Advisors who are interested in starting their own advisory firm, or breaking away from an existing one, face a number of important business decisions – from how they want to structure their firm, to what clientele they will target, what software they will adopt, and when/whether they want to hire staff or outsource certain responsibilities. For advisors who want to provide investment management services to their clients, though, and intend to play an active role in managing and implementing client portfolios, one of the most important decisions they face is which RIA custodian they should work with.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore how to choose the best independent RIA custodian for your business, including the advantages of working with one of the “Big Four” custodians (Schwab, Fidelity, TD Ameritrade, and Pershing Advisor Solutions), as well the reasons why some firms may find a better fit among smaller “second-tier” custodians with more niche offerings for certain types of RIAs!
The first thing to consider when contemplating an RIA custodial relationship, is whether a custodian is actually needed in the first place. For advisors who are simply going to charge financial planning fees, and bill clients with a third-party payment processing solution for those finanical planning fees, and while letting clients continue to be self-directed with their actual portfolios (or serve clients who simply don’t have portfolios to invest), then the advisor does need to become an RIA, but doesn’t necessarily need an RIA custodian. However, given the dominance of the AUM model, and the number of advisors who do want to manage investments, most independent RIAs will ultimately form a relationship with one or more of the top RIA custodians.
For those independent RIAs that do need to use an RIA custodian, the overwhelming majority ultimately custody their assets at one of four major firms: Schwab, Fidelity, TD Ameritrade, and Pershing Advisor Solutions. Due to their sheer size and market reach, these providers all already provide the core technology necessary to trade in client investment accounts, hold a wide range of standard investment assets, facilitate the advisor’s AUM billing, and do it all at an incredibly low cost. In fact, there is generally no platform fee to work with these custodians at all, and instead these platforms make their money indirectly through ticket charges, asset-based wrap fees, 12b-1 and similar revenue-sharing fees via their NTF (No Transaction Fee) platform, receiving a fee for serving as the transfer agent, or making a small spread on the money market or other cash positions that clients hold.
Notwithstanding how commoditized the core services of an RIA custodian have become, though, each does still have its own style or area of focus. Pershing Advisor Solutions aims to work primarily with larger RIAs that are specifically focused on growing a large enterprise business. TD Ameritrade is known best for their VEO One platform, which essentially functions as an open architecture hub that most other advisor technology can integrate into. Fidelity is increasingly being known for their Wealthscape platform, which is increasingly being positioned as a “true” all-in-one platform, especially for comprehensive wealth management firms that combine together investment management and financial planning. And Schwab, as the largest of the four, is arguably the least differentiated, but handles the widest range of firms with what is usually the lowest cost, in part because they’ve literally been doing it longer than (and are larger with more scale than) any of the other RIA custodians.
Despite the popularity of the Big Four custodial firms, there are also a wide range of “second-tier” custodial firms (meaning “second-tier” in terms of size, not necessarily quality) that offer solutions for many independent RIAs. Shareholders Service Group (SSG) is a platform that is actually built on top of the Pershing platform, but SSG specifically services the “small RIA” marketplace, and may be of particular interest to newer firms which do not meet the typically $10 to $20 million AUM minimums of many custodians (including zero-AUM startups). TradePMR is particularly well known for their EarnWise mobile solution that allows you to manage most of your investment needs as the advisor directly from a smartphone or tablet. Trust Company of America is best known for their really efficient model-based trading tools, appealing to both advisory firms that systematize their investment process, and TAMPs that serve other RIAs. Folio Institutional is also known for being a particularly tech-savvy platform, for advisors that want to be completely paperless, and have good tools to manage model portfolios, as well as those who work with smaller clientele where Folio’s ability to trade fractional shares is very appealing. Apex Clearing is a newcomer that is actually so “tech-savvy” that they’re basically just a giant lattice-work of technology APIs that communicate with other advisor technology APIs, but without much of an “interface” layer on top (and as a result, most independent RIAs that work with Apex will work with them through another middleware provider like RobustWealth, AdvisorEngine, or InvestCloud to replace the kind of advisor dashboard and workstation that most of the other RIA custodians already provide). Other notable firms include Millennium Trust Company for RIAs that do a lot of alternative investing, and National Advisors Trust Company for firms that do a lot of trust business (and/or want the opportunity to be a shareholder in their platform).
