In the ever-evolving landscape of the financial advisory industry, registered investment advisor (RIA) firms are increasingly turning to a strategic approach known as multi-custodial relationships. This trend, which is gaining momentum, is not only beneficial for RIA firms themselves but also for their valued clients. The utilization of multiple custodians offers a plethora of advantages, ranging from enhanced flexibility to the safeguarding of client assets. In this article, we will delve into the intricacies of multi-custodial relationships, their growing importance, and how they impact the world of registered investment advisors.
The Shifting Landscape of RIA Firms
Historically, many RIA firms relied on a single custodian to handle their clients' assets. While this approach worked for some, it limited the scope of services and options that these firms could offer. However, in recent years, a significant shift has occurred, with the emergence of multi-custodial relationships becoming a key strategy.
Around 85% of the Financial Times Top 300 RIA firms in 2020 had already adopted the use of two or more custodians by the end of 2019, and a substantial 58% used more than three custodians. This data, provided by FA-IQ's sister publication Ignites Research, sheds light on the rapid adoption of multi-custodians by leading RIA firms. Among the custodians, Charles Schwab has emerged as a popular choice, showcasing its prominence in the industry.
Susannah Noel
Fidelity Custodian Change | JFS Wealth AdvisorsGGM Wealth Advisors | Charles Schwab & Co. Custodian InformationThe Flexibility Factor
Ed Swenson, the Chief Operating Officer of Dynasty Financial Partners, highlights the advantages of employing multiple custodians. He notes that as RIA firms grow, often reaching the $500 million to $750 million mark in client assets, the addition of a second custodian becomes a logical step. Swenson emphasizes that while it may not be practical for smaller firms due to increased complexity, it becomes imperative as a means to address a broader market and seize more opportunities.
Catering to Diverse Client Needs
One compelling reason for the adoption of multi-custodians is the varying focus and expertise of different custodians. Some custodians are more inclined towards handling alternative assets, while others specialize in international assets, adding complexity to the equation. Moreover, certain custodians excel in credit and lending services. For RIA firms committed to providing their clients with the best options, the ability to tap into a diverse range of capabilities is essential.
Streamlining Operations with Innovative Solutions
To further streamline the management of assets across multiple custodians, some firms are turning to innovative solutions. BNY Mellon's Pershing, for instance, introduced a multi-custodial managed accounts platform called Managed Accounts Central. This solution empowers advisors to oversee managed accounts across custodians through a single dashboard, eliminating the need to navigate between multiple platforms. Such innovations are simplifying the multi-custodial approach, making it even more attractive for RIA firms and their clients.
The Power of Choice
Bruce Lee, founder and CEO of Keebeck Wealth Management, emphasizes that advisors have become increasingly aware of the benefits of choice over the last 15 years. The ability to offer clients a choice, rather than pushing proprietary products, has become a hallmark of the RIA industry's growth. Lee's firm, for instance, utilizes both Charles Schwab and Pershing to cater to different clients' unique needs. Clients with short-term cash requirements benefit from Schwab's widespread offices and banking services, while those with concentrated stock positions prefer Pershing's expertise.
Security and Safety in Diversity
Lee Korn, Principal and Financial Advisor at Opal Wealth Advisors, adds another layer to the multi-custodial strategy. In the aftermath of the 2008 financial crisis and the subsequent collapse of firms like Lehman Brothers and Bear Stearns, some clients are opting for multiple custodians for added security and safety. Opal Wealth Advisors employs Charles Schwab and Pershing and utilizes Envestnet's Tamarac platform, which seamlessly integrates data from various custodians. This approach ensures not only choice but also additional layers of security for clients' assets.
In conclusion, the rise of multi-custodians is a defining trend in the registered investment advisor industry. RIA firms are turning to this strategy to enhance their flexibility, cater to diverse client needs, and offer clients a wide array of options. As the industry continues to evolve, multi-custodial relationships are becoming not just a trend but a strategic imperative for the success of RIA firms and the satisfaction of their valued clients.
