Different accounts have different requirements.
As custodians serving the independent advisor market
come and go, and merge and consolidate, many advisors are having a
harder time finding a stable home for their clients' assets. In many
cases, they're finding that using multiple custodians gets the job done
more efficiently-and with less risk-than by relying on just one. Think
of it almost as diversification theory applied to custodial
Indeed, the idea of having a single, dependable custodian to handle all assets is more of a fanciful notion than a reality for many advisors, who either by choice or circumstance, are juggling client assets across several companies.
Ron Beaton, for example, chooses to use three different custodians for clients of his firm, Ron Beaton's Money Matters in Paducah, Ky. His primary custodian is Ameritrade, but he also uses Dupree Mutual Funds to custody municipal bond fund holdings and Vanguard for a limited number of IRA and annuity accounts.
What hasn't been Beaton's choice is the changes he's made in his primary custodian the past few years. After he started his business in 1997, Beaton relied on Vanguard as his primary, until the company shut down its independent advisor business in 2003. That's when he made the jump to Ameritrade, which he thought had the friendliest environment for small shops like his own.
Now, Beaton is facing another change. Ameritrade announced in June that it will acquire TD Waterhouse U.S.A. in a $2.9 billion deal, and merge into a new company called TD Ameritrade. While Beaton is hopeful the impact on him and his clients will be minimal, he still has some concerns. In a preliminary letter to advisors, Beaton says, Ameritrade has said the merger will results in new and improved services.
Whatever the final outcome, Beaton sees the window of time leading up to the merger as less than rock-solid stability for him and his clients. "I certainly hope so, and really I believe that it will be what happens," Beaton says. "But we want them to prove it to us."
Beaton, for instance, worries that the creation of a new company could require the moving of client accounts from Ameritrade to TD Ameritrade-a tedious and time-consuming job that took him nearly three months to complete when he switched from Vanguard to Ameritrade. "I'm hoping that since Ameritrade is the acquirer, I won't have to go through that process again," he says. "That's quite a headache."
Other advisors attest to the fact that deciding on the best way to custody client assets is no simple matter these days-with consolidation, competition and new technologies figuring heavily into the equation.
Although Charles Schwab remains the biggest of the custodial service providers, followed by Fidelity and TD Waterhouse, the landscape of this industry is going through rapid changes. Discount online brokers, for example, are in the midst of a price war that has brought benefits, and new choices, to investors.
Competitors to the big three have moved into the market, many with the aim of filling niches with specialized services and technologies. Others, such as Pershing, are moving into the broader RIA market in direct competition with the market leaders. On the lower end of the market, meanwhile, custodial service providers such as Ameritrade and Shareholder Services, for example, have been aggressively going after small accounts that are increasingly being shunned by the bigger players.
The search for economies of scale has led to a recent flurry of merger speculation. Before the announcement of the Ameritrade purchase of TD Waterhouse, there were discussions of E*Trade buying Ameritrade. Now, in the wake of the Ameritrade and TD Waterhouse deal, analysts are expecting consolidation to continue, with some speculating that even Charles Schwab is not immune to a takeover bid.
The rumor mill became so active that it prompted Charles Schwab himself to issue a statement after the July 4 weekend stating that his company had no interest in being acquired. "We have no interest in selling the company," Schwab said in the statement. "We remain firmly committed to our independence ... focused on providing clients with great service at great value."
The statement, however, did not stamp out speculation that more merger and acquisition activity, whether or not it involves Schwab, is on the horizon. Competition is heating up, analysts note, and that usually means players are going to look for more efficiencies, more market share and fewer competitors.
Pershing, which was acquired by The Bank Of New York in 2003 and serves as the bank's clearing and custody unit, has been aggressively moving into the RIA custodial market over the last year. In June, Pershing announced it repositioned its investment manager services unit and renamed it Pershing Advisor Solutions. The unit is offering customized services to independent and dually registered RIAs, as well as large investment managers.
Over the last year, Pershing has seen its independent advisor assets increase from $28 billion to nearly $40 billion, says Pershing managing director John Iachello. Pershing now has about 350 RIA relationships, he adds.
