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.
HOW TO CHOOSE A CUSTODIAN
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.