Where you put your fee-only business is now a wide-open question.

Where investment advisors decide to custody their fee-based business is becoming a matter of some debate, thanks to an increasing number of new entrants and a decided retooling by established players. The upshot is simple: Advisors today have more choice than ever before in finding the right custodial fit in terms of price, back-office service and technology platforms.

The influx of planners to the fee-based model is driving the creation of custodial platforms at many broker-dealers, where executives don't want to lose their once-commissioned planners to other platforms. Also, fee-based advisory assets are predictable, growing and look particularly profitable in the face of shrinking and unstable transaction-oriented business.

Michael Di Girolamo, senior vice president at Raymond James Investment Advisors Division, says the economic and regulatory pressures of doing commission-based business is fueling the trend. "Fee-only is becoming more attractive across the board," says Di Girolamo, who has led the launch of Raymond James' custodial platform over the past several years. Raymond James allows planners and brokers considering a transition to a fee-only practice to hold their securities license at the firm for two years, in case they conclude that the fee-only world isn't for them and they want to go back to a fee-and-commission model.

Custodial choice and competition is good news for a profession that has seen some of its major custodians, including giants Schwab Institutional and Vanguard, turn the tables on advisors. On July 1 Schwab, the leading U.S. gatherer of custodial assets, according to Boston-based Cerulli & Associates, ratcheted up fees to $1,200 per quarter for advisors who manage less than $10 million, from $600 quarterly for firms managing less than $3 million in assets. The new fees impact 1,800 of the 5,800 financial advisors who use Schwab's custodial services.

In March, Vanguard decided it wanted out of the increasingly costly and technology-driven custody business altogether-a move that is still reverberating among the 400 advisors who custodied roughly $5 billion assets with the mutual fund giant. The firm gave advisors six months to find a new custodian and endorsed T. D. Waterhouse as its replacement.

Both decisions were a wake-up call for advisors and a driving force leading advisory firms to place business with more than one custodian as a defensive move. The goal, say advisors, is to ensure they aren't left high and dry should a broker-dealer run aground or decide to get out of the business. "I think as far as custodians go, two is better than one," says Christopher Cordaro, a wealth manager with Regent Atlantic Capital in Chatham, N.J. "Just in case there is a disaster or a firm closes up shop, we want to be covered."

Brokerage executives admit that they are benefiting from the uncertainty. "There has been lots of interest generated lately, especially among advisors who manage less than $10 million," says Dean Rodewald, director of client relations at Datalynx in Denver.

What's different now than, say, three years ago, is that new and existing custodians are getting very good at deciding what unique market segment they want to serve-whether it's the smallest advisor market or the largest, those who like to trade individual equities or those who want to move their business from a wirehouse. Now more than ever, there really does seem to be a custodian for just about any advisor.

In fact, one of the claims to fame at Raymond James Investment Advisors Division is precisely that it is expert at helping wirehouse brokers transition to a fee-only independent practice with a minimum of muss, fuss and downtime. While the division's Di Girolamo says its sweet spot is asset manager types with $100 million to $500 million to custody, today the average advisor has about $60 million. So far 25 firms have signed on with the division, which Raymond James launched about 20 months ago, and another six firms are in the pipeline. Custodied assets are currently approaching the $1 billion mark, with another $250 million waiting for final custody agreements to be inked. "We're looking for a minimum of $25 million in assets and SEC (Securities and Exchange Commission) registration," says Di Girolamo.

Transitioning wirehouse brokers are accounting for a significant percentage of the new growth. "We think we offer a service that none of our competitors can," says Di Girolamo. He explains that to mitigate the months of downtime a wirehouse broker might experience while he registers as an investment advisor, Raymond James allows the firm to register as an independent contractor with Raymond James Financial Services. "We're in the process of doing this for several branch offices now," Di Girolamo says. "This is for the wirehouse advisor who is already substantially fee-based, but sees himself as independent."

