The future of custody? Data and AI

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Custodians are no longer the central hub of technology for RIAs — nor do they claim to be. Most have chosen the path of open architecture, where advisors customize their tech stack from various vendor partnerships.

“It’s no longer all about us and what is happening at the custodian, but about how we can integrate and work with these different technologies,” says Lisa Crafford, vice president of relationship management at BNY Mellon Pershing. She adds: “It’s been a very natural growth and transition. I don’t know if there’s a start and an end date.”

While the essential role of the custodian is to keep assets secure, they have begun offering something else of value to their advisors — data. Custodians are showing advisors how they line up with peers, and some are beginning to predict what choices clients might make in the future.

It starts with benchmarking. “[RIAs] don’t always know what their peers are doing and what they need to commit to next,” says Lisa Salvi, vice president of business consulting services at Schwab Advisor Services.

Many custodians are sharing information they already have access to, such as compensation packages, fee structure, business expenses and client acquisition trends. For example, Schwab’s annual benchmarking survey reached over 1,200 firms on its platform in 2018 — firms that managed over $1 trillion in assets, according to Salvi. Individual firms can submit company data and sit down with consultants, who guide them through weaknesses in their business relative to other practices.

TD Ameritrade Institutional augmented its cache of industry data when the custodian purchased research company FA Insight in 2016, with its more than 15 years of advisor data and industry studies, according to TD Ameritrade. This data, as well as annual research from TD Ameritrade’s FA Insight Study, is used in an interactive benchmarking tool on the Veo One portal.

While RIAs benefit from learning how they stack up to competitors, gaining insights into retail investors can pay dividends, too.

“If we can’t leverage the millions of households we have custodying at Fidelity and clearing at Fidelity … to help inform our advisors and other institutions we work with, then shame on us,” says Anand Sekhar, vice president of practice management and consulting at Fidelity Investments.

Fidelity mines data from its retail investment and 401(k) platforms in order to show financial planners retirement trends by demographic, according to Sekhar. Information includes asset contributions, client goals and whether clients are meeting those goals.

There is, however, certain valuable client data to which custodians have limited access — personal information like the name and breed of the family dog, according to Greg O'Gara, a senior analyst of wealth management at Aite Group, and author of the study, RIA Custody: Technology, Innovation, and Strategic Direction (Schwab was not included in the study). “That kind of information is important because it forms a greater bond with your client,” he says, adding: “If you know your client has a favorite sports team and they win the World Series, it’s a good day to call and check in.”

Vendors like Salesforce or CRM software providers do have access to this data — custodians don’t.

“The only information that the custodians are getting by default is information that is needed to process investment actions, trades or portfolio allocation,” O’Gara says, adding that custodians “are enhancing their ability to exchange and capture data by integrating with vendors, but they really don’t own the data.”

Some RIAs are collecting this information, too. Carson Group holds client data from its wealth management firm in what it calls a “data warehouse.”

“Without a data warehouse you have to go to multiple sources, and then sometimes you question which point is accurate,” says Aaron Schaben, executive vice president and managing partner at Carson Group. Storing everything in one place saves advisors time, he says. It also allows the planners to spot client trends.

If vendors and RIAs have access to data custodians don’t, does this make them a threat? Not really. When practices grow, custodians get more assets as well.

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“If there is any source where [advisors] are getting really great information, and it’s helping them [grow], then we support it,” Salvi says. “We just also invest very heavily in providing that directly to advisors as well.”

One way custodians will stand out: a predictive, rather than prescriptive, approach to data and business intelligence, according to O’Gara. “I would say that Pershing is probably leading in this effort. TD Ameritrade is also looking at it,” he says.

O’Gara says that Pershing is investing in artificial intelligence to predict investor behavior, whether it be how a client might respond to future life events, or if they are contemplating switching advisors. The custodian is building out a proprietary AI engine, that will recommend reports for advisors based on the data on the Pershing platform, the RIA custody study says. (A spokesman at Pershing said the tool was in the testing stage and declined to comment on when it would be available.)

“That is an awful lot of information, and if you can start to implement AI and machine learning off of that data, you can start to derive some very interesting business intelligence goals for your advisors,” O’Gara says.

Other custodians are making their own strides when it comes to predictive intelligence. Fidelity provides RIAs with a “death date” — or the time that a firm will no longer be profitable. The custodian builds charts that map out the decline of the firm, as well as each planner’s profitability as clients and advisors age, according to Sekhar. Consultants can point to the exact time when a firm should hire younger advisors and bring on younger clients. Advisors can also calculate risk levels and the likelihood of losing certain client assets.

“In order for benchmarking to be really helpful, it’s not just about looking backwards, because that is a lagging indicator,” says Sekhar.

One thing is certain: The value custodians offer RIAs is not going away any time soon.

“Custodians don’t need a total reinvention — they just need to make sure they are providing relevant and good services to their RIA clients, and I think they are,” O’Gara says. He adds: “One of the important things to realize here is that custodians are still the subject matter experts for RIAs .… Custodians aren’t going anywhere.”

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Fintech RIAs Artificial intelligence Clearinghouses/custodians Charles Schwab Fidelity Investments Pershing TD Ameritrade