Custodians no longer at the center of RIA technology hubs

Aite report shows more advisers are reaching out directly to technology vendors

Mar 1, 2019 @ 2:19 pm

By Ryan W. Neal

The relationship between custodians, registered investment advisers and technology vendors is evolving.

RIAs today are demanding deeper and more robust data on clients so they can provide new services like financial planning, but these advisers are increasingly turning to third-party technologies or even their own data warehouses instead of relying on a custodian, according to a new report from Aite Group.

As a result, custodians find they are no longer at the core of an RIA's technology nor its client relationships.

(More:Two IBDs look at technology differently)

"The custodial value proposition is diminishing," said Greg O'Gara, senior research analyst for Aite Group's wealth management practice and author of the report. "They have to bring new ways to leverage data that they do have, and data that they can get, to create a new value proposition for their clients."

After investing heavily in proprietary technology as a differentiating factor, custodians are coming to terms with the fact that advisers just aren't using these tools, Mr. O'Gara said. RIAs want choice on what tools they use, which is why you see firms like Schwab Advisor Services decide to focus less on proprietary products and more on tight integration with third parties.

Noel Stave, RBC Correspondent and Advisor Services chief operating officer, agreed that custodians can be more valuable to RIAs by supporting technology instead of trying to build their own.

"The pure processing aspect of a custodian is just commodity at this point," Mr. Stave said, adding that all the major firms do a good job with the core services. "Where the value-add now is what level of tech enablement we can bring to their practices that helps them differentiate."

RBC offers support for a curated menu of third-party technologies, and then with a handful of "best-in-breed" vendors it builds even tighter integrations through its RBC Black platform.

"We are far more focused on using external fintech vendors that are doing this so much better than custodians for a variety of reasons," Mr. Stave said. "We are not in the game of creating new technologies anymore. It's all about partnering and benefitting from the network effect."

(More: Charles Schwab selling PortfolioCenter to Envestnet Tamarac)

But even as custodians build "open-architecture" platforms to support third-parties, RIAs are finding they can assemble their own technology stacks using their favorite tool as the hub, often times the firm's client relationship manager (CRM), portfolio accounting system or an investment management platform like Envestnet.

Even more challenging for custodians is that these technology tools can offer valuable client data that custodians typically don't have access to, Mr. O'Gara said. Information like demographics, household balance sheets, major life milestones like a child being born, or personal information like birthdays and favorite sports teams.

Third-party fintech also can support RIAs working with multiple custodians and provide information on held-away assets and other financial products like insurance and annuities.

"In order to support holistic financial planning, you need to know a lot about the client," Mr. O'Gara said. "It doesn't always have to be about financial services, it's about deepening the client relationships. You see a lot of RIAs collecting it on their own and storing it with vendors to leverage the relationship."

Custodians should start to aggressively reinvent themselves around data and analytics, going beyond their traditional role as processors to head up benchmarking, predictive analytics, practice management and growth processes, he said.

Some are working on it already.

For example, BNY Mellon's Pershing is working on an AI engine that recommends next best actions for an adviser to take. RBC is doing more practice management than ever before, offering dedicated training and workshops for advisers, Mr. Stave said.

In 2016, TD Ameritrade Institutional bought FA Insight to leverage adviser benchmarking data.

(More: TD Ameritrade to acquire FA Insight for big data)

"Advisers want to see how they stack up against other advisers," said Jon Patullo, TD Ameritrade's managing director of technology product management.

TD Ameritraded is focused on such business intelligence and data going forward, he said.

He also sees an opportunity for custodians to help RIAs with cybersecurity, which Mr. Patullo said is the biggest concern many advisers have today.

While custodians may not be RIAs' central tech hub anymore, they are still a long ways away from being left out of the equation, Mr. O'Gara said. Adoption of modern digital tools is still low throughout the industry, and custodians can be a trusted partner to guide firms through technology decisions.

"At the end of the day… if custodians are really getting squeezed out of the picture, they can just do an acquisition," he said.

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