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John T. Tapsak is at wits’ end. Since Charles Schwab informed him that it plans to double the fees paid by advisors who custody less than $10 million with the San Francisco-based brokerage firm, he’s been feverishly searching for a new custodian. With Schwab’s fee hike set to take effect July 1, Tapsak says he’s run through the short list of custodians that are willing to take on his small Minneapolis practice, John T. Tapsak Advisory. His biggest worry, he says, is that these firms might “pull a Schwab a couple years down the road.” Another concern, he says, is small advisors’ inability to kick the tires before signing on with a new firm. “Without test-driving the machine, you don’t know how much better one [firm] is going to be over the other, since they claim they have the same services.”

Tapsak isn’t alone in his search for a new home for clients’ assets. After Schwab decided to sharply raise its fees, and Vanguard recently exited the custodial business, many other small advisors face the same daunting task. The good news is that there are firms like TradePMR, Foliofn, DATAlynx, EAInvest Securities, Ameritrade, and Shareholder Services Group, Inc. that are willing to step up to the plate–and that claim they won’t offer competing services. But the bad news, says Bert Whitehead, founder of the Alliance of Cambridge Advisors, a group of fee-only personal financial advisors serving middle-income Americans, is that custodial firms will continue to institute more onerous servicing terms on small advisors. “The wirehouses are really squeezing the small practitioner out, and that’s partly because the small practitioner is too expensive for them to service,” Whitehead says. Small advisors will continue “to get squeezed; this is just the second inning in a long ballgame.”

The Worst of Times

Having just reached the fourth year of a bear market, Tapsak says Schwab’s decision to sock it to smaller advisors couldn’t come at a worse time. Schwab’s “doubling [fees] after everybody’s assets have gone down in the last few years seems to me patently unfair,” he says. “Schwab’s looking out for Schwab as they’ve always done. They have no concern about small advisors, obviously, or clients of advisors–the investing public.” Once Schwab’s new fee rate kicks in, advisors with less than $10 million in assets will be charged $1,200 per quarter, double the previous $600 charge.

Lance Berg, a Schwab spokesman, says the new fee is justified because Schwab has “been steadily improving our product and service offering; the new quarterly fee puts pricing more in line with the value we provide.” He says Schwab’s “guiding principle remains unchanged: To be the best place for advisors to grow their practices, and to compete and succeed in the marketplace. We support advisors and their practices in ways that no other custodian does.”

John Gavin, a CFA with First Watch Investment Advisors in Plymouth, Minnesota, whose firm manages $6 million in client assets, says he understands Schwab’s need to look out for its bottom line, but he can’t help feeling somewhat betrayed by the fee increase. When his firm started up in 2000, Gavin searched hither and yon for a custodian, and settled with Schwab because the firm told him “how committed it was to the emerging advisor, and how dedicated their infrastructure was” to smaller firms. “We didn’t realize those were hollow words,” he says, “and that [Schwab] was committed only in good times.” Gavin says his firm is “actively reviewing” other custodians, “and will make the best decision for our clients.” One snag advisors might run across when deciding whether to move to another custodian is if their clients have taxable accounts, Gavin says. If so, “their funds may not transfer” to another custodian. The advisor “could trigger tax events for their clients” if they shift. Luckily, this scenario doesn’t apply to Gavin’s clients.

Whitehead says he understands Schwab’s decision to weed out smaller advisors. He’s trained more than 100 nascent advisory firms that have joined the Alliance of Cambridge Advisors, and experience has taught him that small advisors require lots of handholding, and can be expensive to serve. But being shunted isn’t the only thing that irks Tapsak; he’s also perturbed with Schwab’s insistence on labeling advisors that aren’t looking to grow their practices as “useless, and not a good advisor.”

Getting Around the Dilemma

The best way advisors can get the attention they deserve from the big three custodians, Whitehead says, is by creating ensemble practices. An alliance of firms would make it “profitable for Schwab and TD Waterhouse to treat them as an entity,” he says. Philip Palaveev, senior consultant at Moss Adams LLP, who specializes in financial advisors and broker/dealers, is of the same mindset: Small advisors “should seek to join other advisors with complementary practices, to either offset back-office costs or achieve some type of synergy,” he says. Palaveev also takes the somewhat controversial stance that most small independent advisors are better suited for a broker/dealer relationship. Advisors need a “certain critical mass to be fully independent and use a custodial platform,” he argues. Advisors managing from $10 million to even $50 million, Palaveev says, are better off joining a broker/dealer. “There are a significant number of broker/dealers that are not insisting [that advisors sell the B/D's] proprietary product, and that would allow reps to do fee-based planning and fee-based business, and will allow them to have their own RIA or use the [B/D's] umbrella RIA.” Palaveev believes advisors that are satisfied with pulling in $100,000 in total revenue are “not adequately incorporating the risk of being in business and return on equity.”

