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."