From one angle, the outlook for custodians serving registered investment advisors looks challenging.
For starters, firms holding assets for RIAs must cope with the same difficult environment that RIAs and investors now face. As Greg Vigrass, president of Folio Institutional, says, "the high level of economic concerns is creating a challenging investment environment, nationally and globally."
Among the top issues facing RIA custodians, Vigrass also lists the retirement income and longevity needs of RIA clients, as well as changes in regulation.
Craig Gordon, director of RBC Correspondent Services, cites "continually shrinking margins" as an obstacle that RIA custodians now encounter, largely because of competition and skimpy yields in a low interest rate environment that is likely to continue. "It's difficult to be compensated for the services we provide," Gordon says.
EXPANDING THE UNIVERSE
But the outlook is hardly bleak. In fact, the big picture is quite positive. The breakaway broker trend is well established and is likely to keep accelerating. "There are thousands of advisors who are candidates to become an RIA or join an RIA firm," says Brian Davis, director of Scottrade Advisor Services. More RIAs will mean more RIA assets to hold, so the pie is likely to keep growing and provide profit opportunities for savvy custodians.
"Large fee-based advisors leaving the wirehouses are looking for an integrated broker-dealer and custody solution that provides the independence they desire and the support they demand," says Derek Bruton, managing director and national sales manager for LPL. "They need help to bridge the gap from employee to independence."
That help, Bruton explains, may involve supporting RIAs who are adapting to new conditions and responding to new opportunities. For example, he notes, a fee-only advisor may buy a practice that includes a brokerage business and pursue a hybrid model going forward. "Or," he says, "due to the changing regulatory environment, a hybrid RIA advisor may choose to transition to an investment advisory representative rather than maintain their own RIA."
In yet another scenario, a traditional brokerage advisor may shift to a fee-focused practice to take advantage of new opportunities and convert to a hybrid model. "Our flexible and seamless approach allows advisors to make these types of transitions," Bruton asserts.
Smaller custodial firm National Advisors Trust aims to compete by focusing more narrowly on assets held in trust. "Among the top issues facing RIAs are trusts and trust services," says Cindy Ralls, the firm's vice president of marketing and advisor relations. "Those are becoming increasingly important to RIAs serving an aging clientele that is preparing for the transition of their assets to the next generation."
The problem for RIAs can be holding on to trust assets. "If RIAs are not named in a trust document," Ralls says, "there is a high probability that the assets they are managing today will walk down the street to the local bank or pass to the next generation without their involvement."
National Advisors Trust tries to provide RIAs with services that can help establish and extend multigenerational relationships. "Our trust services can meet RIA clients' unique needs and asset mixes," Ralls explains. "This includes standard and nonstandard assets with a strong degree of personalization and adaptability with trust administration services."
WELCOME TO OUR WORLD
A focus on trusts is not the only niche strategy open to RIA custodians. "We work largely with new and emerging RIAs," says RBC's Gordon. "Especially if they're coming from traditional full-service firms, they need the most help dealing with transition issues."
Those issues can include finding office space, setting up an IT system, acquiring the necessary licenses and dealing with employee benefits. "New RIAs are often willing to pay for the services they need," Gordon says, "which creates added revenue opportunities for us."
Gordon adds that RIAs who use RBC as their asset custodian usually have more than $100 million in assets under management and often have assets in the $200 million to $600 million range. At Scottrade, Davis says his firm eyes state-registered advisors, which means those with less than $100 million in assets.
"We keep our ears to the ground," Davis adds, "so we can provide the services our advisors want." Recent responses to advisor comments have resulted in a free hotline to a compliance firm and a 50% discount on financial planning software.
Other firms report similar scrutiny of RIAs' concerns. "We are much more than just a custodian for their clients' assets," says Michael Durbin, president of Fidelity Institutional Wealth Services.
He says Fidelity offers innovative investment tools and research, an open technology platform, and practice management and consulting - all services designed to help RIAs enhance efficiency, plan strategically and engage with clients effectively.
To David Canter, executive vice president of practice management at Fidelity, the most pressing issue facing his firm as an RIA custodian is ensuring that it can support all of the new practice models that keep emerging in the industry. "The question that keeps me up at night," he says, is this: "Are we providing each of these models with everything that the advisors need to manage and grow their business?"
Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.