Many advisors find just one custodian isn't enough.

Competition in the custodial services industry has undoubtedly provided advisors with more choices, as a steady stream of niche players have squeezed into a market dominated by powerhouses such as Charles Schwab, Fidelity and TD Waterhouse.

There are, in fact, so many custodians to chose from nowadays that many advisors are succumbing to a potato chip effect: They can't just have one. "We would have used one, but what we found is that no one custodian will do all the things you want it to do," says Jill C. Shermer, manager of asset management services with the Wade Financial Group Inc. in Minneapolis.

The firm uses three primary custodians-SEI, Schwab and Foliofn-as well as two secondary custodians for annuity products and clients with large cash positions. Each of the custodians, she says, brings at least one benefit to clients that makes it worthwhile to maintain the relationship.

The firm stays with multiple custodians despite the increased workload it creates for staff, particularly in cases where one client has their assets broken up in separate custodial accounts. "For clients with more than one custodian, it takes more time for us to do back-office things like billing," she says.

There are actually a number of reasons why advisors say it's sometimes unavoidable, and sometimes preferable, to use the services of two or more custodians.

They note that increased competition in the business has made the use of multiple custodians more feasible. Also, as competition forces custodians to tweak their prices and services, advisors are continually finding better deals for themselves and switching to new providers. But even when advisors switch, they often find themselves maintaining relationships with their former custodians-either for the sake of prudence, or for clients who don't want to switch.

"I'm not sure I would want to bank my entire future on one organization," says Charles D. Haines, president and CEO of Charles D. Haines LLC in Birmingham, Ala. Haines is one of the founding shareholders of National Advisors Trust, where he has shifted much of his custodial business.

But he has also retained the services of Charles Schwab, his main custodian before National Advisors. "It's not a good idea to get too tied up and cozy with one custodian," he says. Ironically, Fidelity provides certain clearing and custodial services to National Advisors.

Advisors also say that along with competition, the custodial marketplace has become more specialized and segmented. Charles Schwab, for instance, has been targeting its pricing and services to higher-income clientele. Smaller niche players, including Ameritrade, have moved in to scoop up customers Schwab may be leaving behind. Likewise, fee schedules and services are in constant motion as players adjust to the changing marketplace.

Adding to the plethora of possibilities is the fact that clients themselves have their favorites when it comes to custodians, and can exert a heavy influence on their advisors.

Letting clients do the picking, however, can be risky. LVM Capital Management Ltd. in Wheaton, Ill., for instance, is juggling relationships with more than two dozen custodians because it gave its clients a free hand in deciding where to keep their assets.

The firm's lengthy list of custodians includes full-service brokers, discount brokers and trust companies, says Robert O'Dell, an advisor at the firm. The situation has cut down on the firm's efficiency, O'Dell says, partly because of the many traders and service reps the firm has to deal with. "Costs are up for that," O'Dell says.

The firm is trying to fix the situation. It recently put forth a list of five "preferred" custodians that includes Charles Schwab, TD Waterhouse and Private Bank and Trust Company in Chicago. New clients will be either asked to custody assets with one of these providers or accept an extra 15 basis points on their annual fee. The firm, meanwhile, is trying its best to convince current clients to also switch to the preferred providers, says O'Dell.

Limiting clients to one custodian, while ostensibly more efficient, isn't feasible because clients have varying needs, he says. Clients who are heavily weighted in fixed income, or who have a need for trust services, would probably best be served by a trust account, he notes. "I think we'd like to give our clients a little choice that way," O'Dell says.

Phillip Cook, owner of Cook & Associates in Torrance, Calif., has gone through about ten custodians during his 25 years in business, including a bank that went belly up. Among the lessons Cook says he's learned are to not judge a custodian by price alone, to assess the competency of a custodian's staff before making a full commitment and to not assume that a company-even a trust company-doesn't cheat.

He's also wary of big companies, and those that make big promises.

"If they are too liberal or cutting edge in their investment policy, that usually means they are here today and gone tomorrow," Cook says.

He currently uses five custodians, including Pershing and Trust Company of America. Some of the custodians are just good fits for his clients. Cook uses Lincoln Trust, for example, because they provide a reasonably priced solo 401(k) account for one of his self-employed clients.

He generally finds that trust companies, while more expensive than brokerage companies, are more flexible in their investment policies and better suited for more affluent clients.

When striking a relationship with a new custodian, he starts slowly, usually with one or two accounts to test the company and its service. "You talk to them about different issues and see how long it takes them to get back to you," he says. "Then you get a feeling for how long these people have been doing what they've been doing."

Schwab, which owns the majority of the custodian market, is often entangled in an advisor's decision-making in some way. Craig Limoge, owner of Limoge Investment Management in Vancouver, Wash., says he has a love/hate relationship with Schwab that has resulted in him moving to other custodians, but not completely separating from Schwab.

His client accounts are currently split between Schwab and Ameritrade. The latter company became his custodian after it bought Bidwell & Co. of Portland, which Limoge had been using as his custodian. Limoge's gripe with Schwab is a common one. He's troubled by the fact that they are, in fact, a competitor-pursuing customers who fit his client profile as well. Schwab's costs are also not the lowest around.

Other drawbacks, he says, include a limited bond inventory and a fee structure that can add up for frequent stock traders. But Limoge acknowledges that Schwab does have volume, experience and a broad range of services. "They do have other benefits to working with them," he says.

A recent client, for example, had a Swiss account that held securities that were held with a mix of Swiss francs and euros. The client wanted to change custodians, but did not want to convert the assets into ADRs, Limoge says. While this type of account would have been a problem with a smaller custodian, and could not be handled by Ameritrade, Limoge says Schwab had the staff to tackle the problem. "I called Schwab and they said, 'Let us transfer you to our international trading department,'" he says.

Limoge had a similar result when he was trying to devise a strategy for a client who had 80% of his net worth tied up in one company. The client refused to sell off the holdings, so Limoge was forced to devise a strategy for protecting the investment position. He contacted Schwab and found out they had a department for concentrated positions.

"The strength of a larger company is they have the staff to track down the problems and details that come up when transferring accounts and money," he says.

Broker-dealers are picking up on advisors' inclination to have more than one custodian relationship. Securities America, for instance, recently launched a program that gives advisors access to Pershing, National Financial and Schwab for their custodial needs.