In 2019, Charles Schwab announced its acquisition of TD Ameritrade, setting off a lengthy, often criticized integration process with TD’s RIA custody business. The conversion of TD advisors to the new platform is now scheduled for Labor Day weekend 2023. The merger makes Schwab the largest RIA custodian by a wide margin; in fact, a new report by Cerulli Associates estimates Schwab controls $3.7 trillion, or 54% of RIA assets, including inflows and clients from the TD acquisition.
The Cerulli report states that four firms—Schwab, Fidelity, Pershing and LPL Financial—control 84% of assets custodied in the RIA market. Yet, one in four RIAs is exploring adding a new custodian in the next year, pointing to an opportunity for emerging ones to fill gaps for existing RIAs or help breakaway advisors set up new firms.
“We’re seeing a once-in-a-generation occurrence, which is Schwab acquiring TD Ameritrade. That in and of itself creates opportunity for everyone else, simply because advisors are thinking, ‘I should probably diversify,’” said Tim Welsh, president, CEO and founder of Nexus Strategy in Larkspur, Calif.
Cerulli points out that while many advisors are looking to add new custodial relationships, they aren’t necessarily looking to switch from their existing custodians. In fact, only 4% of RIAs have switched custodians in the past year.
Welsh said that points to the fact that the opportunity for the emerging custodian marketplace lies at the point of sale.
“The fundamental aspect of the custodian buying decision is, ‘It’s easy for me as an advisor to take the next account that comes in the door and start a new relationship with someone else,’” Welsh said. “‘It’s very hard for me to take my $100 million and 200 accounts from Schwab and move them over to Fidelity. I’d have to be really pissed off to do that.’”
“The logistical challenges of switching custodians make it rare that RIAs drop an existing custodial partner entirely,” said Marina Shtyrkov, associate director at Cerulli, in a statement. “Instead, RIAs are more likely to add a new custodian to fill any perceived gaps in service or capabilities.”
The plurality of RIAs (44%) work with just one custodian, yet RIAs with higher assets under management tend to have more custodial relationships, Cerulli finds. Seventy-one percent of RIAs with three or more custodians manage $500 million or more in assets.
“Now, everyone has a reason to diversify their custodian because, ‘If I’m Schwab/TD, now I just have one. I still want to provide client choice. I still want to have the ability to diversity my back-office for a variety of reasons,’” Welsh said.
There are a number of newer players coming into the RIA custody space, and many of them are building sophisticated technology from the ground up. Companies like Apex, Goldman Sachs, Axos Financial and Altruist, a custody solution, have entered the market in recent years. Smaller incumbents include Interactive Brokers, Shareholders Service Group, TradePMR and Equity Advisor Solutions.
“The technology that is coming out of these platforms—like an Apex, like an Equity Advisor Solutions, like an SEI—they all have these opportunities to build a better mousetrap,” Welsh said.