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Look Before Switching

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Switching custodians. It’s a decision that many advisors have already made or may make in the future. One of the most common reasons advisors choose to switch is because they’ve become dissatisfied with their custodian’s services. Marty Watkins is one such advisor who decided to transition his clients’ accounts from SEI Investments to Fidelity Institutional so that he could offer his clients a broader array of investment options.

When contemplating how to make the transition, be aware that there are myriad steps to take and issues to consider before jumping in feet first. The most important question, naturally, is whether the move will ultimately benefit your clients. Watkins, chief operating officer of UMA Financial Services in Salt Lake City–which manages $300 million for physicians who are members of the Utah Medical Association–says his planning firm was utilizing portfolios designed by SEI, but he also wanted to provide portfolios offered by other fund families. “At SEI Trust, they really want you to use their portfolios,” he says.

While SEI offers approximately 900 funds from other fund families, Watkins says SEI would not allow UMA to move clients’ accounts into competitors’ products while using its platform. SEI’s platform “didn’t have enough flexibility so that you could change investment content providers” in a matter of days, not months. That’s why Watkins thought it was best to move to a custodian that would allow him to move clients’ accounts, and could handle moving accounts quickly between mutual funds from various companies on UMA’s shortlist–like Russell Investments and Vanguard, as well as SEI.

Steve Onofrio, national sales manager for SEI Advisor Network, notes that “the SEI platform was developed as a strategic business solution for advisors and not just for transactional purposes.” Onofrio says that in fact there is a “great deal of flexibility built into our platform. For example, we accommodate outside funds as well as securities. However, this flexibility was developed with the same strategic objective in mind and is an option primarily reserved for our select advisors who have made a commitment to grow with us.”

Onofrio adds that “SEI is committed to acting as quickly and efficiently for our clients as possible. Generally, most transactions can take anywhere from a few minutes to a couple of days, depending on the nature of the transaction. However, when parties functioning outside SEI’s platform are involved, although we free up requested assets as quickly as possible, advisors could experience longer wait times as a result of the other parties involved in the transaction.”

When it came time to move his clients’ accounts–all 1,400 of them–Watkins chose to transition them one client at a time, rather than the traditional method of moving all of the accounts en masse by a certain date. Of course, moving the accounts one by one meant it would not only take longer, it would also require face-to-face meetings with UMA’s 500 investment clients. While it’s been “more difficult” for UMA’s staff to shift clients one by one because “it takes time, preparation, and follow-up,” Watkins says it gave him time to explain to each client why he was moving their accounts to a new custodian. Plus, the more personalized approach of moving accounts solo has been good from a profitability standpoint. “It’s been tremendously rewarding having those meetings because you often find more assets to manage, and it’s been a very beneficial process,” Watkins says.

Three Benefits to Clients

In the year and a half that it’s taken UMA to transition its clients’ accounts from SEI to Fidelity (UMA expects to have all client accounts moved by March), UMA pulled in $45 million in new money–with most of it coming from existing clients. “Clients appreciate that we’re going through a process to put them in a better position.” UMA didn’t lose a “single client in the transfer,” he says, “because we made it clear that the motives were positive.” Watkins explained to clients that they’d reap three benefits from the move. First, by using Fidelity, UMA could switch a client’s portfolio from one fund company to another in a matter of days, not months. Second, UMA was able to find portfolios at Russell Investments that were less costly than portfolios at SEI. Finally, “Fidelity had more products and services available than SEI Trust.”

Another plus was the fact that “Russell has an arrangement with Fidelity where all of the firm’s products can be traded without transaction costs on the Fidelity platform, and on that platform, performance reports would be provided,” Watkins says. “If we went to someone else, performance reports would not have been provided.”

While UMA’s transition of client accounts has been successful thus far, the process hasn’t been without its complexities. UMA began its transfer process in February 2004, when the U.S.A. Patriot Act was being implemented. This meant that the forms UMA was required to fill out containing clients’ information kept changing. “Our forms changed four times during the transition,” Watkins says. “That made it particularly difficult.” But Fidelity and Russell stepped in and helped UMA prepopulate all of the forms each time the Patriot Act changed them, he says.

