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“What’s the best RIA custodian to use?” This is one of the most common questions I hear from advisors launching RIAs, experienced advisors breaking away from broker-dealers and even existing RIAs that want to know if there’s a better option available to them. Given the substantial costs of breaking away or switching from one RIA custodian to another, it is worth figuring out which custodian is right for you — not just in the short term, but for the long run.
Of course, if you’re solely going to operate as a fee-for-service advice firm and not actually manage client portfolios directly, you don’t need a relationship with a custodian at all; the relationship only begins once you’ve decided to help clients implement their portfolios (and need a platform to both execute the trades and bill for your services).
But given the continued dominance of the AUM model among RIAs — which I don’t foresee changing any time soon, even with the growth of advisors using alternative, fee-for-service models to bring advice to new segments of consumers — most RIAs still have to pick an RIA custodian. Here are some strategies for making that all-important decision.
Similar but different: The overwhelming majority of independent RIAs ultimately custody their assets at one of four major firms, ranked here from smallest to largest based on market share: Pershing Advisor Solutions, TD Ameritrade, Fidelity and Schwab.
Yet despite their size and market reach, or perhaps because of it, all four provide substantively similar services. They all offer the core technology necessary to trade on behalf of clients. They can hold a wide range of standard investment assets. They can facilitate billing. And they all are incredibly low-cost. Indeed, none of the major RIA custodians even charge a platform fee or take a percentage of the advisor’s revenue (as a broker-dealer would).
Rather, they just use their incredible size and scale to make what amounts to a very, very small scrape from a very, very large number of transactions.
Most of these platforms earn whenever your clients trade: $5 or $7 per, or maybe via a small asset-based wrap fee. Some participate in 12b-1 fees as part of their no-transaction-fee or NTF, platform. Some receive a small number of basis...