Of course, even once you narrow down your potential RIA custodian options based on fit, it’s important to spend some time really looking at their technology, and their investment options, and make sure that their core systems really do fit what you do, how you serve your clients, and how you want to do business. But the key point is to acknowledge that no single custodian is best for all advisors, and given the substantial costs of switching from one RIA custodian to another, it is worthwhile to try to figure out upfront which custodian is the best for you, and not just in the short-term, but ideally in the long-run too!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome, everyone! Welcome to Office Hours with Michael Kitces.
For this week’s Office Hours, I want to talk about one of the most common questions that I hear both from newer advisors who are launching an RIA to start their business, and even from experienced advisors who are breaking away from broker-dealer and about to become a standalone RIA, which is this question of:
“What’s the best RIA custodian to use?”
Of course, the reality is if you’re solely going to operate as a fee-for-service financial planning firm and not actually manage client portfolios directly, you don’t actually have to have a relationship with an RIA custodian at all just to operate as a Registered Investment Advisor. The RIA custodian relationship really only begins once you want to help clients actually implement their portfolios and need access to trade on their behalf to be able to directly bill their investment accounts for your advisory services.
And so if you’re simply going to charge planning fees, bill your clients directly with a third party payment processing solution like our AdvicePay platform, and let the client continue to be self-directed with their portfolios (or are working with the sorts of clients who don’t have portfolios to invest), then you still have to become an RIA, but you don’t necessarily need an RIA custodian, because the role of the custodian basically is to hold the clients’ investment assets, which is a moot point if you’re not working with clients and their investment assets.
But given the continued dominance of the AUM (assets under management) model amongst RIAs – which, as I’ve written in the past, I don’t think it changes anytime soon even with the growth of advisors using alternative fee-for-service models to bring advice to new segments of consumers – most RIAs still on the AUM model still have to make this decision: Which RIA custodian is best for me to use?
The Big Four Top Independent RIA Custodians [Time – 1:51]
The overwhelming majority of independent RIAs ultimately custody their assets at one of four major firms: Schwab, Fidelity, TD Ameritrade, and Pershing Advisor Solutions, which are, in that order, the largest to smallest based on their market share of advisor assets.
And because of the sheer size and market reach they already have, the reality is actually that all four of them already provide substantively similar services. They’ve all got core technology necessary to trade and bill clients. They can all hold a wide range of standard investment assets. They can all facilitate your billing. They’ve all got frankly really incredibly low-cost. None of the major RIA custodians even charge a platform fee or take a percentage of your revenue the way that broker-dealers work and the way actually that most RIA-equivalent platforms work in other countries. And instead, they just use their incredible size and scale of hundreds of billions of dollars or for some even more than $1 trillion of assets on their platform to make what amounts to a very, very small scrape from a very, very large number of transactions.
So ultimately, most of these platforms make their money earning ticket charges whenever your clients trade. You know, $5 or $7 or $10 per trade fee, maybe a small asset-based wrap fee. Some participate in 12b-1 fees as part of their no-transaction-fee or NTF platform. Some of them get a small number of basis points that are paid from asset managers for the custodian’s role as transfer agent, or they make some very small spread on money market or other cash positions that clients hold. All of which are really very small dollar amounts for each event or transaction but really add up after first couple hundred billion dollars of advisor assets.
And so, in practice, most advisors don’t simply pick an RIA custodian by their sort of cost and basic capabilities, but more for their particular focus or the style of an advisor for which they’re the best fit. In this context, there are some notable differences even amongst the top four RIA custodians.
