Close Close

Industry Spotlight > Clearing and Custodial Firms

Are Custodians Tilting at Windmills?

Your article was successfully shared with the contacts you provided.

What You Need to Know

  • Any independent advisor will say that the technology holy grail is one unified and integrated system that does everything for them.
  • Because this vision is so vast and the industry is so fragmented with thousands of small businesses that are all different, no one has cracked this code..
  • Custodian technology initiatives will always be challenged because all are based on a proprietary technology strategy designed to aggregate an advisor’s business on the sponsoring custodian’s platform.

Any independent advisor will say that the technology holy grail is one unified and integrated system that does everything for them — from CRM to financial planning, to trading to rebalancing and reporting. It has a client portal, a robo platform for small accounts, includes risk profiling, generates proposals, digitally opens accounts, manages documents, works with multiple custodians and broker-dealers, provides compliance oversight, has automated workflows and more.

Finally, this holy grail has best-in-breed functionality that is tightly integrated and can service the many different types of clients ranging from emerging investors all the way to the ultra-high net worth. Easy, right?

Unfortunately, because this vision is so vast and the industry is so fragmented with thousands of small businesses that are all different, no one has cracked this code. Therefore, independent advisors are left to fend for themselves and cobble together their own tech stacks from the hundreds of advisor technology providers.

Which brings up a juicy opportunity — and potential market dominance — for whoever in this technology and custodian ecosystem that does become the “owner” of the advisor desktop. That means the workstation or system advisors log into every morning to process business.

The firm that succeeds in this gets to charge two-way rents from advisors’ clients as well as from product providers in the form of basis points for accessing the underlying investments, separate accounts, funds, cash vehicles and other products that generate revenues in the investment management value chain.

Ultimately, this positions a firm to “win” wealth management, just as the tech titans Google, Amazon, Meta (formerly Facebook) and Apple have won their categories. Also, due to the fast growth and success of the RIA industry, there are trillions of dollars at stake making this once sleepy sector in financial services a potential land-grab for whoever can deploy the “platform” that can at least provide most of the functionality to solve for the vast majority of advisory firms.

Winners and Losers?

In this “Squid Game,” who has the most to gain or lose? Clearly, legacy RIA custodians currently are benefitting the most from the success and growth of RIAs as they extract their two-way basis points in their dual roles as custodian and product distributor.

As a result, there always has been a delicate balance of power between the custodians and the advisor technology community that RIAs depend upon to manage and grow their businesses. Of course, when advisors are more efficient via technology, they grow faster, fueling the scale and profitability of the ­custodians, creating a mutually beneficial relationship.

At the same time, custodians desperately don’t want to become disintermediated by a technology layer and end up de-facto commoditized processors, subservient to their new technology overlords.

This is why custodians continue to try, and try again, to create a bundled technology plus custody solution to keep the technology wolves at bay, while strategically attempting to gain market share from their competitors via a new, end-to-end, complete, comprehensive, full-featured, integrated, does it all, etc. — “technology platform.”

Case in point: Pershing’s new initiative launched last month to much fanfare: “Pershing X will deliver the industry’s leading end-to-end advisory platform, helping financial services firms solve the challenge of managing multiple and disconnected technology tools and data sets for their advisors to fuel business growth,” said Jim Crowley, Pershing CEO in its news release.

Troubled History

This latest development from Pershing is not a surprise in the advisor industry.However, big custodians have a long and problematic history in trying to deliver a silver-bullet solution.

It all started back in 2007 when Fidelity made the first attempt to bundle a tech stack with the WealthCentral initiative. WealthCentral initially was launched with much hype as a, “new, integrated, web-based wealth management platform that would integrate key RIA operational systems such CRM, portfolio management and financial planning, along with the capabilities of Fidelity’s current Advisor Channel platform, melding them into one hosted unified workstation that can be accessed through a web browser,” as described at the time by tech guru Joel Bruckenstein in Financial Advisor. Fidelity promised it would be spending $50 million, representing “the single largest investment we have ever made in the independent RIA business.”

WealthCentral had a little pickup in its early years as most advisors already had their own CRM and planning tools, and while impressed with the integration, wanted to immediately unbundle it and layer in their current systems instead. Because of this false start, Fidelity re-branded WealthCentral as WealthScape and went back into the bundling waters, after acquiring eMoney, with its next iteration called the “Total Advisor Platform,” which again was announced with much hype in 2016. TAP would be “a single technology platform to access Fidelity’s proprietary tools, third-party vendors and data from multiple custodians.”

Fidelity spent more than $1 billion on TAP, but advisors were reluctant to purchase technology from their custodian. They still relied on their third-party software solutions, which created a renaissance in the advisor technology community as these independent software providers continued to innovate and benefit from the latest enhancements they could quickly and nimbly deliver.

While Fidelity’s technology efforts were percolating, Schwab, often late to the tech game, was launching “Project C” in 2009, another CRM, planning and portfolio management system bundle featuring Salesforce as its hub. Again, launched with much fanfare as “intelligent integration,” Schwab would become a Salesforce reseller via the bundle.

History was not kind to the tech execs at Schwab, however, as Project C came crashing down just six years later, saddled with low adoption and soaring costs. In fact, Schwab abandoned the project in 2016, orphaning 150 RIA firms who actually bought the bundle, as well as leaving them to fend for themselves and to rebuild their tech stacks from scratch, with nary a refund nor apology.

Challenges Continue

In the final analysis, these custodian technology initiatives will always be challenged by default because all are based on a proprietary technology strategy designed to aggregate an advisor’s business on the sponsoring custodian’s platform. This is why they only work with that custodian’s accounts and data. It is a popular strategy for attempting to lure business through their technology pipes, build a competitive wedge, and again, attempt to control the advisor desktop.

While this looks great on PowerPoint, it fails to recognize the underlying tenets of the RIA marketplace. Advisors are independent for a reason and want their technology to be independent as well.

Additionally, most, if not all RIAs, work with multiple custodians and always will need a middleware solution that is independent of any one custodian. Despite the claims that these custodian technology platforms will be “multi-custodian,” in reality that is never the case. It also defeats the whole strategic point, as they only make money on assets on their platform, why provide technology that makes it easy to diversify away?

Ultimately, the only custodian technology integration strategy that actually worked was TD Ameritrade’s Veo, which was true open architecture, providing advisors with choice and flexibility as to the software they wanted to use that would work well with TDA. This technology-friendly approach for both advisors and the advisor tech community resulted in making TDA the fastest-growing custodian as a result.

Sadly, TDA’s vision of a “digital ecosystem” with Veo will be snuffed out by Schwab as they shut it down and move everyone back to Schwab’s systems through the acquisition of TDA. While I’m sure the industry wishes Pershing well on their Pershing X strategy, history has shown that the custodians might want to think about sharpening their jousts a bit more before starting on this familiar, yet quixotic technology ­journey.

Timothy D. Welsh, CFP, is president, CEO and founder of Nexus Strategy, LLC, a consulting firm to the wealth management industry and can be reached at [email protected] or on Twitter @NexusStrategy.


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.