Small planners are also debating whether to go ahead and pay a higher fee in order to get better custodial services. Ron Pearson, a planner with Beach Financial Advisory Service in Virginia Beach, Virginia, says he counsels small advisors to first assess what type of practice they want to have before choosing a custodian. Do they want to stay at their current asset level, or continue to grow? Pearson tells smaller advisors not to pick a custodian “based on expense,” because “five or ten years down the road when their practice is where they want it to be, they may find there are constraints on what they can do because they went to a custodian that was cheap” and doesn’t provide adequate services. It’s a trade-off, Pearson says. If you’re a small advisor that expects to have $25 million to $50 million in assets under management, then it can make sense to go to a custodian that charges more because ultimately, as the advisor’s assets rise, the cost of service will fall. But if an advisor shirks managing assets and charges hourly fees, Pearson says, “then a high-cost provider may be prohibitively expensive.”

One Planner’s Search

Dennis Delphenich, a planner with Capitol Portfolio Advisors, Inc. in Dayton, Ohio, has some of his clients’ assets at Schwab, and is looking for a custodian that will allow him to consolidate all of his $10 million in assets at one place. Not only is Delphenich disappointed with Schwab’s fee hike, but he’s also become disenchanted with Schwab’s refusal to house his variable annuity and variable life business, as well as the noticeable drop-off in service he’s getting from Schwab. “You can feel yourself getting pushed to the back. Hold times on the phone are way up.”

In his search for a new custodian, Delphenich says he considered Ameritrade and DATAlynx, but the front-runner turned out to be TradePMR. He likes Ameritrade’s name recognition, he says, but “I’m worried about the fact that it’s another custodian with a retail focus.” And after initially favoring DATAlynx, he realized he’d have to pay a yearly fee because his average account size is less than $100,000. Gainesville, Florida-based TradePMR is now taking center stage, he says, because it’s “oriented toward investment advisors only” and because of the firm’s “huge” no-transaction-fee mutual fund platform. “I use a lot of NTF mutual fund networks, and TradePMR’s network is twice the size of Schwab’s.” In fact, the NTF list, says Robb Baldwin, TradePMR’s president, consists of about 7,000 mutual funds. Delphenich says TradePMR also has “a lot of the class A shares that normally have a sales charge; they offer lots of those [A shares] as no-loads. That’s interesting because the more I do [business] the more wary I am of custodians that deal with the retail public and funds that deal with the retail public.”

Delphenich says TradePMR is “bending over backward to accommodate me. That’s refreshing.” Another strong selling point, he says, is TradePMR’s “very low” $19.95 commissions on stock trades.

TradePMR started up in 1997 specifically to serve investment advisors. The brokerage firm now serves 60 advisors, and has added 15 new ones in the last 30 days. Baldwin says the firm is “attracting a lot of advisors now” because it requires no minimum asset size. Most of the new and potential recruits, he says, are coming from Schwab, Vanguard, or are startup firms. The company is in talks with five Vanguard refugees, and one has already signed up. “We offer everything online,” Baldwin says. “We try to even offer a complete portfolio management software so that even new advisors don’t have to have Centerpiece or Advent.” TradePMR is getting ready to add a rebalancing tool to its Web site (, as well as total performance reporting, he says. “And we already do block trades and basket trades and bunch trades. All of these services aren’t available with anyone else, according to what we’re hearing.”

Another selling point for smaller advisors, Baldwin says, is the fact that TradePMR “offers them just about everything they need at no charge–real-time streaming quotes, all the performance reports and trade blotters, all the things they need for compliance and regulatory purposes come with the platform for free, which saves them from having to purchase different platforms to manage their business.” And advisors don’t have to worry that the brokerage firm won’t be around. The firm is “profitable,” he says, and makes its money from trading costs and trailers on the 7,000 mutual funds on its NTF platform.