Pershing Advisor Solutions aims to work primarily with larger RIAs that are specifically focused on growing a large business. Not just a successful and profitable practice, but a business that’s going to be hundreds of millions or billions of dollars of AUM. And this stems in large part from the fact that their CEO is Mark Tibergien, who spent more than a decade leading the practice management consulting division of Moss Adams and is still absolutely one of the leading experts on practice management and business strategy for RIAs.
So Pershing Advisor Solutions is particularly popular for a lot of large breakaway teams from wirehouses – larger independent broker-dealer breakaways who value that kind of deep practice management support in pursuit of building and scaling a business. And the global banking capabilities that come from Pershing’s Bank of New York, now BNY Melon, is also a selling point if you’re working in the ultra-high-net-worth space where you want a little bit of that global banking capability crossover.
TD Ameritrade, on the other hand, is best known for their Veo One platform, which essentially operates as an open architecture hub that not only facilitates trading and activity on their platform but that most other advisor technology tools can integrate into. Which means TD Ameritrade is really the best fit for advisors who have a vision of some particular tech stack combination that they want to have, or more generally, value the control of selecting their own tech components one by one, plugging them in themselves, and keeping their independence by not necessarily needing to rely as much on the custodian’s own proprietary platform. Although TD Ameritrade actually does have some very good proprietary technology of their own around their investment capabilities, including a free online version of iRebal for TD Ameritrade advisors, which was the original and is still one of the most popular rebalancing software solutions.
Fidelity is increasingly being known for their Wealthscape platform, which is being positioned sort of as a true all-in-one platform, especially for comprehensive wealth management firms. Their decision about three years ago now to buy eMoney Advisor, which was and still is one of the leading financial planning software solutions for advisors and more and more deeply integrated into Wealthscape, and their automated managed platform solution, makes it very appealing for planning-centric firms that want to build towards financial planning, investment management, this kind of holistic wealth management offering.
Of course, you can use eMoney Advisor with any custodian, but expect eMoney to be more and more deeply integrated into Fidelity’s Wealthscape in the coming years. Which, if you’re a holistic planning-centric advisor, is going to make you very interested in Fidelity’s increasingly all-in-one data-centric offering. Or by analogy, if you like Apple devices, where everything is managed by Apple and it just works, you’re probably going to like Fidelity in the future. If you prefer Google Android devices, where you maintain your independence and control everything, configure all your settings your own way, you’re probably going to go more towards TD Ameritrade’s open architecture solution.
Now, of the four, the biggest again is Schwab. And perhaps not coincidentally because Schwab is the biggest, I would actually argue that they’re the least differentiated of them all. In part, that’s simply the challenge that comes with size. It’s hard to have a focus after the first $1 trillion of advisor assets that Schwab already serves. And so Schwab simply continues to compete with just the size and scale of what they do. They are often the most competitive on price because of what their scale allows. They have incredibly deep service depth and service team experience, in part because they’re the largest and in part because they’ve literally been doing it longer than any of the other RIA custodians. Because Schwab Advisor Services was the first to really seriously pivot into the RIA marketplace all the way back in the early 1990s.
And so while it’s hard to assign a lot of distinguishing features to Schwab, the simple fact that they’re the biggest and the most experienced and the most scaled wins them a lot of business and is why they’ve been able to maintain their market leader position for so long.
RIA Custodian Platform Minimums And The “Second Tier” Custodians [Time – 7:48]
All that being said about the four top RIA custodians, it’s worth noting that there is a pretty big range of what are often called second-tier RIA custodians as well. Now, to be fair, the second-tier label doesn’t necessarily mean they’re worse or inferior or lower quality or anything, it is simply because they’re smaller. And in most cases, literally, like 10 to 100 times smaller than any of the big four. And so they simply don’t have the scale of the rest. Which means, in practice, they’re often (a) at least a little bit more expensive because they just don’t have the scale to generate the cost savings, and (b) they usually develop some kind of niche or specialization of their own because they don’t have the resources to be good at everything, but they can get really good at one thing or one particular type of advisor in particular. Which, in turn, ends up meaning it’s often more appealing to choose them even if they’re sometimes a little bit more expensive because, for some advisors, they’re a much better fit.
