Creative Planning President & CEO Peter Mallouk says the RIA he leads works with all four large custodians — Schwab, TD Ameritrade, Fidelity and Pershing — to service its over $50 billion in client assets.
The a popular industry speaker and author, who’s been head of Creative Planning for the past 22 years, sees many shifts ahead in the clearing and custody business — and for the advisory business overall — as a result of the Schwab-TD Ameritrade deal. He reflected on some developments that came before the $22 billion transaction and its implications in a recent interview with ThinkAdvisor.
“When TD bought Scottrade [in 2017] and then Schwab [said last year it would buy] TD, that really dramatically changed the landscape, and in the middle of at all that and you thought, ‘maybe E-Trade’s going to come out of nowhere and become an option.’ But technology-wise, they just never got there. And then they got bought by Morgan Stanley,” explained Mallouk.
In terms of RIAs’ view of their biggest options, it looks like they now have “really got Schwab and Fidelity, and a lot of places would like to have a third bucket,” he said. “So [Schwab’s deal with TD Ameritrade] does open the door for another [large] competitor, whether it’s Pershing or someone else.”
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Earlier this year, Pershing lowered its minimum asset level for RIAs to $100 million from $250 million and gave its RIA clients two more options for how they pay for custodial services — a zero-commission model tied to a low-yield cash sweep program and a plan that charges at least $25 a month with fees tiered to assets.
With most RIAs managing less than $200 million, those competing with Schwab and Fidelity “need to move downstream” to capture that part of the market, Mallouk said. “And it just naturally seems like if there’s only two major players, you’ll probably see them raise the minimums, so they can encourage consolidation and have less firms to keep track of.”
Explaining the motivation of such a move by the biggest players, he asked: “[If] you’ve got thousands and thousands of [RIA] firms, why not raise your minimum and have to deal with 20% less firms with [about] the same assets?”
The advantage with this strategy, Mallouk added, is that “it’s just less everything — less cost, less risk.” Also, he noted, the more traditional industry players are not likely to lower their minimums to $50 million or $25 million.
While there could be some interesting developments among those firms willing to work with RIAs with under $100 million of assets, “the real door opener is going to be the self-custody places,” the executive added.
‘The Squeeze’ Begins
At the RIA level, “We’re in the beginning stages of the squeeze, and … people don’t realize they’re about to be squeezed,” according to Mallouk.
“You saw this with mutual fund commissions, with mutual funds fees and then with ETFs. [It’s happened] with custodial trading fees, and now you’re seeing it with advisors,” he explained.
What’s playing out “is this demand for technology, strong personal relationships, extra services and value, and more control [that is] moving to fewer custodians,” Mallouk said.
“All of those things put together are going to resolve the great squeeze in the RIA space,” he noted. “But … 18 months ago, [Schwab and Fidelity were] competing with TD Ameritrade … and E-Trade, and now essentially all of that’s gone.” (Scottrade was gobbled up by TD Ameritrade in 2017).
As a result, “a lot of the power has shifted back towards the custodians,” Mallouk pointed out. In addition, compliance and technology requirements are increasing, as is the demand for financial planning.
“You’ve got to deliver for your [RIA] clients without raising their fee,” he explained.