The business of being a custodian for independent RIAs is gener- ally considered a bit “boring.”And that’s pretty much how it’s been forthe last 30-plus years.
After all, what do they do? Open brokerage accounts, keep client assets safeand secure, process trades and moneymovements, deliver statements andprovide basic operational technologythrough some form of an online advisorworkstation.
That’s about it — a sleepy, commod-itized corner of the financial servicesindustry if there ever was one.
Meanwhile, RIAs do all of the heavylifting by acquiring clients and managing relationships, while implementing investment and financial plans, allunder their own brand. At the sametime, RIAs benefit greatly from theresources, services and economics oftheir chosen custodian in driving operational efficiencies.
Pricing for custodial work typicallyhas been paid by the end-client as custodians automated all sorts of non-trans-parent pricing schemes to keep costs forRIAs “free,” providing RIAs with operational leverage to continue to grow.
To provide these no-cost custodialservices, though, custodian brokersneeded to revenue share with mutualfunds, accept payments for order flowfrom institutional traders, harvestend-client cash through bank sweepprograms and profit from trading commissions (until recently), margin lending and other product related fees.
These multiple revenue streams made
custodians one of the most profitable
entities in all of wealth management, as
RIAs’ relentless asset gathering ability
over the years transformed wealth man-
agement, gained market share and pow-
ered custodians’ growth.
Life was good, advisors were happy,and custodians started showering themwith new technology and practice- management help to keep the RIA bandwagon rolling along.
THE NEW SCENE
So, why now do we have so much dramabuilding in this sleepy segment? Theanswer lies on the other side of the custodian house — in their retail divisions.These businesses compete fiercely in abroader retail investment world, and asa result, conflicts arise, economics getflipped upside down, and chaos ensues.
Case in point: Charles Schwab let
loose a “shot heard round the world”
on Oct. 1, 2019, when it cut trading
commissions to zero; many direct com-
petitors quickly followed suit, though
Interactive Brokers made the first move
in the race to zero on Sept. 26.
The aftermath of Schwab’s head-line-grabbing decision, along withTD Ameritrade’s copycat maneuver,is now ripping through the wealthmanagement industry with tsunami-level force, changing the economicdynamics for advisors, custodians andinvestors forever.
One immediate result of zero commissions was the devastating impact tothe entire online broker space, as stockprices of these brokers were pummeledto levels not seen in decades. Two ofthe weaker players with RIA custodydivisions, TD Ameritrade and E-Trade,were soon scooped up by rivals inopportunistic acquisition plays to gaineconomies of scale in a rapidly decliningrevenue environment.
While on the surface, this may notseem like an inflection point in the
By Tim Welsh
A Look at Chaos in the Custodial Space
The once-sleepy industry has been the scene of intense change over the
past nine months.