Advisers are required to perform due diligence when choosing or retaining a custodian for their clients' accounts. In compliance terms, this is called "best execution." Best execution requires analysis of more than just how a custodian executes trades; advisers must consider other factors such as reputation, service, pricing, accuracy, etc.
Technology seems to have become an area of consideration when evaluating custodians. I agree that it should factor into the decision. However, I break down custodian technology into two areas: custodian relevant and adviser relevant. The differentiation is whether the technology is aimed at adding efficiencies to dealing with the custodian or is more targeted to help with the internal functioning of the advisory firm. I think the former is important; the latter is not.
(Related: Custodians jump into the robo game)
Of course, the baseline for any custodian is accurate and efficient trade execution and reporting as well as fair pricing. Beyond that, a custodian has the ability to make interactions with its advisers (and clients) efficient and easy or difficult and complex. This is where technology can make a real difference.
• How fast can the custodian open an account?
• Do the custodian offer paperless forms and electronic signatures?
• How easy is it to communicate?
• Are there options for phone or email or is dial-up fax still used?
• How is the billing process handled?
• Can monthly statements be customized?
These types of functions directly deal with matters that are custodian specific.
When custodians get into other areas such as providing technology for portfolio analysis, rebalancing or practice management tools, this can be problematic in two ways. First, it is not within the custodian's primary business and second, it can be an attempt to create "captive" advisers. Although it is possible for a custodian to perform its custodian duties excellently while also providing exceptional business tools, it's not likely. Since a custodian is the only entity that can provide custodial services, it is most important to excel at that. A custodian moving into other practice management areas has to compete with other companies that focus solely on those areas.
And, like choosing a bundled solution over "best of breed," having so many functions tied up with one company can put the practice at risk should it become necessary to change custodians.
I evaluate custodians based on how well they perform custodian functions. And I choose my practice management tools based on what I consider as most appropriate for my firm.
Sheryl Rowling is chief executive of Total Rebalance Expert and principal at Rowling & Associates. She considers herself a non-techie user of technology.
