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Industry Spotlight > Mergers and Acquisitions

Why the RIA Custody Business Is in Play

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Over the Labor Day weekend of 2023, Schwab Advisor Services is set to fully integrate TD Ameritrade’s RIA custody business. Bernie Clark, Schwab’s head of RIA custody, acknowledged that this integration “won’t be without incident,” at the firm’s recent 2022 IMPACT event in Denver.

No commissions, low interest rates, questions about payment for order flow and a movement away from mutual funds to ETFs have affected the custody industry, with the large end-client accounts typically associated with big RIAs generating most profits for the infrastructure-heavy, big custodians.

A growing number of firms are offering, or working to soon launch, alternatives for advisors and other financial professionals who use the “Big Three” custodians — Schwab, Fidelity and Pershing. And many of these firms are gearing up for an opportunity to sow doubt in the minds of some Schwab clients about the integration with TD Ameritrade.

Fundamentally, the industry’s upside-down economics means the big custodians need scale to make it work. As a result, the competition is eyeing this mega-merger as a once-in-a-lifetime opportunity to move some RIA assets its way.

Activity in the Custody Arena

A key example of the opportunistic strategic grab to capitalize on this pending disruption is the recent poaching of highly regarded former TDA-Schwab technology executive Jon Patullo by Apex, one of the RIA industry’s largest behind-the-scenes fintech custodians.

Patullo and his team of advisor technology innovators designed and executed on the multi-award winning Veo integration platform, much beloved by advisors and by the advisor software industry.

Veo was a true technology breakthrough a decade ago, providing APIs for all of TDA’s various back-office systems; this allowed nimble third-party technology vendors to write code for specialized integrations into their software and workflows, making life easier for advisors.

The efficiencies and productivity elevation of the entire technology ecosystem from Veo was dramatic. Also, it spurred many copycat moves by industry leaders, with none of them really gaining the traction and innovation that Veo achieved.

The integration creates a space in the industry for parties with an innovative technology strategy to enter and disrupt the oligopoly of RIA custodians. With Patullo and his colleagues, the potential competitive threat from Apex — via its transformation from an institutional fintech custodian to that of a highly viable substitute to Schwab — is quite real.

Other emerging technology platforms are coming to market with plenty of fanfare and high-profile executive hiring. Entrustody, a newcomer to the custody wars, recently onboarded a new CTO and hired Anthony “Mr. Purple” Stich, a well-known technology sales executive.

Stich was the former NaviPlan executive who helped broker the sale of the company to InvestCloud. He brings a lengthy list of contacts and relationships with some of the largest and best-known RIAs and technology platforms to Entrustody, which should have an immediate impact on the firm’s credibility.

Of course, let’s not forget the biggest player on the block — Goldman Sachs — which recently came to market in a big way with the billion-dollar onboarding of breakaway wirehouse brokers.

Goldman, with its strong brand, wealth products, access to the industry’s largest capital markets, seasoned operations and renowned technology is an instantly powerful player in the RIA space, simply by showing up.

Other Players

In addition, there are a handful of emerging RIA custodians known for having a niche approach to the market. Platforms such as Equity Advisor Solutions (EAS) have successfully focused on the marketplace of RIAs with less than several hundred million dollars in assets, creating an integrated suite of technology by being one of the first custodians to provide access to crypto and other digital assets.

Axos Clearing also makes the list of well-resourced custodians. It’s fresh off its acquisition of E-Trade’s RIA custody business, which was the former Trust Company of America. After acquiring E-Trade, Morgan Stanley had zero interest in keeping this competitive asset for their wirehouse brokers and parted with it for pennies on the dollar.

TradePMR is another smaller legacy custodian. It has made inroads into the broker-dealer space by inking a lucrative deal with Wells Fargo and other institutions of note.

Front-end technology platforms are also primed to benefit from small RIAs looking for alternatives to the Big Three. Leveraging slick, all-in-one interfaces embedded on top of institutional custodians, Altruist (Apex) and TradingFront (Interactive Brokers) provide a full-suite of technology integrated into their underlying custodian partners, which gives instant entry to startup RIAs that would typically be ignored by the Big Three custodians.

Shareholders Service Group, led by the dynamic former Schwab technology executive Dan Skiles, has been the industry leader in this segment for some time, and it now boasts 1,600 RIAs. It’s known as a service-first platform, driving tremendous loyalty and growth from its advisor clients.

Adding to the list of newcomers is an old-timer: Envestnet. Long rumored to be exploring building out a custodial offer, Envestnet finally made it real just recently by announcing a seminal deal with New Zealand-based FNZ to create an end-to-end tech stack that also includes custody.

Envestnet has long had the capabilities and wherewithal to create an RIA custodian, but has held off for a number of reasons, most notably that they were worried about creating competition with some of their largest clients, such as Schwab and Fidelity. Whether or not this competitive custody offering draws backlash, it makes the looming battle for hearts and wallets of TDA advisors even more spicy.

Of course, there are also the large independent broker-dealers, such as LPL Financial, Commonwealth and Raymond James. They have invested aggressively to build out their RIA custody and technology platforms to not only play defense in keeping their potential breakaway brokers in house, but to also now become viable competitors for the RIA hybrid model that is growing in size and scale.

There have never been more options for RIAs to diversify their custody relationships, which is a very positive sign for the long-term health and growth of one of the fastest-growing segments in financial services. This is no accident, however, as it was foreshadowed by the Schwab-TDA mega-merger announcement of 2019.

It’s also created the opportunity of a lifetime: The RIA ecosystem can continue to capitalize on its own growth, while trying to entice advisors who may be looking to switch custodians.

Timothy D. Welsh, CFP, is president, CEO and founder of Nexus Strategy. He consults for firms in the wealth management industry and may occasionally mention them in his writing, which does not represent an endorsement or recommendation. Reach him at [email protected] or on Twitter @NexusStrategy.

(Image: Shutterstock)


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