Time To Rethink Your Custodian? Hot

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For example, TD Ameritrade has a current advertising campaign offering a complete refund of two quarters’ fees should the portfolio experience negative performance for two quarters in a row. This offer applies to new and existing Amerivest management clients who place new investments of $25,000 or more. Annual advisory fees on these accounts range from 0.75% to 1.25% on the first $100,000; 0.60% to 1.25% on the next $150,000, 0.45% to 0.95% on the next $250,000, and 0.30% to 0.80% on amounts over $500,000, depending on the risk level of the portfolio.

This type of fee structure seems to fly in the face of SEC rules that prohibit performance-based fees.  In the Trainer, Wortham[1] case, the SEC granted a letter of relief to their “satisfaction guaranteed” program based on a very narrow interpretation since the client could get a refund for any reason. According to SEC staff lawyer Kyle R. Ahlgren, regulators would not block the offering because TD “does not select securities itself.” This seems like sketchy reasoning and one wonders to what degree the SEC will continue to allow arrangements such as this.

Question: How many advisors would be willing to provide a money-back guarantee to their clients? In the article “Crowded Out” (www.wealthmanagement.com/rias/crowded-out), author Diana Britton states, “… RIAs are prohibited from offering such fee rebates, and some advisors are concerned that the guarantees could raise questions from clients custodied at these firms.” Laura Tarbox, president of the Tarbox Group in Newport Beach, California, was quoted in the article: “Certainly our existing clients understand that that’s not a possible way for us to do business. I worry a little bit with prospective clients. I think a lot of things [will] change when we get the next downturn, and that’s probably when that kind of pressure will hit us.”

Schwab offers investment management through “Schwab Managed Portfolios™.” This program offers the “Schwab Accountability Guarantee”; they’ll refund previous quarterly fees if a client is unhappy for any reason. Schwab’s management fees on mutual fund portfolios are 0.90% on the first $100,000; 0.70% on the next $150,000; 0.50% on the next $250,000 and 0.30% on the next $500,000 (fees for ETF portfolios are somewhat higher). Further evidence of Schwab's commitment to the retail market was revealed in a recent RIA Biz article, "Schwab promotes relative newcomer Terrie Kallsen to head retail..." According to reporter Liz Schidler, Kallsen has been given the job of "transforming Schwab into a national wealth manager on a scale that impresses stakeholders."

Fidelity offers a variety of managed accounts services through its Strategic Advisers, Inc. arm.  Fees vary, depending on account size and type of managed account, from 0.25% to 1.7% per year. Although Fidelity does not seem to offer any form of rebate, they are clearly going after clients who might otherwise be or become advisory clients. And how does their acquisition of eMoney play into this strategy? Their website entices prospects with a “relationship with a dedicated team of experienced managed account professionals… [who manage] your money based on your goals and [maintain] a level of risk consistent with your investment profile.”

Several institutional-only firms come to mind, including SSG, TradePMR and Scottrade.  (Although Pershing is an institutional-only custodian, its parent company BNY Mellon offers wealth management services.  Advertising customized strategies and a “close relationship with your Investment Counsellor,” services include an Investment Policy Statement, manager selection and ongoing reporting, rebalancing and monitoring.)

SSG (Shareholders Service Group) is an example of a truly institutional only custodian. According to SSG’s website, “SSG was created to provide high-quality, dedicated services for independent registered investment advisors. We work exclusively with independent RIAs across the nation serving affluent clients.” Dan Skiles, President of SSG, states that “SSG exclusively serves the needs of independent registered investment advisors because it allows us to focus all of our attention and resources on this growing market segment.  Everything we do ultimately benefits independent RIAs, without the distractions or conflicts that arise when you are serving the interests of other business channels.” When asked about SSG’s target market, Dan responded “If you are an independent RIA, we will speak to you – even if you are just starting your new firm.” 

Brian Stimpfl, Senior Vice President at Scottrade Advisor Services, had these comments: "Scottrade Advisor Services is committed to empowering RIAs’ success. We service both state and federally-registered investment advisors with assets under management ranging from several million to several billion dollars. Our investments in our business – including hiring top talent, enhancing innovative technology and infrastructure, and becoming more efficient in our operations – are aimed at empowering advisors and their clients to reach their goals.  We remain committed to our role as a leading custodian for RIAs and their clients."

TradePMR, one of the largest custodians in the RIA industry, provides this information on its website: "At TradePMR, our primary goal is to provide the highest level of support and services to financial advisors." The company makes clear its advisor-only mission, stating "Our only line of business is serving the needs of registered investment advisors.  We are not interested in competing with your RIA firm to gather client assets, unlike many of our competitors."

If your firm is utilizing a custodian that serves management clients as well, is it time to consider switching part or all of your business to an institutional-only custodian? Maybe you’re not ready to make a change, but what if you start losing clients to your custodian? Rather than put yourself in emergency mode, it might make sense to diversify providers now.


[1] Trainer, Wortham & Co., Froley, Revy Investment Co., Starbuck, Tisdale & Assoc., SEC Ref. No. 20043171112, 12/6/04

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