Phill Rogerson, director of the Western Division of the Russell Investment Group in Tacoma, Washington, was instrumental in helping UMA transition its accounts. He says that in UMA’s case, prepopulating all of the necessary forms and transitioning the client accounts required a “great deal” of coordination because it involved a tri-party relationship–Russell as the investment manager, UMA as the advisor, and Fidelity as the custodian. Russell turned out to be the lead coordinator, he says, but “Fidelity did a boatload of work in prepopulating the paperwork.” Russell had its share of paperwork to do as well, Rogerson says, to make this offering “part of our mutual fund wrap program custodied at Fidelity.” Three of Russell’s employees were responsible for providing Fidelity with the information needed to prepopulate client applications, he says. “Those applications were then shipped to Russell,” and were organized the way Watkins requested. Watkins adds that the assistance UMA received from Fidelity and Russell in prepopulating the forms to ready them for client signatures saved the planning firm loads of time. Fidelity also trained three of UMA’s staff members on how to use its platform early on in the transition process, he says.

When the Time’s Right

When one thinks about switching custodians, one usually imagines two parties being involved–the advisor and the custodian. But Rogerson says that as an investment management firm, the most common reason Russell gets involved is because an “advisory firm has reached a point in their evolution where they question whether the current provider is the right one to take them to the next level.” In other words, “they’ve reached an inflection point in their growth, or a point where they’re seeing diminishing returns of their current business model, so they look at more flexible, efficient, and scalable solutions.” When Watkins was considering Russell, Rogerson says, “he was trying to find that–a business model that would take his business to the next level of profitability or next level of assets.” Russell is also hands-on in the process, he says, because the firm manages a mutual fund wrap and separate account program that is available on a number of custodial platforms.

From Russell’s experience in dealing with custodial switches, Rogerson says “advisors tend to overestimate the concerns their clients will have, and underestimate the amount of administrative overhead associated with the conversion.” Because of the “strong trust relationship” between advisors and clients, the transition from the client’s perspective usually “ends up being a non-issue.”

During the initial consultation with Watkins and UMA’s operations staff on the transfer, Rogerson says Russell focused on “analyzing UMA’s book of business and the holdings in each account so we could map the accounts to the new custodian, and [determine the] new investment content that those accounts would be invested in.” This isn’t a piece of cake, he says, because “you have to overlay that [analysis] with some clients having highly customized portfolios that may incorporate outside assets that are different from what the other portfolios hold.” Plus, Russell had to consider the tax consequences as well, he says. “If we had to sell out of the investment they had currently, did the new investment and platform warrant the tax the investor would have to pay?”

Get the Details First

Because the “devil is in the details” when shifting accounts to a new custodian, Rogerson recommends advisors do some legwork before making the transfer. First ask: How involved will their new partner be in helping with the transition? If advisors “have the greatest investment content in the world, but they can’t get to it and manage it effectively for their clients on an efficient platform, it doesn’t represent that much utility for them,” Rogerson says. Russell “spends a lot of time working with a variety of custodians to ensure that when clients make a decision to move to Russell, we can help them ensure the operational structure and processes are in place to make that happen smoothly.” Advisors should also involve their operations staff early on in the process, he advises, and evaluate how processes like prepopulation of forms and the transfer of client accounts will happen. Advisors should also find out how the transaction fees and wiring fees will be handled, he says.

Deciding to move UMA’s clients’ accounts to Fidelity “was not a quick decision,” adds Watkins. Along with holding “multiple meetings ahead of time” with Fidelity before the transfer, Watkins says he presented all of the issues involved with the switch to UMA’s board, because the board was ultimately responsible for approving the transfer of client accounts. All 13 board members–who screen all of the products UMA offers–made an on-site visit to Russell.

Washington Bureau Chief Melanie Waddell can be reached at [email protected].


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