokers coming to the RIA world, there’s often the additional challenge of not knowing what they don’t know about a world where the compliance, tech tools and procedures are somewhat different. They should make sure their custodian has deep knowledge of the brokerage world, as well as the advisory world, so they can knowledgeably help the advisor make the transition.
InvestmentNews Create: Any takeaways?
Steve Earner: Choosing a custodian is a big decision, but don’t make it just about custody. Your RIA is unique, and the level of support and capabilities is unique. Choose the custodian that not only checks the custody box, but knows your business and your goals, and can lean in to provide the individualized support and services you need to serve your clients and help you flourish.
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Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.