Custodians, hands off my retail clients

Register now

Let’s get one thing straight: The independent advisory business wouldn’t have thrived without the support of the traditional custody-and-clearing firms. Large direct-to-consumer behemoths like TD Ameritrade, Schwab and Fidelity were willing to power channels that essentially competed with them for retail clients.

Of course, there was a business reason. With larger processing volumes, trading became more efficient and the firms could keep unit costs low and generate profits to fund technology and other strategic investments. In return, advisory firms got efficient support and access to platforms that included custody, clearing, bundled service options and outsourced technology.

Even the firms that offer an alternative to traditional clearing providers, like mine, have benefited from the arrangement.

It was certainly a win-win, but with a hidden cost. Along with all the bells and whistles came conflicts of interest and self-serving revenue streams from product distribution and fees. Moreover, the mega-custodians created deep hooks into the advisor’s business operations and their retail client base.

That’s become a big problem.

First of all, marketing suppression rules — like no direct mail, no outbound sales calls — used to put a fence between retail and the accounts on the third-party custody platform. With the rise of digital marketing, it’s no longer feasible to suppress all outreach.

With the marketing rules effectively outdated, these custodians argue that the difference between bespoke and mass-customized advice should be so apparent and so valuable that advisors have no reason to worry about losing clients.

Two things bother me about those assurances:

Blaming the victim — or the advisor — for not being good enough to keep clients is a low blow when the retail side of the custody giant can use micro-targeting (based on customer data) or slash pricing to get a competitive advantage.

If not outright poaching an advisor’s current clients, the retail behemoths do seem committed to capturing their prospects —younger, mass affluent investors for whom a less costly digital and human model is quite attractive. How will advisors grow with the next generation?

Schwab’s announcement of the subscription-based Intelligent Portfolios Premier is a case in point. For a $300 upfront fee and $30 monthly you get a comprehensive financial plan, a customized roadmap, unlimited time with a CFP for advice and 24/7 access to a highly collaborative planning tool that lets the client test out their own ideas and assumptions.

Compare that offer with what a traditional advisor’s website says and you will see that the words are similar.

Which custodians have the most RIA assets?
An inside look at which firms are attracting assets and advisors.

The average investor may not understand or appreciate what’s different between the experience at Schwab and what they get from a local RIA, but they will immediately grasp the pricing difference.

No one is denying that for the biggest custodians, like Schwab, Fidelity and TD Ameritrade, entering the custody business made great sense for their shareholder value. It makes good business sense to keep the scale from custody while the firms grow their retail market share.

That said, at this point in the evolution of custody, new models, which don’t have channel conflicts, are gaining traction with advisors who want to have more control over their futures.
When they launched their custodial businesses, Schwab, Fidelity and TD were discount brokers who didn’t offer relationships or advice —that has changed dramatically.

With massive marketing dollars, they are promoting human and digital advice relationships for mass-affluent and high-net-worth investors, with technology and pricing that grabs attention.

The competition is clear, and the conflicts are just beginning.

For reprint and licensing requests for this article, click here.
Clearinghouses/custodians RIAs Client acquisition Client retention