Business is booming.

Keeping your Status: Getting the most of your custodial relationship

As business travel resumes, an upgrade on a long trip may become more elusive. After three years of restrictions, reductions and retention problems, demand for these benefits is set to skyrocket but most likely will only be available to customers paying their way.

Too many people want the perks of reclining seats, hot towels and more leg room – benefits that are in short supply.

This scenario may sound familiar to individual and smaller Registered Investment Advisors (RIAs). About one-third of the country’s 6,000 retail-focused RIA firms were created in the past six years, according to a McKinsey study. The same research found an estimated 700 new firms joining the channel annually.

This explosive growth has strained ancillary services, especially those in the custodial space. The disparity places the comforts of first-class custodial services within reach of those firms with the scale, resources and assets to warrant access. And behind a closed curtain for smaller firms.


The Silent Consolidator

Some leading custodians have seen the number of RIAs using their platform swell from fewer than 100 to nearly 2,500 in less than a decade. How can these providers offer the same level of service to all RIAs regardless of their size?

Well, they can’t, and they don’t. Custodians are doing what advisors have done for years – triaging their book of business. In essence, “firing” unprofitable clients to free time to work with those driving growth.

Custodians will choose to provide tiered service based on an RIA’s assets, with some already doing so. This isn’t a problem for the custodians or the more prominent players. As industry consolidation continues, there will be a significant pool to sustain and grow the custodians’ and the larger RIAs’ businesses.

But it presents an existential threat for the smaller players. It is not unheard of for a custodian to tell an RIA it is too small to support, and that’s a very different conversation today than it was five years ago. Leading custodians have become another consolidating force in the industry.


Limited Options for Smaller Players

This trend may force the hand of smaller firms to roll up into a larger RIA or merge with a peer. However, if individual and smaller RIAs want to maintain their independence, these owners may decide to work with another smaller custodian. This choice limits them to providers with less cache and fewer resources than a globally recognized firm.

Using a smaller custodian can demand more of an advisor’s time, may not offer the same technology or services and leave an RIA exposed due to lacking business operational support.

In short, shifting to a secondary custodian to maintain independence may inhibit the growth and viability of an individual or smaller RIA.


If you try sometimes, you get what you need

Some smaller custodians value all sizes of RIAs, and these firms tend to focus on serving clients by enabling growth. For those who need to maintain independence, finding a custodian that exhibits a vested interest in learning about the firm and building a relationship is key. This could be a willingness to have in-person meetings or frequent conversations about support and needs – but frankly, these platforms don’t deliver the same value as their best-in-class counterparts.

Individual and smaller RIAs must take a step back and decide what they want versus what they need to achieve their goals.

The choices are limited for those on the smaller side of the industry: Find a smaller custodian that may not provide the support and technology as industry leaders or grow the business to achieve scale.

However, if an RIA does not seek scale in this environment, they will be left behind regardless of if they find a secondary custodian. 

Mark Contey is Senior Vice President and Head of Business Development at LaSalle St.

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