Custodians help advisers navigate DOL fiduciary rule

Custodial units don't just hold assets anymore. To varying degrees, they're jumping into the role of compliance partner.

Aug 7, 2016 @ 8:00 am

By Christine Idzelis

Custodians have morphed into consultants for registered investment advisory firms, navigating them through an increasingly complex regulatory landscape.

Chief among new regulations financial advisers have to conform to is the Labor Department's fiduciary rule, the most significant law to reshape wealth management in decades. Now they must be able to demonstrate they're acting in the best interests of their clients when providing advice tied to retirement accounts.

Custodial units, including those at Charles Schwab Corp., Fidelity Investments, Pershing and TD Ameritrade Holding Corp., have been busy educating advisers about the highly prescriptive rule, which runs more than 1,000 pages and must be implemented by early next year. One particular concern is the rollover of assets into individual retirement accounts, because it creates a new layer of cost to investors that could come under the scrutiny of regulators.

“If there is an executive who has their assets in a 401(k) plan, and they move jobs,” advisers will need to compare investment options and fees before moving them into an IRA, said Ben Harrison, Pershing Advisor Solutions' head of business development and relationship management. “We're working on an automated tool that will help advisers.”

(Related: In-depth coverage of every aspect of the DOL fiduciary rule)

The idea behind the rule is simple: to prevent conflicts of interests from arising in situations where financial advisers may be incentivized to make investment recommendations that compensate them better at the expense of their clients. Digesting every detail of the new rule and establishing the necessary infrastructure to avoid a run-in with regulators is less easy.


Mr. Harrison said Pershing is aiming to have an automated tool available by April, which is when the Labor Department is requiring the first stage of implementation of the new rule to be completed. Advisers must be fully compliant by January 2018.

“As specific as the law is, the practical matter of it is not just black and white. There's a lot of gray in there,” said Tony Mazzali, chief executive of wealth management firm CG Financial Services. “In order for us to be able to determine best interest, we have to be able to take a holistic view” of clients' assets.

$2.8TSize of the RIA custody market

That's where having the right technology in place is important.

The Securities and Exchange Commission has begun asking for digital records of client trades and transactions to help ensure investors aren't exposed to inappropriate risks, according to Mr. Mazzali. “It's in the same vein of the DOL best-interest rule,” he said, adding that it's becoming imperative to view each client transaction in digital form for compliance reasons.

Since the Labor Department issued its fiduciary rule four months ago, custodians largely have focused on helping advisers understand how the various pieces of the regulation will impact their business.

(Related: Automating better compliance to meet new SEC requirements)

“At this point, it's really about education,” said Tom Nally, president of TD Ameritrade Institutional, which provides brokerage and custody services. Many RIAs have needed “a little bit of a wake-up call,” he said, after initially assuming they wouldn't be impacted by the DOL's rule because they're already fiduciaries.


Unlike brokers, RIAs are held to a fiduciary standard by the SEC when providing any kind of investment advice, meaning they must put their clients' interests ahead of their own. Still, they'll have to satisfy the demands of the DOL's new regulation by having the proper work flow procedures in place.

“There's a lot of complexity to the rule,” said Mr. Nally, adding that TD Ameritrade has teams of people looking at its various aspects. “It's not an order ticket. It's far more nuanced.”

In July, TD set up a “DOL Rule Resource Center” on its brokerage and custody platform to provide RIAs access to resources and information relating to implementation of the rule, according to a spokesman for the firm. Advisers can find a list of frequently asked questions, news articles, white papers and webcasts to help them prepare.

There's a lot of complexity to the rule. It's not an order ticket.— Tom Nally,  president of TD Ameritrade Institutional

There's a massive amount of client assets at stake, with the industry's total assets more than doubling since 2007.

The $2.8 trillion RIA custody market is dominated by Charles Schwab and Fidelity, which hold about 70% of client assets overseen by 18,520 registered investment advisory firms, according to Boston research firm Aite Group.

Charles Schwab held about $1.06 trillion in assets last year and Fidelity had $882 billion. Each increased assets by less than 2% from 2014, while smaller custodians grew at a much faster pace, an Aite Group research report shows.

Independent broker-dealer network LPL Financial saw the biggest jump last year, with assets swelling nearly 31%, to $119 billion. Assets at Pershing, which is owned by Bank of New York Mellon Corp., rose almost 14%, to $182 billion, and TD Ameritrade increased its assets by about 11%, to $334 billion.

(Related: Custodians and clearing firms ranked by number of clients)

“Our role in this is to help firms comply with the rule,” said Bob Oros, head of the RIA division for Fidelity Clearing & Custody Solutions. He estimated that about half of advisers the firm works with weren't really paying attention to the DOL rule because they already viewed themselves as fiduciaries.


“We've started with education, and we've been very aggressive with outreach,” Mr. Oros said. “April 2017 will probably be here faster than people realize.”

There's another way custodians are lending a hand in adapting to new regulatory burdens: They're playing the role of matchmaker. The cost of compliance may nudge some RIAs to find a merger partner, and they're already turning to firms like TD Ameritrade and Fidelity for help in finding one.

Fidelity has a short list of potential buyers. “We've identified roughly 40 firms who we think have a blueprint for doing this,” said Mr. Oros, adding they've already grown by acquisition and have access to capital alongside their advisory expertise.

(Related: Frequently asked questions about the DOL fiduciary rule)

With the initial DOL deadline still eight months away, Charles Schwab so far has focused on educating RIAs and is advocating for them in Washington, according to Jonathan Beatty, senior vice president for sales and relationship management at Schwab Advisor Services. The industry has yet to see an actual best-interest contract which advisers will use to comply with the fiduciary rule as part of their regular work flow, he said.

As the ongoing analysis of the regulation gives way to practical steps for advisers, Charles Schwab will find itself in a familiar position as business consultant, according to Mr. Beatty. The firm already offers workshop programs to help advisers build the value of their practices.

“Custodian is almost a term of the past,” he said. “We have evolved beyond that traditional role.”


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