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Picking the right custodian could save clients cash

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Clients expect fees to correlate with real value and advisors should expect the same from their custodians.

Competition among big-box clearinghouses to offer increasingly cheaper trading fees in a so-called “race-to-zero” only distracts from other charges — some of which may not initially be obvious or transparent. The total cost of ownership includes transaction costs, underlying product costs, platform fees and technology add-ons. Depending on the practice, the structure of a custodian’s fees may dictate how and how often advisors make trades.

For example, online trades at a discounter can cost between $4.95 and $15 per trade, and even more ($40 and up) if they’re broker-assisted. Actively managed portfolios, for example, may want to consider a custodian who offers asset-based pricing with no mutual fund ticket charges.

Even for buy and hold clients, there’s a lot of trading going on in the course of a year. Think about it — trades are made every time clients add money to their portfolios, every time they need a cash distribution, every time you need to rebalance their portfolios, every time there are dividend proceeds to reinvest. It all adds up and ticket charges can still be more expensive than asset-based fees.

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Total costs also depend on various types of investments, funds and share classes used. For those who invest with individual stocks and bonds, there are no fees for underlying investments. However, most advisors use at least some mutual funds or ETFs in client portfolios, which include additional costs for underlying expense ratios. A recent Inside Information fee survey revealed that underlying expense ratios on mutual funds can range from 20 to 75 basis points or greater, with a median of 50 basis points, which will add to the all-in cost of investing.

Mutual funds can also include 12b-1 fees paid to brokers or sub-TA paid to custodians. Advisors like to take advantage of market opportunities and position portfolios accordingly, but as these fees and ticket charges on transactions mount, they may become reluctant to hit client accounts with more and more costs. It’s important to find a custodian with a simplified fee schedule and flexible trading capabilities.

While trades can tack on hefty costs, digital solutions like performance reporting, rebalancing, risk profiling and fee billing software also come at a price. Then having to toggle between multiple platforms and paying for various subscriptions to vendors that don’t integrate well, only adds expense and time.

For example, separate fees for billing engines and performance reports from a number of different vendors can cost tens of thousands of dollars per year. Take Morningstar that charges more than $20,000 on a $200 million book, or Orion that charges more than $80,000 on a $400 million book.

A better solution may be to find a custodian where many of these functions are already part of the platform free of charge — which can save a significant amount of money. Built-in features result in greater efficiencies and scalability, as well as, improved reporting accuracy.

One way to save money is to partner with a custodian that provides an integrated platform with access to account management, portfolio trading, rebalancing, account billing and performance reporting. In addition, evaluate whether an asset-based pricing structure or paying by the transaction will be more effective. Finally, find out if a custodian gets paid for order flow or buys and sell securities from its own inventory. Armed with this knowledge, advisors will be able to make a more informed decision and hopefully save money.

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