In 2020, the number of RIA firms hit a record 13,880, with the collective AUM hitting a record $110 trillion. As RIA firms grow, more and more firms with over $500 million in AUM are employing the use of more than one custodian to offer additional options and benefits to their clients.
Multiple custodians provide firms with more opportunities and allow them to serve a larger share of the market. Because custodians’ focus varies from institution to institution, RIA firms can offer more flexibility for their clients and thereby better meet the client’s specific needs.
While the benefits of using multiple custodians are considerable, there are some caveats.
First, RIAs cannot use custodians to give their larger customers an advantage with better custody and brokerage fees. Second, RIAs must be mindful of dividing customers’ assets among custodians, particularly where there are fee breakpoints (e.g., 1% fee for up to $500,000, .5% for the next $500,000). The customer’s entire portfolio among the various custodians must be cumulated. Third, the RIA must be mindful of the best execution and trade aggregation/allocation, because the RIA cannot aggregate trades or rebalancing among multiple accounts as easily when accounts are divided among multiple custodians.
Finally, given the new DOL rule, the RIA must give full disclosure of any conflicts of interest and cost differentials among custodians. For example, as the RIA allocates more assets to its platform, Fidelity provides more services for less cost. So when the RIA will be advantaged by allocating qualified assets to one custodian over another, that now falls within the Prohibited Transaction Exemption disclosure requirements. While it can be done, it requires monitoring and special attention.
As your RIA firm continues to grow in both size and the number of options available to its clients, AdvisorLaw’s RIA Services can help you remain compliant and protected.
AdvisorLaw’s services were created exclusively for financial advisors—contact us for a free consultation about our RIA compliance services.
Director of RIA Services