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How Custodians Retain Advisors and Attract New Firms

Post on: September 20, 2019 | Ryan Gunn | 0

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Custodians compete over advisors who manage the approximately $46 trillion in invested assets in the United States. But not all custodians are the same. Some smaller custodians target niche advisory firms, usually dealing with high-net worth clients with unique interests or investing preferences. Meanwhile, the big four custodians—Schwab, Fidelity, TD Ameritrade, and Pershing Advisor Services—handle nearly all retail investor business while also trying to attract advisors that deal with high-net worth investors.

In order to attract more advisors, and therefore more assets, as well as retain firms that already hold assets, custodians attempt to differentiate themselves by offering a diverse range of products and technology solutions, as well as by charging less in fees.


Most custodians offer the same or extremely similar range of public equities. However, offering other investment options such as access to alternative investments can be a compelling draw to advisory firms that deal with more sophisticated investors. Additionally, the availability of unique product offerings is only likely to increase in importance as younger generationswho are more interested in alternative investments than previous generations—begin to inherit wealth from their parents.

However, if an advisor cannot count alternative investments in their AUM, they cannot be compensated for it, unless they are a fee-only advisor who is not compensated on AUM at all. Despite this roadblock, access to a broad range of products is a driving factor when advisors are considering a custodian.

As an example of how essential product availability is to advisors, in 2009, Schwab Advisor Services temporarily stopped accepting new alternative products, which angered the advisor community, prompting some advisors to switch custodians. Schwab quickly reversed their decision.

While alternative assets may require more diligence than public offerings, new technology is facilitating acceptance of certain types of investments. In particular, DTCC’s AIP platform allows custodians to accept and track some types of alternative products more easily.


Speaking of technology, it is another strong driving factor and may be the most important piece of the puzzle for retaining current advisor firms. That is because once a custodian’s technology platform is implemented in an advisory firm, it can be expensive and disruptive to switch away from.

Each of the major firms has their own proprietary technology that they offer to advisors. TD Ameritrade, for example, tries to differentiate itself on the integration abilities of it’s VEO One platform, which works seamlessly with many other common advisor technology products. Meanwhile, Fidelity’s Wealthscape platform is marketed as an all-in-one technology, positioned to eliminate the need for other products altogether.

Second tier custodians offer more niche options that may appeal to smaller advisory firms, or those looking for mobile technology solutions, paperless transactions, API integration, or specialized dashboard reporting. As more alternative investment technology products come to market, custodians may be able to leverage them to capitalize on both the product and technology preferences of advisors.

Fee Compression

As technology adoption across the industry has grown, it has not only served as a way to attract advisor firms to particular custodians, but has also allowed those custodians to charge far less for their services thanks to increased efficiency as a result of automation.

Custodial and platform fees either directly reduce the client’s investment, which can reduce AUM, or the fees are covered by the advisor or their firm, cutting into their own profitability.

According to Michael Kitces, the big four custodians generally charge no platform fees and instead “make their money indirectly through ticket charges, asset-based wrap fees, 12b-1 and similar revenue-sharing fees via their NTF (No Transaction Fee) platform, receiving a fee for serving as the transfer agent, or making a small spread on the money market or other cash positions that clients hold.”

No custodian tries to market themselves as a discount provider, but they continue to compete on price. Schwab is generally able to charge the lowest fees due to their size and volume. While, as a percentage, these fees are significantly less than a smaller custodian can afford to charge, a large custodian like Schwab can remain profitable because of the sheer volume of AUM they deal with, hundreds of times more than some of the smaller players in the market.

Fee compression is also affecting advisors, so the less they have to pay to a custodian, the lower they can set their own fees in order to be competitive. The minimal-to-zero benefit of economies of scale and technological advances like robo-advisors, which charge an average of 0.25% when advisors have historically charged 1% or more, make any ability for an advisory firm to cut fees they pay to custodians essential to maintaining their own profitability.

By offering a diverse range of investment products, enabling efficiencies with proprietary and third-party technology solutions, and charging less for custodial services, custodians can keep their current advisor clients happy and attract new firms looking for a place to custody their AUM.


In the face of emerging threats to the advisor industry,
technology and alternatives can offer a competitive advantage.


Disclaimer: Altigo provides this information for educational purposes only. It should not be construed or relied upon as legal or tax advice.

About author

Ryan Gunn

Ryan leads content creation at WealthForge. He earned his bachelors from Virginia Tech and MBA from the College of William & Mary. His writings on fintech, alternative investments, and advisory best practices have been featured in Real Assets Advisor, Alternative Investments Quarterly, Equities, and other industry publications.
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