The custody business has evolved over the last decade. No longer just holders of financial adviser client assets, firms are now developing their roles as business partners for advisory firms.
Thanks in large part to the proliferation of Internet communications and other technological advances, broker-dealers seamlessly run the back offices for advisers today, making client information available to advisers at the touch of a button.
Custody firms also now offer advisers myriad business services, many focused on helping independent investment advisers expand their client base or their adviser ranks. Some even help advisory firms access health insurance or other employee benefits.
"The simple business we were in five years ago is not the business we are in today," said Charles Goldman, head of San Francisco-based Schwab Institutional, the division of The
Charles Schwab Corp. that holds about $569.7 billion in assets in custody for clients of about 5,500 advisers. "We have a far broader array of products, platforms and clients."
The custody business has come so far in the past 10 years that it's hard to remember how important its original functions were to the success of registered investment advisers, who by the mid-1980s were drowning in a sea of paper.
Today, in addition to Schwab Institutional, other giants of the custody business for advisers include the Fidelity Registered Investment Advisor Group, TD Ameritrade Institutional and Pershing LLC.
As more assets are moving toward independent financial advisers, the businesses of custody providers are surging, said Rebecca Pomering, practice leader for Seattle-based Moss Adams LLP's financial services industry consulting group. But there have been a few bumps for the industry in the past 10 years.
Looking even further back, the stock market rally that began in 1982 resulted in many new investment products and lots of new customers for financial advisers.
But the paperwork load was so heavy that some firms had to close their doors for several days each quarter to compile client statements manually, advisers recall.
Advisers had to consult duplicate paper confirmations they received from each mutual fund company that held a client account and manually enter balance information so they could send out a statement, said Jeff Merriman of Seattle-based Merriman Berkman Next Inc., which has $1.5 billion in assets under management.
The solution was inadvertently provided by brokerage firm Charles Schwab & Co. Inc. The company had created a central platform in 1984 for investors to buy and sell no-load mutual funds from multiple providers. Schwab charged their account holders a small transaction fee for each trade and provided customers with a consolidated statement.
Independent advisers soon began using the Schwab system for clients, who gave advisers authorization to buy and sell in their accounts. After learning how popular its platform was with these professionals, in 1987, Schwab formally launched its custody business serving advisers.
Most advisers keep assets in custody with multiple firms, hoping to gain the "frequent-flier benefits,'' or competing services, the custodians offer, said Ms. Pomering, who next month will step into a new role as head of Moss Adams' wealth management group.
New technologies, additional business services, and help attracting and retaining financial professionals are all benefits that custodians will increasingly make available to lure advisers to their platform, she said.
"You don't hear custodians distinguishing themselves based on custody or reporting,'' Ms. Pomering said. "They're focused on tools they can offer advisers to differentiate themselves."