A good case in point example is Shareholders Service Group (SSG). The SSG platform is actually built on top of the Pershing platform, so you’ll see the same Pershing technology, but SSG specifically services the small RIA marketplace. Generally under $100 million, all the way down to $0.
And in fact, SSG is still one of the only RIA custodians that does not have an asset minimum to get onto their platform, as contrasted with all the big four that usually have somewhere around a $10 to $20 million AUM minimum at any given time to get on their platform, unless you have some special circumstance where basically you can prove you’re very likely to hit those numbers very quickly after launch. Otherwise, you really can’t even get onto those platforms unless you have special access to them through some other affiliation. Maybe you tuck in under a TAMP, you tuck in under some larger RIA. You know, we have a partnership with XY Planning Network and TD Ameritrade to allow our advisors onto the TDA platform even if they don’t have assets yet. Not a lot of options though to get to the big four if you’re not already bringing assets to the table.
And so, because of those asset minimum limitations for most advisors, SSG is by far the most common platform today for startup RIAs, especially since all the other startup-friendly RIA custodians in the past like TradePMR and Scottrade have been instituting asset minimums for new advisors in recent years and lifting that threshold up. And of course, last year Scottrade was sold to TD Ameritrade and is now going to be rolling the TD Ameritrade platform anyways likely with their minimums.
Now, it’s worth noting, SSG isn’t necessarily the cheapest. That’s part of the trade-off when you’re a smaller advisor and especially a start-up, but those costs don’t necessarily mean advisors have to pay much of a platform fee, it simply means that you may find your clients have somewhat higher costs when it comes to things like ticket charges to buy a stock or an ETF or a mutual fund on the SSG platform. But you can work with them because they are startup-friendly.
Now, many of the second-tier RIA custodians try to differentiate specifically through their technology, often built for a particular type of advisor or do a particular thing well. So, for instance, TradePMR is especially well known for their EarnWise mobile solution that allows you to manage pretty much all of your investment needs as an advisor directly through a smartphone or tablet. Very appealing if you’re an advisor on the go, you work virtually with clients, or just, in general, those who are more tech-savvy and like the idea of being able to trade your clients’ accounts or check the status of an account opening or a transfer form from your smartphone.
By contrast, Trust Company of America is best known for their technology that does really efficient model-based trading, makes it very easy to keep clients invested to a model and allocated properly, very appealing for RIAs that like to use model portfolios for their whole client base. And TCA, because of that reason, is especially popular amongst a lot of TAMPs (turnkey asset management platforms), or, more generally, any RIA that likes to be an investment manager that offers their models to other RIAs, and then trades all of those advisors and clients consistently using the TCA software.
Folio Institutional is another one in the second-tier RIA custodian space. They’re also known for a particularly tech-savvy platform for advisors that want to be completely paperless. Folio was early to the game there and have good tools for managing model portfolios as well and also are unique in being able to support smaller clientele because Folio can actually handle fractional shares, which is very appealing if you want to buy very small slices for clients as part of their diversified portfolio. Folio is also popular amongst a small subset of firms that really want to customize their advisory firm experience because Folio actually has more API integration capabilities than TradePMR or TCA. And so, those that really want to build some of their own technology layer and client experience on top of their custodian will often go the Folio route.
Now, the latest newcomer in the tech-savvy second-tier RIA custodian platform space is Apex Clearing, which is actually so tech-savvy that they’re basically just a giant latticework of technology APIs that communicate with other technology APIs and just makes everything talk to each other, but without as much of an interface layer on top. And so, as a result, most independent RIAs that are going to work with Apex will work with them through another middleware provider. In our advisor space, that would be solutions like RobustWealth, AdvisorEngine, InvestCloud, to replace the kind of advisor dashboard and workstation that most of the other RIA custodians already provide.