Casting a Wide Net

Tapsak, the Minneapolis planner, has tested the waters at other custodial firms, and is leaning toward Ameritrade because of the firm’s well-known name. He initially contacted TD Waterhouse, but was told the firm wasn’t accepting any new advisors unless they had $10 million or more in assets. Waterhouse “was nice enough,” Tapsak says, to recommend DATAlynx and Ameritrade, but DATAlynx was out of the question, he says, because he didn’t meet the firm’s $100,000 average account size. He considered EAInvest Securities as well, but began to question the firm’s new structure now that BenefitStreet, Inc., a firm that markets 401(k) plan back-office software and support, has acquired it.

But there’s no need to worry, says Luis Doffo, VP of Alliances at BenefitStreet. EAInvest Securities, now a wholly owned subsidiary of BenefitStreet, is still providing custodial services to small advisors, and the alliance between the two firms actually “increases the amount of service and support that small advisors receive,” Doffo says. For instance, not only do small advisors now “have support on the taxable side of the assets, but they also have the ability to go after qualified retirement assets via the BenefitStreet platform, and via voluntary benefits like Cafeteria Plans,” also called Section 125 plans. Advisors are also offered an Employee Stock Ownership Plan (ESOP) management system. Furthermore, BenefitStreet “coaches new advisors, not only on the taxable side of the business, but on how to form relationships with retirement experts and how to attack the overall market.”

Collectively, BenefitStreet and EAInvest Securities serve approximately 200 advisors who manage assets ranging from $500,000 to close to $1 billion. While there’s no minimum asset requirement for service, both small and large advisors are charged the same hefty $5,000 licensing fee per year. Doffo says EAInvest is adding an average of five new advisors per month. Since the acquisition, Doffo says, service has changed for the better. “We’re helping advisors understand that it’s not just about acquiring high-net-worth individuals,” he says. “You have to figure out a new marketing technique to go after the high-net-worth; and the retirement business is the best way because you can go in and win over a large pool of potential investors that you are building trust with, and can then go after their personal assets as well.”

The Ameritrade Option

Since Schwab, TD Waterhouse Institutional, and Fidelity Institutional have made it clear that they’re not interested in serving advisors with smaller practices, Ameritrade has made a big play for the small advisor’s business. James C. Wangsness, senior VP for Ameritrade Advisor Services, says that as of March 31, Ameritrade had signed up about 500 advisors (with approximately $500 million in total assets). Fifty-four advisory firms were added in March, he says, and the firm is continuing to grow at that rate. April’s signups were “just massive,” he says. Ameritrade is particularly interested in pulling in advisors that used to house their assets at Vanguard. Vanguard has forged a deal to refer its advisor accounts to TD Waterhouse Institutional, but some of those advisors have already landed at Ameritrade. Granted, some of those advisors have signed up with only a nominal amount of assets–”house accounts,” Wangsness calls them–and his challenge will be to convert these into real business. “We will start to see tranches of hundreds of millions of dollars coming in,” he insists. And Ameritrade has “been taking [advisors] out of Schwab left and right” since the discount broker decided to jack up small advisory firms’ fees.

But Lance Berg with Schwab claims that the discount broker isn’t “seeing advisors leave Schwab.” He says Schwab won’t know how many advisors may be affected by the fee increase until July 1. But Schwab hopes that the new fee increase will prompt advisors that custody less than $10 million at Schwab “to move [more] assets to Schwab, not only to avoid fees, but also to maximize the efficiency of their relationship.”

Jerry Becker, an investment advisor with Aspen Financial Management in Taos, New Mexico, says his firm decided to move its assets from Main Street Management in Connecticut to Ameritrade after receiving its Series 65 license last year. TD Waterhouse was in the running, Becker says, but Ameritrade was more accommodating to the firm’s needs. Aspen only had $1 million in assets when it was in talks with Ameritrade and Waterhouse, and while Waterhouse was willing to bend some rules, Becker says, he could tell the firm was less than thrilled with Aspen’s paltry asset size. Ameritrade “was willing to do things that we wanted,” he says. In one year, Aspen has seen explosive growth, and now has $15 million under management. Becker likes the fact that Ameritrade doesn’t require a minimum asset size, or charges a yearly fee. And the discount broker was “willing to allow us to transfer money to IRAs or Ameritrade’s individual accounts on a monthly basis, and charges no fees on IRAs, SEPs, or Simple IRAs.”