Pershing-the firm known first and foremost as the country's largest clearing brokerage-is also taking advantage of the trend of reps who want to create fee-only practices. Instead of courting individual reps, the broker-dealer is courting their introducing broker-dealers. "We're moving businesses en masse," says John Iachello, managing director of Pershing Investment Management Services, which started reaching out to its introducing broker-dealer clients only recently. "We're not doing this one by one, so we're talking in the billions of dollars of assets."

Pershing's decision to get into the custody business came in response to a call from its introducing broker-dealer clients who wanted help holding on to reps who were leaving to start or join registered investment advisory firms. "They were saying, 'Can you help us repatriate these assets?'" says Patrick Burke, director of Pershing Investment Management Services. The program Pershing developed provides a one-stop compliance solution along with back office support and a platform that helps broker-dealers and their reps monitor everything they are doing.

Iachello says the firm does not yet have a head count of firms or assets, but adds that a number of broker-dealers have "signed on to either move assets here or test drive our services." One of the main marketing advantages Pershing has is that it does not compete with its broker-dealers or advisors. "They see us as a wholesaler of financial services. We don't have a competing network of brokers. We don't have a retail side to detract from the energy and effort we pour into our core business," says Iachello.

While competition from Schwab and others who are actively touting retail services is often a heated subject for advisors, Cordaro says i it's inevitable. "Get over it, they're going to compete with us. If not now, then down the road." Cordaro's firm, RegentAtlantic, uses Schwab to custody part of its assets, and the giant's U.S. Trust affiliate has offices a mile or so down the road. "We are occasionally in competition," says Cordaro. "They're usually competing with us for clients in the $2 million to $10 million range. We're strong there, so we rarely lose. Their strength is $100 million family office clients." On the other side of the equation, Cordaro says, Schwab's client referral program provided 15% of the firm's new clients in 2002. "That's a significant piece of business development, so no, we're not shopping for a new custodian."

Not surprisingly, some broker-dealers are targeting the custody market of the super advisory firm. New York City-based Bear Stearns Advisor Services is leading this charge. In the several years since its inception, it has signed on 70 firms with a total of $30 billion in assets. So far clients have included existing hedge fund and broker-dealer clients who were already trading with Bear Stearns and had begun adding separate account and advisory services. "Most firms approach this market from a retail perspective, but we approach it from an institutional perspective," says Managing Director John Tyers. For advisors, that means access to broad and deep wealth management resources, including the firm's progressive restricted and concentrated stock strategies. "The sweet spot for us in terms of firms is $200 million and up," Tyers says.

At the other end of the target market spectrum is Ameritrade, which is only too happy to oblige advisors with less than $50 million in assets, or even $10 million or less. "We think this is the underserved market, so that's how we're positioning ourselves," says Jim Wangsness, vice president of business development at Ameritrade in Omaha, Neb. "We do it profitably because we're able to leverage our retail factory and all it's technology. Our surveys show that we're offering really good client service to lower-level advisors," says Wangsness.

Part of that service is full automation, including online account opening and weekly training seminars. So far so good; the firm, offering custodian services for less than a year, had signed on 429 advisors as of March and 600 by June.

Existing custodians are also getting a good deal smarter. Datalynx, which has been marketing custodial services since 1991, provides a spectacular level of cost savings to advisors by bundling trading costs and passing that fee along on an omnibus basis. For instance, if an advisor wants to make a trade for 100 clients, the firm will be charged $25 for the entire trade, instead of the $299.50 or so that Ameritrade claims they would pay on a per-head-basis at a retail firm such as Schwab. "What that does for advisors is it allows them to provide value-added to clients by way of a flat annual fee and it gives them a profit center they can manage," says Datalynx's Rodewald. While the firm can support advisors with less than $10 million in assets, its sweet spot is the $50 million to $100 million range, Rodewald adds.

For advisors who want to start over or are hankering for innovation, the time to find a new or additional custodian is here.