Custodians try to entice breakaways with substantial perks

More creativity via sweeteners are being used to lure big RIAs

Aug 9, 2015 @ 12:01 am

By Mason Braswell

As larger teams move into the registered investment adviser channel, the major custodians are getting more creative and adding some sweeteners to entice big breakaway outfits.

Looking to differentiate themselves by more than just their ability to hold money, firms like Charles Schwab & Co. Inc., Fidelity Investments, TD Ameritrade Institutional and Pershing Advisor Solutions are pulling out all the stops. Their service offerings range from practice management consulting to more unexpected benefits, including client leads, hundreds of thousands of dollars to help defray startup costs, sponsoring client events or paying for Bloomberg terminals.

“That probably is the biggest evolution in this business from 25 years ago, when what advisers would do is put their assets at a bank and the bank would charge a custody fee, and that's what you get,” said Mark Tibergien, chief executive at Pershing Advisor Solutions.

“Now the way you think about it is, we're a business solution provider with custody at our core,” he said. “It's kind of like how Starbucks changed coffee. It's the rest of the experience that's going to make me decide to do business with you.”

Securities laws prohibit clear conflicts of interest such as firms' making direct payments to RIAs, but exemptions under Section 28(e) of the Securities and Exchange Act allow them to offer benefits or pay for services such as research that could be considered to have a direct or indirect client benefit.

Each firm provides a different set of resources and draws a careful line about what they're willing to offer that won't appear to create a serious conflict of interest. The perks are disclosed by firms in a Form ADV filing with the SEC and in client brochures.


“Brokers at the big wirehouses are used to that sort of beauty contest, whether it's from another wirehouse saying we'll give you three times trailing 12 [months' revenue], to pitting Fidelity and Schwab against Pershing to convince an adviser to join with them,” said Tim Welsh, president and founder of Nexus Strategy. “The stakes are a lot higher now; the teams are bigger and the timing is right.”

Asset growth, the size of the team, average account size are all part of an algorithm custodians use to determine if they're going to offer something to the adviser beyond institutional-level pricing.— Ryan Marcus,  director of business development at Spartan Capital Securities and a former senior vice president of business development at RBC Advisor Services

Fidelity, for example, offered one firm, IFAM Capital Management, a group of former UBS Wealth Management advisers with $1.1 billion in assets under management, a credit of up to $350,000 “to be used toward qualifying startup and transition costs incurred during the first two years after the firm's launch,” according to their ADV.

Bob Oros, head of Fidelity's RIA segment, said the firm provides a broad range of support, most of which is not financial. The custodian, for example, has built a team of practice management consultants to work with advisers on its platform, and also helps with things like client events when the adviser wants to celebrate the opening of a new office.

“We're very sensitive to not creating conflicts of interest,” he said. “We're helping them prepare for this new independent mode, and a lot of that is nonfinancial support. So it's helping them transition clients, select the proper technology — and some of it is financial.”

Generally, the services differ based on the size of the team, according to Ryan Marcus, director of business development at Spartan Capital Securities and a former senior vice president of business development at RBC Advisor Services.

“Each custodian does it differently,” he said. “Each of them uses a different metric to determine what they can do. Asset growth, the size of the team, average account size are all part of an algorithm custodians use to determine if they're going to offer something to the adviser beyond institutional-level pricing.”


The most important benefit that almost all custodians provide is paying for account closing and transfer costs when brokers are breaking away, Mr. Marcus said. Otherwise, those costs, which can be in the hundreds of thousands of dollars for advisers who have a large number of accounts, would have to be covered by the adviser.

Peter Dorsey, managing director of institutional sales at TD Ameritrade's custody unit, said they do not get into paying advisers' transition costs, but the firm provides other perks.

Any economics have to have a benefit for the end client.— Peter Dorsey,  managing director of institutional sales at TD Ameritrade's custody unit

For example, TD Ameritrade agreed to pay approximately $41,000 for the licensing fees for two Bloomberg terminals for The Colony Group, an RIA with more than $5 billion in assets, according to its ADV. TD also provided The Colony Group with a credit of $12,000 to provide daily research reports on high-yield bonds, debt markets and credit analysis, according to the ADV.

“Any economics have to have a benefit for the end client,” Mr. Dorsey said.


TD, along with Schwab and Fidelity, also give client leads to some RIAs on their platform. Schwab, for example, provides referrals through its Schwab Advisor Network, which is designed to help investors who walk into a Schwab branch find an independent investment adviser.

Participating RIAs pay Schwab a quarterly fee for any referred accounts and would have to pay a higher “non-custody” fee if they moved the referred accounts to another custodian.

Executives at Schwab, the largest custodian, were not available to comment for this story, according to a spokeswoman, Mayrav Weiss.

Pershing, a subsidiary of The Bank of New York Mellon Corp., does not do client referrals, but it does provide other benefits, such as practice management consulting or providing three-year loans to help advisers get on their feet, according to Ben Harrison, head of business development and relationship management at Pershing's RIA unit.

“We do believe it's important for these newly independent advisers to remain independent,” Mr. Harrison said. “Providing a working-capital loan helps them to manage their transition and allows them to preserve their independence with the obligation to repay.”

Mr. Tibergien warned that custodians have to tread cautiously as they try to fill the void for brokers who previously relied on support from their firm. They don't want to provide so much support that they interfere with advisers' ability to have independent choice in recommending a custodian.

“We recognize the difference in the economic model of an RIA versus a broker, and part of our responsibility to those people who are starting as an RIA is to help them understand the rules of engagement and how to run the business in the new environment,” he said. “That's where we would rather add value than try to induce them with financial incentives.”

Reported by number of RIA custody clients
# of clients
(% change vs. 2014)
Assets under custody (M)
(% change vs. 2014)
7,100 (# of clients)
1.4%(% change vs. 2014)
$1,136,500 (Assets under custody (M))
5.1%(% change vs. 2014)
Interactive Broker
Source: InvestmentNews Data
Note: As of June 30. N/A = not available. N/D = not disclosed.


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