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Portfolio > Alternative Investments

An Alternative Custody Strategy

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The number of people considering alternative investments is increasing, whether it is in individual portfolios, 401(k) plans, IRAs or HSAs. As a result, RIAs need to identify competent custodians who will provide their clients with the specialized services non-publicly traded assets require. They require firms with the special knowledge and experience to custody, administer and report on assets including hedge funds, real estate, private equity, futures, precious metals and promissory notes.  

The need for special alternative investment custodial services is growing. Morningstar recently reported that 80% of advisors have a stronger conviction that alternatives are a necessary part of their clients’ portfolios. Sixty percent of them had increased their clients’ exposure to alternatives. Though just 10% of their current clients own alternatives, the previous two figures would indicate that ownership of alternative assets will continue to increase.

The search for alternative asset custodians is especially critical today because many large clearing firms that have previously provided these services are focusing on their core businesses to eliminate the cost, time and responsibility that alternative custody services require. RIAs should check with their clearing firm for a list of custodians they believe are capable of accommodating the needs of the alternative asset portion of their business.

RIAs and their clients must remember that custodial firms do not provide tax, legal or investment advice. Their main responsibilities are administrative in nature. They are charged with the safe keeping of assets, accurate accounting and valuation as well as reporting to clients, advisors and regulatory agencies. Unlike traditional assets that are tracked electronically through a central market system, most alternatives are valued and accounted for individually.

Choosing the right custodian requires a lot of homework which might include direct discussions with these firms, as well as reviewing their marketing materials, websites and published articles. It may also be possible to visit trade shows and conferences in which they are participating.  

Among the most essential evaluation criteria when considering a custodial firm is its experience and expertise in a specific investment area; the types of alternatives they will custody; their client service capabilities; and their Web-based account services.

Additionally, it is important to review a firm’s approach to similar advisors it serves and to gauge its understanding of the unique needs of the RIA business. Not only must they be experts at handling alternatives, but they need to understand that a unique relationship exists between RIAs and their clients. They must be able to customize their technology and their client service models to effectively deliver information to each advisor and their clients.

Most advisors use a portfolio management system to provide information to their clients. That makes it critical that custodians are able to feed alternative investment related to an RIA’s clients directly into whatever management system he or she uses. Should an advisor be considering a change in custodians, it will be a distinct advantage if other custodians under consideration can feed data into the advisor’s portfolio management system in a manner that will appear seamless to the RIA’s clients.

Not only is it important that the RIA’s clients have 24/7 online access to their accounts, it is equally crucial that the advisor has this same access for all of his or her clients. This goes beyond a review of holdings in the account and includes being able to track account openings, transfers and investment transactions. Advisors should be able to securely communicate with the custodian in any matter related to clients.

The epicenter of the RIA world is shifting from a focus on traditional assets to the inclusion of alternative investments in clients’ portfolios. To continue to grow this segment of their business, RIAs will need to partner with custodians whose services are aligned with the needs of today’s investors.


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