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What to Look for When Choosing a Custodian

What to Look for When Choosing a Custodian

Starting an RIA isn't just about managing a client's money. Think of it as taking a seed, nurturing it and growing it into a thriving business. As such, perhaps the most significant decision is which custodian to work with

What to Look for When Choosing a Custodian

Starting an RIA isn't just about managing a client's money. Think of it as taking a seed, nurturing it and growing it into a thriving business. As such, perhaps the most significant decision is which custodian to work with. Read on for some points to consider as you go through the vetting process.

Consider your individual circumstances
There are four main custodians in the marketplace and a host of smaller players, too; not all will be right for your business. It depends on factors such as what direction you are interested in taking your business. It helps to make a written inventory of all the products and services you currently provide and would like to offer in the future. Understanding what you want your business to look like will help you choose the custodian that is the best fit for you.

Talk with other advisors
While every advisor's business is different, it can be helpful to talk to advisors that have similar business models to get their input on various custodians. By talking to other advisors, you'll quickly learn how custodians are helping their businesses and where others may need improvement.

Approach it from a client's perspective
This is a lesson that Andrew D. Jamison, a certified financial planner with Main Avenue Financial Services LLC in Beaverton, Ore., says he learned the hard way. When evaluating providers, he didn't ask questions that pertain to the client experience, such as whether clients can log in and see accounts easily. Other things to look into include: Are statements clear and easy to read? Is there a direct deposit option? Will the custodian provide cost-basis information? Do they reinvest dividends?

Evaluate service levels
Make sure you know who you will be dealing with on a day-to-day basis. Will you have a dedicated account team? Are they responsive? Are they competent? Also, ask detailed questions as to how the custodian handles out-of-the-ordinary situations and how problems are escalated and resolved, says Timothy D. Welsh, president of Nexus Strategy LLC in Larkspur, Calif. Before you sign on with a partner, ask what happens, if, say, a top client calls you on a Sunday afternoon after his purchase was declined despite having several million dollars in his account, says Welsh. It's obviously an error, but how is that going to be fixed quickly, without jeopardizing the client relationship? Or what happens if there's a trading error? Who eats the cost? What's the custodian's policy for escalating and resolving errors? "That's the definition of service," Welsh says.

Practice management
Look for a fit with the custodian's sales and service team to ensure they can effectively help you grow your business. Many advisors, particularly those who are leaving big firms where they've received a lot of hand-holding, welcome the support and advice custodians offer. Beyond growing your business, custodians can help you find and evaluate technology solutions, market your practice, work on some operational and efficiency enhancements and plan for your firm's future, which effectively includes succession planning.

Consider product offerings
While most custodians offer a core, there are differences, particularly when it comes to alternative investments. So make sure you find a custodian that best matches your needs to access stocks, bonds, mutual funds, separate accounts, alternative investments and other products. Depending on your asset mix, you might prefer one custodian over another, or prefer to work with a few custodians.

Each custodian has its own technology platform. It's important to seek a custodian that offers flexible solutions that will help you run your practice efficiently, including trading, portfolio management, financial planning and other advisor technology, says John Furey, principal of Advisor Growth Strategies LLC in Phoenix, Ariz. "Integration is key to success," he says.

Make sure you choose a custodian who will help you do business faster and better. "The operational burden on the advisor is tremendous," says Welsh of Nexus Strategy. Custodians all have bells and whistles that help with that and some are better than others. Choose a custodian that can streamline the process, he says.

Understand the pricing offered by various providers so you can negotiate the best rate for your clients. "Give preference to a custodian that will provide flexibility in meeting the needs of your practice," Furey says. Also, be aware that custodians will shower you with their best opportunities if you do more business with them. It's similar to an airline loyalty plan, where if you fly a lot, you get upgrades, free drinks and other perks, says Welsh of Nexus Strategy."The more you consolidate with them, the more chance you have to access their best service."

Transition services
A good custodian will help you prioritize what needs to be done for your move and will walk you through the process from beginning to end. Advisors who fall short on the planning tend to have a harder time with the transition. What's more, while most custodians offer basic account transition support, try to find one that can help you develop a game plan for success.

Determine how many custodians you want to work with
When Furey consults with advisors looking to start an RIA, most choose to work with one custodian. It's simpler that way because you only have to learn one system and you can benefit from the operational efficiencies of housing all your assets in one place, Furey says.

Nonetheless, some advisors choose to work with multiple custodians and for valid reasons. These reasons include the desire to have a backup on tap in case of service disruption and the ability to offer clients the greatest choice possible at the lowest possible price.

Nothing is permanent
Also remember that, while it can be a hassle to change custodians if the relationship doesn't work out, it's not impossible. Indeed, it's important to evaluate your custodian annually to address issues such as what they are doing to add value. "Be educated about what the market consists of. Evaluate what you're getting. Know what some of the other firms are providing," says Ryan Shanks, founder and chief executive of Finetooth Consulting, a business consulting firm in Longmeadow, Mass., that focuses on RIAs and broker/dealers.

Questions or feedback? Please email us at [email protected].

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