Kitces: How to pick an RIA custodian

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“What’s the best RIA custodian to use?” This is one of the most common questions I hear from advisors launching RIAs, experienced advisors breaking away from broker-dealers and even existing RIAs that want to know if there’s a better option available to them. Given the substantial costs of breaking away or switching from one RIA custodian to another, it is worth figuring out which custodian is right for you — not just in the short term, but for the long run.

Of course, if you’re solely going to operate as a fee-for-service advice firm and not actually manage client portfolios directly, you don’t need a relationship with a custodian at all; the relationship only begins once you’ve decided to help clients implement their portfolios (and need a platform to both execute the trades and bill for your services).

But given the continued dominance of the AUM model among RIAs — which I don’t foresee changing any time soon, even with the growth of advisors using alternative, fee-for-service models to bring advice to new segments of consumers — most RIAs still have to pick an RIA custodian. Here are some strategies for making that all-important decision.

Similar but different: The overwhelming majority of independent RIAs ultimately custody their assets at one of four major firms, ranked here from smallest to largest based on market share: Pershing Advisor Solutions, TD Ameritrade, Fidelity and Schwab.

Yet despite their size and market reach, or perhaps because of it, all four provide substantively similar services. They all offer the core technology necessary to trade on behalf of clients. They can hold a wide range of standard investment assets. They can facilitate billing. And they all are incredibly low-cost. Indeed, none of the major RIA custodians even charge a platform fee or take a percentage of the advisor’s revenue (as a broker-dealer would).

Rather, they just use their incredible size and scale to make what amounts to a very, very small scrape from a very, very large number of transactions.

Most of these platforms earn whenever your clients trade: $5 or $7 per, or maybe via a small asset-based wrap fee. Some participate in 12b-1 fees as part of their no-transaction-fee or NTF, platform. Some receive a small number of basis points for their role as transfer agent, or they make some very small spread on money market or other cash positions held by clients. These are very small dollar amounts, but they add up after first couple hundred billion dollars of advisor assets.

Consequently, most advisors don’t simply pick an RIA custodian by cost and basic capabilities (which aren’t that different), but more for a custodian’s particular focus or style. In this context, there are some notable differences worth underlining among the top four RIA custodians.

The big four: Pershing Advisor Solutions works primarily with larger RIAs that are specifically focused on growing a large business. It’s not just oriented toward successful and profitable practices, but toward those holding hundreds of millions or even billions of dollars of AUM, that still want to grow a lot bigger.

This stems in large part from the fact that CEO Mark Tibergien spent more than a decade leading the practice management consulting division of Moss Adams, and is still among the top experts on practice management and business strategy for growing RIAs.

That helps explain why Pershing Advisor Solutions is particularly popular among breakaway teams from wirehouses — larger, independent broker-dealer teams that value that kind of deep practice management support in pursuit of building and scaling their business. And if you’re working in the ultrahigh-net-worth space, the global banking capabilities that come from Pershing’s Bank of New York, now BNY Mellon, are also a selling point.

TD Ameritrade, on the other hand, is best known for its Veo One platform, which essentially operates as an open architecture hub that facilitates trading and activity on its platform, with the added flexibility that comes from its open structure that makes it easy for other advisor technology tools to integrate.

This means TD Ameritrade is really the best fit for advisors with a vision of some particular tech stack combination that they want to have, or more generally, for those who value selecting their own tech components one by one, plugging them in and maintaining them without relying heavily on the custodian’s proprietary platform.

That said, TD Ameritrade actually does have some very good proprietary technology around investment capabilities, including a free online version of iRebal for TD Ameritrade advisors — the original and still one of the most popular rebalancing software solutions.

Fidelity’s Wealthscape platform, meanwhile, is increasingly being positioned as a true all-in-one, especially for comprehensive wealth management firms. The firm’s decision about three years ago to buy eMoney Advisor — which was and still is one of the leading planning software solutions for advisors, and is increasingly being more integrated into Wealthscape — makes Fidelity’s solution a very appealing long-term solution for planning-centric firms that want to build toward a holistic wealth management offering.

Of course, you can use eMoney Advisor with any custodian, but expect eMoney to become more and more deeply integrated into Fidelity’s Wealthscape. If you’re a holistic, planning-centric advisor, Fidelity’s offering becomes very interesting. By analogy, if you like Apple’s hardware, software and connected services where everything is managed by Apple and it just works, you’re probably going to like Fidelity.

If you prefer Android devices, where you maintain some independence and control over software and settings to configure it your own way, you’re probably going to gravitate toward TD Ameritrade’s open architecture solution.

Now, of the four, the biggest is Schwab. And perhaps not coincidentally because Schwab is the biggest, I would argue that it’s the least differentiated of the lot. That’s partially attributable the challenge that comes with size; it’s hard to have a focus after the first nearly-$1.5 trillion of advisor assets that Schwab already serves. Consequently, Schwab simply continues to compete through sheer size and scale.

Consequently, Schwab is usually the most competitive on price. And it has incredible service depth and service team experience, in part because it has literally been doing it longer than any of the other RIA custodians. Indeed, Schwab Advisor Services was the first to seriously pivot into the RIA marketplace back in the early '90s.

And so, while it’s difficult to assign a lot of distinguishing features to Schwab, the simple fact that it’s the biggest, most experienced and most scaled wins it a lot of business — and has long maintained its dominant position.