Iachello says the strategy was a natural outgrowth of the merging demands of brokers and investment advisors, and the company's ability to offer a technology platform that serves both sectors.
"What's also occurred is the emergence of the dually registered rep and advisor," he says. "We can service both ends of those businesses as if they are one."
Yet advisors say finding a custodian to fit all their needs is becoming harder, particularly with the widening use of alternative investment vehicles, including private equities, real estate and hedge funds. The need for specialized services, combined with the continuing changes in the custodial marketplace, has made multiple-custodian setups the normal operating procedure for many advisors.
There are other factors as well. Mindy Ying, president and co-founder of PacWest Financial Management in San Marino, Calif., says she purposely uses Fidelity as a custodian in addition to her primary custodian Charles Schwab in order to keep some distance between herself and Schwab. "I just want to demonstrate that there is no bias and we want to deliver the best for our clients," she says.
Of the $250 million her firm has under management, about 80% is in the custody of Schwab, and the rest is at Fidelity. Another reason she uses Fidelity: It has a superior platform for handling pensions, IRA accounts and other defined benefit plans. "Some other custodians do not really take them," she says.
Ted Bush, president of Capital Advantage in Plano, Texas, uses up to five custodians-mainly Schwab and Fidelity, and trust companies that handle more specialized types of investments.
He uses Santa Fe Trust for holding real estate properties, for access to services that include rent collection, appraisals and other aspects of real estate management he says are difficult to find with other custodians. Sterling Trust Company of Waco, Texas, meanwhile, serves his needs for acting as custodian for gold coins, which some of his clients use as a hedge against inflation and equity market volatility.
But a disadvantage to spreading out assets among several custodians, he says, is reporting. "It does make it harder," Bush says. "The data collection process is more difficult, both manually and technologically. Sometimes the custodians will allow you to pull down data, sometimes they won't."
Another potential pitfall when dealing with small trust companies is that sometimes they get bought by companies that operate under a different set of rules. Bush ran into that problem recently, when a Delaware-based trust company he used as a custodian was acquired. "They literally changed so much of their requirements that we moved all the assets out of them," Bush says. "They changed things like the minimum account levels, the way transactions were processed, the kinds of things they allowed in the trust."
Some advisors say multiple custodians work to their advantage by giving them leverage when negotiating fees. "We use multiple custodians, and we believe that it helps our clients," says Tom Orecchio of Greenbaum and Orecchio Inc., wealth managers in Old Tappan, N.J.
He says aside from allowing the firm to pick custodians that suit the needs of their clients, "it further provides us with leverage when we negotiate our transaction fee schedule on behalf of our client."
"It is certainly more powerful to inform the custodian that we have an existing relationship and that we are willing to take our business elsewhere if we are unhappy with their service or fees."
Some advisors find that not all choices for custodians are open to them. With a practice that is less than a year old and has less than $10 million of assets under management, Jeff Broadhurst of Lansdale, Pa., has found a narrow set of options when it comes to custodians.
Initially, he sought to open accounts with Schwab and TD Waterhouse, but found that he fell under those companies' sweet spot when it came to account size. "When they realize you are new, you get the cold shoulder pretty quickly," he says.
Broadhurst did find, however, that there are smaller competitors anxious to fill niches that have been neglected by bigger players. Two custodians that expressed interest in having him as a client, Broadhurst says, were Ameritrade and Shareholder Services Group.
He decided on becoming a client of Shareholder Services, after setting up his business in November, because of their attentive service, he says. "I remember the day I finally got ADV approved and I sent out an e-mail blast to my contact list," he says. "They called me within a half hour asking, 'Are we ready to go?'"
For some advisors, it can reach the point where too many custodians are in the mix. Robert O'Dell says his firm, LVM Capital Management of Wheaton, Ill., works off a list of five preferred custodians, but actually deals with more than 20. The reason: many clients who join the firm insist on keeping some of their former custodians.
In many cases, these custodians are just brokers who act as "order takers," he says. "We are doing everything we can to reduce the number of custodians we have. But some clients are in love with the broker they went to college with."