Nonetheless, because Apex is the newest of the tech-savvy RIA custodians, they’re built with the most recent tech capabilities and frankly make some of the other RIA custodians look a little Neanderthal by comparison. For instance, most advisors, we’ve all had the frustration of NIGOs. When you submit paperwork to open an account or do a transfer, only to find out usually like three to five days later that the paperwork is NIGO (not in good order), and it’s being bounced back to be fixed.
With Apex, their software just validates right when you enter the information whether it’s all there and correct. And so if there’s anything missing, you hit the “submit” button and it just prompts you on the spot to fill in what you’re missing. Rather than taking the paperwork, processing the paperwork, and then bouncing it back to you days later when a human realizes the mistake. It’s really RIA custodian technology the way you’d expect all of them to work, and hopefully eventually someday they’ll all step up to Apex’s capabilities and actually work that consistently. But at this point, it’s an edge for Apex over some of the others.
Beyond those who try to select their RIA custodial platform based on tech savviness, there are a few others worth noting as well. Millennium Trust Company is particularly well known for advisors who do a lot of investing with alternatives and want a custodian who knows how to handle non-traditional assets besides just the good old-fashioned stocks, bonds, mutual funds, and ETFs.
And for those who do a lot of trust business with clients, you may be interested in National Advisors Trust Company, which provides not only RIA custodial services, but corporate trustee services as well and are unique because most RIAs that use National Advisors Trust platform actually become shareholders of National Advisors Trust Company. It’s a kind of RIA custodian co-op structure. That means you don’t have to worry about the custodian trust company making decisions that potentially harm you and your clients for the sake of fulfilling their duty to shareholders because their RIAs are their shareholders.
In fact, it’s worth knowing that for many advisors, the appeal of these second-tier custodians is that most of them are only in the business of serving advisors and RIAs and don’t even have retail divisions and call it sometimes other “distractions” about where their business resources and focus are going. So unlike working with Schwab or Fidelity or TD Ameritrade, you never have that awkward feeling with most of the other custodians that you’re competing with your RIA custodian for the same clients that may also be getting solicited through their retail branches.
Although on the other hand, I know a lot of advisors who actually prefer Schwab and Fidelity and TD Ameritrade in particular because they have a national, big retail presence. Which means when you tell your clients their assets will be held there, you don’t get the question like, “Wait, where will my money be held?” Which a lot of people care about since Madoff. And so instead, they’ll hear a brand name they already know and trust. “You assets will be held at Schwab. Your assets will be held in Fidelity.” And it gives them some assurance that if they ever decide they’re unhappy and they want to leave you as their advisor, they can simply switch their money to a retail account. They don’t even have to move it, which may be reassuring for some nervous clients. So to each their own about their preferences.
Of course, I’d ultimately encourage that once you narrow down your potential RIA custodian options based on fit and maybe some of the discussion here, to still spend time looking at their technology, at their investment options, and what you can do on their platform, to make sure that their core systems really do fit what you do, how you serve your clients, and how you want to do business.
But again, because the core technology itself is increasingly commoditized in today’s marketplace, it’s really these other factors of where the firm is focused and what they’re known for, that I think matters a lot in identifying the “best fit”. Because while you can change custodians and move assets, ideally, you want to pick a platform that’s not only a good fit for you now, but is likely a good fit for you in the long run as well, which means picking one that is best aligned to your model or your focus and how you do business.
In any event, though, I hope this is helpful as some food for thought about both the four top RIA custodians, the second-tier RIA custodians, and trying to figure out which is the best RIA custodian. Which, as you may have gathered from the discussion, really comes down to figuring out which is the best RIA custodian for you and your particular needs in the advisory business.
This is Office Hours with Michael Kitces, normally 1 p.m. East Coast time on Tuesdays, but unfortunately I was traveling yesterday and on a plane at this time, and so we’re broadcasting today instead. Thanks for joining us, everyone, and have a great day!
So what do you think? How did you choose your RIA custodian? What characteristics do you think are most important in a custodian? In what areas do you wish custodians would improve? Please share your thoughts in the comments below!