Does the world need another custodian?

Velox is just one of several new, digital-first custodians to hit the scene recently.

Last week in New York City, former Electronic Transaction Clearing executives hosted a party to launch their latest venture: Velox Clearing.

Velox is a custody and clearing firm targeting registered investment advisers, small to midsize brokers and hedge funds that CEO Pat Kelly says have largely been neglected by incumbent firms. In other words, firms without enough assets for them to be worth larger custodians’ time.

Mr. Kelly says Velox will provide superior technology that’s not reliant on the legacy systems at the larger banks, brokerages and custodians, and give better service than smaller advisers can get elsewhere, all at a price point that he says will help small firms increase profitability.

“We certainly want to talk on new customers and grow with them,” Mr. Kelly told InvestmentNews.

Velox is one of several new, digital-first custodians to hit the scene recently. There’s DriveWealth, which promotes its proprietary digital trading technology and application programming interfaces (APIs) for firms looking to offer client-facing technology like self-directed investing or robo-advice. And there’s Altruist, which entered XY Planning Network’s fintech competition as “the world’s first commission-free digital investment platform for financial advisers” and says it can help firms cut technology costs by 90%.

There are undoubtedly others that will frantically send a PR email after reading this article, asking why they weren’t included. But the point is that there seem to be a lot of people looking to get into the custody business these days. Why?

Nexus Strategy president Tim Welsh said technology has made it simple to recreate the custodian model, which was always a money-making enterprise if one could get customers.

“The custody business is probably the most profitable thing on planet Earth,” Mr. Welsh said. “Now with technology, you can actually make custody sexy again.”

Pinnacle Advisory group director of wealth management and XYPN co-founder Michael Kitces said there is still a gap between the client experience offered by the robo startups and what advisers get from the big custodians. The newbies could fill it. Traditional custodians are also raising asset minimums for advisers, creating an opportunity for newcomers to serve the smaller end of the market.

But even if the new guys have the best technology in the world, it’s not clear whether they can carve out market share. Cost is only one part of the equation for advisers deciding where to custody client assets, especially when custody services are often free and firms are eliminating trading fees. Mr. Kitces feels the new entrants are brandishing operational efficiencies to solve for distribution challenges.

“It’s sort of like bringing a knife to a gunfight,” he said.

There’s also a reason traditional custodians are raising minimums, Mr. Kitces added. A lot of small advisers simply aren’t succeeding, creating challenges and even compliance concerns for custodians that took them on.

Mr. Welsh points out that the brands associated with big brokerages and custodians still mean a lot to end investors. It’s easier for advisers to tell a prospect their money will be safe at a Charles Schwab, TD Ameritrade or Fidelity, names that are ubiquitous among consumers, than to explain what Velox is. It could be the difference between winning and losing an account.

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“The big brands will continue to dominate. The custody business is easy to enter, and profits are huge, but the challenge is getting to scale and making a go of it,” Mr. Welsh said.

After all, the pitches of these newcomers all sound pretty familiar to Apex Clearing, which launched in 2012 as an API-driven alternative to older custodians.

While Apex was the custodian behind Wealthfront and Robinhood, two of the most successful fintech startups, both companies have since left Apex in favor of building their own custody platforms. The company recently pivoted toward focusing more on human advisers, but it’s unclear to what extent Apex has persuaded advisers to choose it over more traditional options.

So what can Velox, DriveWealth and Altruist do differently? The companies are long on buzzwords like client experience, better technology and creating efficiencies, but short on specifics.

That’s not to say they can’t succeed. As Mr. Kitces pointed out, the opportunity is there to build something advisers want, but can’t yet get from the major custodians, or to service clients with few assets. It’s just a matter of getting advisers to try them out.

No one doubts that a better mousetrap can be built. The question is if anyone really needs another mousetrap.