Pershing, Northwestern Mutual and the industry's fierce custodial fight

BNY Mellon's Pershing scored a big custodial recruiting win with Northwestern Mutual renewing a contract for services to nearly 10,000 financial advisors managing $250 billion in client assets.

The Jan. 11 agreement of undisclosed length and terms maintains a relationship spanning nearly two decades between the giant Milwaukee-based insurer's wealth management arm and the New York-based custodian, which bounced back on the strength of $23 billion in net new assets in the third quarter after the demise of First Republic dealt losses in the prior period. Pershing and its megabank parent firm will disclose their fourth-quarter results on Jan. 12.

"Our relationship with Northwestern Mutual goes back to 2006, and interestingly enough, I was there at the very beginning," Jim Crowley, the global head of Pershing and a senior executive vice president with BNY Mellon, said in an interview. In the world of "custody or advice," he added, "Your relevance and sustainability and value over long durations is super-important."

Representatives for Northwestern Mutual said no executives were available for interviews on the agreement, which includes custody, trade-clearing and technology.

"Pershing has been an important partner as we have grown our wealth business to over $250 billion in client assets," Jeb Bentley, the CEO of Northwestern Mutual Wealth Management, said in a statement about the contract. "Extending our relationship with Pershing allows us to leverage their scale as an industry leader, while providing more value to our clients and advisors."

READ MORE: Pershing recovers from First Republic loss with $23B in new assets

The wealth management custody business, explained

As one of the largest custodians in wealth management, Pershing faces competition among the only two larger firms of its type in Charles Schwab and Fidelity Investments, self-clearing companies like LPL Financial, Ameriprise, RBC and Raymond James, and a burgeoning group of startups and smaller rivals such as SEI, Altruist, Apex and Axos Advisor Services. 

In an industry spanning tens of trillions of dollars in client assets, the firms fight continuously for business among registered investment advisory firms and wealth management companies with brokerage arms. With $2.2 billion in 2022 revenue as the No. 6 firm on Financial Planning's most recent IBD Elite rankings, Northwestern Mutual represents a big custodial relationship. Those strategic agreements can abruptly switch between custodians through M&A deals in which the sellers adopt their new parent's service providers or new outsourcing collaborations with firms like LPL recruiting for the wealth management business of banks or insurers.

Pershing has sustained some recent outflows from its custodial business due to First Republic's collapse as well as the M&A and recruiting activity. However, it also gained new business last year through an expansion of its relationship with Lincoln Investment Planning and an incoming agreement with the wealth management unit of State Farm Insurance in 2022. In the third quarter, Pershing's assets under custody or administration jumped 14% year over year to $2.4 trillion, while its average active clearing accounts rose 7% to 7.98 million, its latest earnings report showed. The company's revenue ticked up by 2% to $699 million.

Asked about the competitive dynamics affecting Pershing, Crowley cited the importance of the firm's resources for growth and scale under BNY Mellon, which itself is the largest custodian on a global basis across the financial services. 

"We believe that we're going to be winners in an M&A transaction more often than being on the other side," he said. "Scale is something that is super-important and it is, after growth, the next most important thing that organizations are looking to create in their business model. Once you're capacity constrained, it's sort of like game over."

Apex is emerging as "a big challenger" to Pershing and other big-name incumbents after its hiring of many former TD Ameritrade executives in the wake of Schwab's acquisition of its previous rival, according to veteran industry consultant Tim Welsh of Nexus Strategy. With many smaller RIAs switching to Schwab last year after the deal through no choice of their own, Pershing is making "a strategic mistake" by focusing on the largest firms, Welsh said. Altruist's acquisition of brokerage and custodian platform Shareholders Service Group, which uses Pershing on an outsourced basis, carved some further inroads into Pershing's base, he said.

"They were not diversified, and then they missed out on this once-in-a-generation Schwab-TD merger which threw 7,000 RIAs into motion," Welsh said. "Everything is segmentation. Strategically, they put themselves into that box."

READ MORE: Schwab and Fidelity referrals give certain RIAs business, deal others out

Pershing's response to competitive challenges

On the contrary, other Pershing client firms like Cetera Financial Group or Osaic are "well-positioned to serve those smaller advisory practices," according to Crowley, who added that direct custodial relationships with that niche of RIAs "wouldn't be off-limits" for any inquiring firms. However, Pershing is still primarily targeting RIAs and other wealth management firms with at least $1 billion in assets under management, administration or custody, since that's the area of the industry where "we offer sustainable value to the market," Crowley said.

"Our ideal clients are the professionally managed, growth-minded organizations who are serving investors with complex lives and financial needs," he said. "We recognize that we can't be all things to all people. I think that too is an area where we're different from some of our competitors."

The extended contract with Northwestern Mutual stemmed from Pershing's answers to questions such as "How can we simplify all the things that they're trying to do in their operating system?" and "How can we make that experience even better, so their advisors are rewarded by that, find value by that?" in a way that helps the firm's clients, according to Crowley. For example, Pershing and Northwestern homed in on easing the client onboarding process for the firm's advisors and customers, he noted.

Issues around trusting business relationships and service quality receive much more emphasis these days in meetings with clients and prospective clients than the traditional topics of clearing and custody, Crowley said. Wealth management firms are questioning how their potential custodians are innovating, rather than "asking about, well, how do you do clearing?" he said.

"I don't think we're in the business of selling clearing and custody. I think we're in the business of selling something that is much bigger," Crowley said. "That's where we try to really underscore how we differentiate ourselves in the marketplace."