Second-tier custodians: All that being said about the big four, it’s worth noting that there is a sizable range of what are often called second-tier RIA custodians. To be fair, “second tier” doesn’t necessarily mean inferior or lower quality, but just smaller — significantly so, as they’re typically 10 to 100 times smaller than any of the big four.

In practice, this means the platforms are often a bit more expensive (lacking big-four scale). And because they don’t have the resources to be good at everything, they also usually develop some kind of niche or specialization to serve one type of advisor particularly well. This can, however, make them a much better fit for certain advisors.

A good case study is Shareholders Service Group. The SSG platform is actually built on top of the Pershing platform, so you’ll see the same Pershing technology, but SSG specifically specializes in the small RIA marketplace, i.e., firms with under $100 million. SSG isn’t necessarily the cheapest, but that doesn’t mean advisors pay much of a platform fee. Rather, it simply means that you may find somewhat higher ticket charges when buying a stock, ETF or mutual fund on the SSG platform.

Additionally, SSG is still one of the only RIA custodians that does not have an asset minimum to get onto its platform, as contrasted with all the big four that usually have somewhere around a $10 to $20 million AUM minimum at any given time, unless you have some special circumstance where you can prove you’re very likely to hit those numbers very shortly after launch. Otherwise, you can’t even get onto those big four platforms unless you have some other affiliation.

Because of those asset minimum limitations, SSG is by far the most common platform among startup RIAs, especially since all the other startup-friendly RIA custodians in the past — among them TradePMR and Scottrade — have been instituting asset minimums for new advisors and periodically lifting them. And of course, Scottrade was sold last year to TD Ameritrade, and is now going to be rolling into the TD Ameritrade platform, likely with the same minimums of its new home.

Many second-tier RIA custodians try to differentiate through their technology. For instance, TradePMR is well known for its EarnWise mobile solution, which allows advisors to manage virtually much all their investment needs directly through a smartphone or tablet. If you’re often on the go, working virtually with clients or generally tech-savvy and like the idea of tracking and managing client accounts from your smartphone, it’s a sound choice.

By contrast, Trust Company of America is best known for really efficient model-based trading technology, making it easy to keep clients invested in a model and allocated properly. It’s also appealing for RIAs that like to use model portfolios for their whole client base. For that reason, TCA is especially popular among TAMPs.

Folio Institutional, another player in the second-tier RIA custodian space, is also favored by tech-savvy advisors who want to go completely paperless. Folio was early to the game there, and has popular tools for managing model portfolios.

Folio can also handle fractional shares, endearing them to smaller firms that may want to add small slices to clients’ diversified portfolios. The platform also has more API integration capabilities than TradePMR or TCA, a plus for larger firms that want to invest into layering their own more customized technology atop their custodian’s platform.

Then there is Apex Clearing, which is basically a giant latticework of APIs that communicate among themselves to handle all the core functions of a custody and clearing platform — albeit without much of an interface layer on top.

As a result, most independent RIAs who choose to work with Apex will go through a middleware provider to get the kind of advisor dashboard and workstation that most other RIA custodians already provide. In our space, that would be solutions like RobustWealth, AdvisorEngine and InvestCloud.

Nonetheless, because Apex is the newest of the tech-savvy RIA custodians, it’s built with the most recent capabilities and, frankly, makes some of the other RIA custodians look a little Neanderthal.

To wit, Apex’s software immediately validates the information you enter into account application and transfer forms. Imagine a world where your NIGO rate is 0%, because the software helps you fix every problem on the spot, before the paperwork is even submitted. Contrast this to other custodian platforms that process your paperwork, only to bounce it back days later when a human bothers to notice a mistake or omission.

There are a few other custodians worth noting as well. Millennium Trust Company is particularly popular among advisors who do a lot of investing with alternatives, and who want a custodian that knows how to handle non-traditional assets beyond good old-fashioned stocks, bonds, mutual funds and ETFs.

And those advisors who do a lot of trust business with clients may be interested in National Advisors Trust Company, which provides not only RIA custodial services but corporate trustee services as well. The National Advisors Trust platform is also unique in that most RIAs that use it actually become shareholders. 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 its duty to shareholders. After all, its shareholders are the RIAs themselves.

For many advisors, the appeal of 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. Unlike working with Schwab, Fidelity or TD Ameritrade, you never have that awkward feeling that you’re competing for the same client that may also be getting solicited through the custodian’s retail branches.

On the other hand, many advisors actually prefer Schwab, Fidelity and TD Ameritrade precisely because they have a national, big retail presence. Which means that when you tell your clients their assets will be held at one of these major firms, you don’t get the question, “Wait, where are you putting my money?”

The name recognition gives clients some assurance that if they ever decide they’re unhappy and want to leave, 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.

Once you narrow down your potential RIA custodian options—hopefully based on some of the discussion here—it’s ultimately important to look closely at their technology, at their investment options, and what you can do on their platform. Ensure that their core systems really do fit what you do, how you serve your clients and how you want to do business.

But again, with the core technology itself increasingly commoditized in today’s marketplace, the savvy advisor must pick a custodial platform that’s not only a fit for today, but one that can align to whatever long-term vision you setting for your practice as well.

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.

This article originally appeared in Michael Kitces
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Financial planning RIAs Broker dealers High net worth Client communications Client strategies Independent advisors Clearinghouses/custodians Charles Schwab Pershing TD Ameritrade Fidelity Investments