Wangsness says Ameritrade is focusing on smaller advisors who he thinks have potential for growth. “Philosophically, we want to be the home for the startup advisor,” he says. “Our guys see opportunity in the mass affluent [investors] with accounts under $1 million, whether they are validators or delegators.” He contends a lot of smaller advisors are able to survive, even in this market, because they entered financial planning as a second career and already have income from other sources. This is a mixed blessing for Ameritrade. “A lot of folks we are getting from Schwab are like that,” Wangsness says. “They don’t want to get bigger.” On the other hand, “they are not demanding on client services.” But over time, this is not where Wangsness wants to be. “We are making a huge gamble,” he says. “We don’t want to support the business of advisors who are not going to grow.” Indeed, one sign of this is the free packages Ameritrade is handing newly signed advisors, which are for one year only. Those who do not produce sufficiently, Wangsness indicates, probably won’t receive such largess the second year.

New to the Game

Two newcomers to the custodial game for small advisors are Foliofn and Shareholder Services Group, Inc. Foliofn’s custodial platform, Folio Advisor, is still in its infancy, admits Greg Vigrass, VP of institutional sales, but within the last couple of months the firm has been “retooling and revamping the services to make them more robust.” For instance, after getting advisor feedback, Foliofn is now building a fund supermarket platform, “and is aggressively growing the number of funds on the platform,” Vigrass says. The platform now consists of 50 funds, with up to another 50 fund families in the pipeline. “The goal is to have a very deep stable of mutual funds by the end of the year,” he says.

Foliofn doesn’t require advisors to have a minimum asset size, is self-clearing, offers trading and online tax tools, as well as online proxy voting, and supports downloads from portfolio management software packages like Centerpiece, Advent, and TechFi. It also offers a Web-based interface so advisors can manage client accounts, as well as online client filing cabinets, that allow delivery of statements, confirmations, and proxy notifications, Vigrass says.

Advisors can also directly build client accounts through folios, which is “the tool that we use to offer accounts and account services to advisors,” Vigrass says. An advisor can create a folio using any combination of investments–stocks, mutual funds, ETFs, etc., he says. “The advisor can create a model folio which he or she can then manage, and any and all client accounts linked to those models receive the benefits of any rebalancing, reallocation, or other changes the advisor makes within the model.” Folios relieve the advisor from managing individual client accounts, Vigrass says, allowing them to focus on what they do best: managing client relationships and investments.

Vigrass say Foliofn charges an asset-based fee on an advisor’s clients’ accounts, and the fee includes window trading and the services offered by Folio Advisor. The fee is negotiated on a case-by-case basis, he says, “and depends a lot on the profile of the advisor’s business–level of activity, turnover, and the degree to which they need customization like logos.” Foliofn is able to “offer advisor pricing that makes sense for their business,” he says, because it’s “tailored specifically to what their use of our platform is going to be, instead of [forcing them to] pay for services that they’re not going to be using.”

Advisors of all sizes often worry about transferring assets to a new custodial firm because they fear the firm will either abandon the business or will fail. Peter Mangan, who runs Shareholder Services Group, Inc., says advisors shouldn’t lose sleep over his firm’s stability, because “it’s only new on the surface.” Mangan and his four colleagues collectively have 50 years experience in working with advisors, and although Shareholder Services just started offering custodial services this month, it’s been up and running as a broker/dealer for a year.

While Mangan admits he’s entering a crowded field, he believes advisors need a custodian they can trust. “There are advisors who are feeling threatened by the brokers they’re doing business with; whether that’s because of their size or because the brokerage firm is providing advice,” he says. Mangan isn’t concerned about an advisory firm’s size. More important, he says, is finding “advisors who are providing services to their clients on an ongoing basis and will continue to be in business for a long time.”

Shareholder Services has an NTF platform of 3,000 funds. The firm charges $25 for online trades, and $35 for broker assisted trades. “Advisors can trade online, unload their data, send us their periodic customer fees, and we’ll help process those fees,” Mangan says. “We’ll send duplicate statements to clients and advisors. The processing and service capabilities are what advisors need in order to run their businesses.”

Mangan offers two pieces of advice to small advisors who are looking for a new custodian: The first is to look for a company that will help with the transition, because moving to a new custodian “can be onerous and a reason not to move,” he says. Shareholder Services has set up a business transitions group that “will process the paperwork and make it a quick and smooth transition.” Second is to make sure the firm has service people who understand the advisor’s business. Those providing service to advisors should be licensed and understand both the advisory and brokerage businesses, Mangan says. The folks should also “continue a day-to-day dialogue with the advisor so they don’t have to start fresh every time they talk to someone at the brokerage firm.”

If you’re a small advisor that’s caught up in the minutiae of pursuing a new custodian, and fear you won’t find the right match, don’t lose heart: More firms are hastening to fill the void.


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