Editor's note: This story was amended after it was brought to our attention that Ms. Crowther has represented Charles Schwab.
As competition continues for financial advisory clients, there may be a tendency for registered investment advisory firms to worry that large firms that custody the RIAs' assets will poach the RIAs' clients. While there are few legal limitations on the competition for clients, various factors should reassure RIAs that there is no need to fear the large custodians.
Most RIA firms are small businesses with fewer than 10 employees. These small businesses must therefore be poised to serve many different clients, and the burden of overhead and administrative requirements can negatively impact their ability to compete for new business and serve their existing accounts.
To avoid the onerous requirements imposed by the Securities Act of 1940 on RIAs who take custody of their clients' funds or securities, many choose to rely on banks or broker-dealers to hold their clients' funds.
Four major broker-dealers also offer substantial support to independent RIAs: Charles Schwab, Fidelity, TD Ameritrade and Pershing Advisor Solutions. Each of these "Big Four" custodians also has a separate investment management or advisory business where in-house financial consultants provide investment advice and management services to clients, and these businesses compete with the RIAs who use the broker-dealer to custody the clients' accounts.
Disputes have arisen in a variety of contexts in which the RIA asserts or suspects that the custodial firm intends to disadvantage the RIA so that the in-house consultants will be able to lure the RIA's clients to become direct clients of the custodian itself.
Indeed, some recently expressed such concerns when Schwab launched a subscription-based pricing for its robo-adviser.
Generally, the terms of an RIA's arrangement with a custodian are questions of contract; few statutes or other laws govern the relationship between the parties and they would not prohibit competition.
In California, even contractual limitations on the ability to compete for business are largely unenforceable, as the Business and Professions Code voids agreements that restrain "engaging in a lawful profession, trade or business to any extent." This statute generally invalidates non-competition agreements and has recently been interpreted to encompass agreements not to solicit former co-workers as well. WeRide Corp. v. Huang, 2019 WL 143934 (N.D. Cal. April 1, 2019.) There are consequently few legal restrictions on the ability to compete for colleagues or clients.
However, the RIA business at the "Big Four" firms is substantial, growing and symbiotic. Schwab, for example, has about the same volume of client assets managed by RIAs on its Advisor Services custodial platform as it has on the retail brokerage side.
Schwab and TD Ameritrade both have referral programs in which they introduce retail clients to RIA firms under appropriate circumstances, and some custodial firms have implemented policies that prohibit their in-house consultants from directly contacting the clients of RIA firms who custody with them.
To the extent that any custodial firm would engage in poaching activities, it would be well-publicized within the RIA community, negatively impacting the custodial firm's business. The market itself should allay fears that RIAs have about working with those firms as custodians as the legal and practical benefits outweigh the risks.
Robyn C. Crowther is a partner at law firm Steptoe who has represented Charles Schwab and other financial institutions. She serves as co-managing partner of Steptoe's Los Angeles office.