Various industry surveys over the years have shown that the larger an RIA gets, the more likely they are to use the services of more than one custodian. In my 27 years in wealth management, I can confirm that the conventional wisdom has been, regardless of the size of the RIA, “We should keep our custodian honest—let's split our assets into two custodians and make sure they are competing for our business at all times.” At face value, this seems like logical reasoning, but a deeper understanding reveals potential flaws in this approach.
When an RIA divides its assets between two custodians, each custodian considers only the assets held with them when determining the RIA's service level. If, for example, your RIA has $1 billion in assets under management, and you put $500 million in Custodian A and $500 million in Custodian B, neither custodian sees you as a $1 billion client—indeed, they do. see your firm only based on the amount of assets you have held with them. Even worse, if you're a $2 billion RIA and invest $500 million with Custodian A and $1.5 billion with Custodian B, you'll notice a big difference in service between the custodians as you qualify for the highest level of service of custodian B, but not qualify for the top tier in custodian A. Therefore, you won't be comparing apples to apples when evaluating your service for both custodians.
As a consultant, when I traveled around the country meeting with RIAs, I would always be amazed that an RIA would tell me that Custodian A is far superior to Custodian B, but then I would travel to the RIA in the street. with the same amount of total assets, and they would say the exact opposite. In their experience, Custodian A was struggling and Custodian B was clearly a better partner for their business. The only difference in the two scenarios was the amount of assets with each custodian: the RIA that was satisfied with Custodian A happened to have 70% of their total assets stored there, and the RIA satisfied with Custodian B had over 80% of their total assets. there. In my opinion, there are no “good” or “bad” custodians in our industry – they all do a great job partnering with RIAs and supporting the end client. An RIA's level of satisfaction with a custodian is directly related to the percentage of assets held with them.
My advice has always been to place as many assets as you can with a custodian, qualify for the highest level of service, and try to keep things as simple as possible for your support staff. Don't make them learn the nuances of each guardian, the different terminology between guardians and the different document requirements and different policies and procedures between them. The mere potential of an RIA exploring relationships with other custodians is sufficient to encourage competition and ensure fair treatment by the incumbent custodian. So keep things as simple as possible for yourself and your team.
The reason larger RIAs are more likely to split assets across two custodians is because a $5 billion RIA, for example, can split their assets and still qualify for the highest level of service in both custodians. I've never been able to set up a custodian and learn exactly what level of AUM qualifies for the highest level of service, but I think $1 billion is a safe bet. So the $5 billion RIA could still disproportionately allocate assets with $3.5 billion in Custodian A and $1.5 billion in Custodian B, and they would still be placed at the highest level of service in both. Keep in mind that it's natural that the $3.5 billion custodian will offer some services and price concessions that the $1.5 billion custodian will not; but compared to a $1.5 billion split of the RIA's $1.1 billion and $400 million in assets between custodians, you can see where the larger RIA with both custodians has an advantage.
The other main reason that larger VNRs divide assets between custodians is for M&A considerations. The landscape for acquiring RIAs is extremely competitive, and getting an acquisition across the finish line is very difficult. The buyer and seller must agree on: investment philosophy, geography, culture and, of course, valuation. Assuming an agreement can be reached on these difficult topics, it will be difficult to then say, “Oh, but you have to re-report all your clients to our custodian.” It's going to be hard to compete with another buyer who says to the seller, “Oh yeah, we have a relationship with your custodian … our back office support staff is very familiar with them, you can You absolutely keep your customers in that custodian.”
If your firm's assets are currently with only one custodian and you're considering getting into the M&A game, it's a good idea to reach out to other custodians and introduce yourself. Let them know that if you were to buy a firm already held with them, you plan to leave the assets there. You'll want to have that discussion now and learn about the onboarding process and how to get your RIA on their platform, so during those M&A negotiations, if you can't say, “Yes, we we already have assets there,” you can at least say, “Yes, we've had many discussions with that custodian, we understand the process, and it will be a smooth transition for you, your employees, and your customers to join our firm.”
We owe a great debt of gratitude to the custodians who support the RIA industry. Customers are looking for asset security, record keeping and banking products like checks, debit cards, credit cards, lending solutions, mobile deposits, etc. RIAs themselves don't provide these solutions – it's the custodians who make it possible. They also do a fantastic job with their approach to customer segmentation – knowing their exact profit margin for each RIA on their platform and tying a certain level of service to each. Understanding their business model can help you determine the right approach to take with your guardian(s).
Matt Sonnen is the Chief Operating Officer at Coldstream Wealth Managementas well as the creator of the digital consulting platform COO Society, which educates RIA owners and operations professionals on how to build more impactful and profitable enterprises. He is also the host of the popular The COO Roundtable Podcast.