- Key insight: Fidelity's new asset minimum exposes harsh economics: Top-tier custodians are having a hard time making money from small firms.
- Expert quote: "Ultimately, your custodian is a vendor, not a partner any more. Know how they get paid, get commitments in writing, and always know how you'd leave. Basically, everyone should now have at least one foot out the door." — Tim Welsh, founder of Nexus Strategies
- Supporting data: According to AdvizorPro, the median RIA using Fidelity has $328 million in AUM, more than triple Charles Schwab's $107 million median. Fidelity serves about a quarter as many RIAs as Schwab but has roughly 80% as much in managed account assets.
Fidelity told RIA customers last week that they will have to
The options include:
- Join a large RIA aggregator already at Fidelity and pool assets with other small advisories to meet the minimum requirement. Many acquirers promise to allow RIAs to do this while maintaining a good deal of autonomy.
- Move assets to another custodian. This could be a long-established firm like Charles Schwab, Pershing or Interactive Brokers, or a relative newcomer like Altruist.
- Grow assets to exceed the $100 million minimum. Some RIAs use more than one custodian and could simply concentrate their client assets at Fidelity. Others could try to bring in more assets from existing clients or even buy another firm.
Each op;tion offers a way around Fidelity's new threshold, but all come with trade-offs. Here's a look at the pros and cons of each.
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The benefits of joining an industry consolidator
Tom Prescott, the co-founder and managing member of Advisory Services Network in Atlanta, said many custodial clients falling under Fidelity's limit may be overlooking one of their best options.
Rather than search for a new custodian, he said, they should consider joining a consolidator like ASN that already uses Fidelity for custodial services.
For many RIAs, switching custodians is a dreaded prospect often involving an onerous process known as repapering. Consolidators like ASN instead allow small RIAs to report their assets alongside other network firms while maintaining a good deal of control over their own businesses.
Unlike many aggregators, ASN doesn't buy the firms that join it. Its network is composed of more than 150 firms which collectively have $10.6 billion in assets, according to a Form ADV filed on Oct. 1 with the Securities and Exchange Commission.
"We already meet Fidelity's requirement," Prescott said. "Therefore, any of our advisory firms that operate with us or through us can continue the relationship with Fidelity. In other words, there is absolutely no effect from the news that hit last Friday."
Prescott said he has already heard from various advisory firms that have been prompted by Fidelity's new asset minimum to join ASN, which also custodies assets at Charles Schwab, Pershing and Goldman Sachs. He said there are other
"Put it this way, for a $50 or $75 or even $100 million advisor, what's going to be the service model?" Prescott said. "It doesn't matter whether it's Fidelity or any of the other custodians. What's going to be the service model which you're going to work under, and then how do they provide that service model in an economic fashion so that they're obviously making a profit?"
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The pitfalls of aggregation
But, as with all options, there are drawbacks. Will Trout, the director of securities and investments at Datos Insights, said some aggregators claim to report all their affiliated RIAs' assets on a single Form ADV but don't actually do so.
"If the aggregator files separately for each acquired firm, the RIA doesn't benefit from scale," he said. "This is a material question most RIAs skip over."
What's more, many consolidators and aggregators want at least minority ownership stakes in the firms they buy. That raises the delicate question of how much the owners of RIAs
Owners also need to accept that they are likely giving up some control of their firms when they choose to sell even a small stake.
"An acquired RIA often keeps client relationships but loses independence on back office, compliance, technology and pricing," Trout said. "The aggregator imposes its custodian, trading protocols and fee structure. Some firms report this as liberating. Others find it suffocating."
The fees and other charges aggregators charge for the services they provide also eat into acquired firms' bottom lines.
"That's a permanent economic hit," Trout said.
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The case for switching custodians
Rather than join a consolidator, some sub-$100 million RIAs now at Fidelity will simply shop around for another custodian. Although Fidelity is routinely ranked as the second-largest player in the custodial business, plenty of options remain for small firms.
Charles Schwab,
Data from industry researcher AdvizorPro confirms that Schwab remains the most-used custodian by both assets entrusted to it and by the number of advisors using its services.
Nearly 70% of all RIAs rely on Schwab to custody accounts managed on behalf of clients. Fidelity comes in at second place with just over 17%. But the two large custodians serve very different types of RIAs.
The median AUM of an RIA that works with Schwab is $107 million. That of one working with Fidelity is $328 million. Among RIAs with less than $100 million, about 8% are with Fidelity. Among those with $1 billion or more, it's 43%.
"Fidelity has about a quarter of Schwab's RIA count but 80% of its [managed account] assets, because the average Fidelity RIA relationship is three times larger," according to AdvizorPro.
Fidelity hasn't given a detailed explanation of the rationale behind its new minimum, but Trout said the advantages custodians get from working with larger RIAs are fairly clear.
"The economic logic is simple: Fidelity's service infrastructure costs the same whether an RIA has $50M or $500M in assets," Trout said.
Meanwhile, smaller firms have been making inroads into the custodial industry. And some are trying to appeal directly to RIAs given the boot by Fidelity's asset minimum.
On Tuesday, the financial firm and robo advisor Betterment announced it is waiving until the end of 2028
"RIAs of every size deserve a custodial partner that supports where they are today and where they want to go," Betterment CEO Sarah Levy said in a statement.
Altruist CEO Jason Wenk, whose firm is set to be acquired by Vanguard Group later this year, has also moved
Other custodians say they have no need to make a special appeal. Amanda McLean, the director of institutional sales at Interactive Brokers, said in an interview, "We don't have to entice them. They're coming here or are here already."
Like many of its rivals, Interactive Brokers
"We don't put up barriers to entry," McLean said. "We're willing to meet you wherever you are in your business cycle, and you know the performance will show in terms of better execution, better technology. Automation is an advantage."
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Adding assets to get past Fidelity's minimum
For RIAs that want to stay at Fidelity, the simplest solution is also likely the hardest: Grow past $100 million. That could mean bringing in new clients, gathering more assets from existing clients or — for firms truly on the threshold — relying on strong market appreciation for the needed boost.
"For most firms, that's a hope, not a strategy," said Tim Welsh, the founder of the consulting firm Nexus Strategies. "A $70 million firm would need more than 40% growth in nine months."
Trout said another option is to go out and try to buy a firm with the needed AUM.
"But it's expensive and risky," he said. "And here's the problem: Even if a firm scrapes together $100M by the deadline, Fidelity can raise the minimum again."
Welsh said Fidelity's new asset minimum shows why firms would be wise to have relationships with more than one custodian when possible.
"Ultimately, your custodian is a vendor, not a partner any more," he said. "Know how they get paid, get commitments in writing, and always know how you'd leave. Basically, everyone should now have at least one foot out the door."
Introductory bullet points created by AI with editorial review.
