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.