More registered investment advisors (RIAs) reportedly are exploring adding a custodian in the next year, but there may be challenges, as only a few currently dominate the market.
In fact, one in four RIAs are considering adding a custodian in the next year, according to The Cerulli Report—U.S. RIA Marketplace 2022: Expanding Opportunities to Support Independence. Yet, while many RIAs are considering adding a new custodian, only 4% have switched custodians in the past 12 months.
At the same time, just four firms[1] control an estimated $5.8 trillion of RIA assets as of 2021, collectively representing 84% of assets custodied in the RIA channel, the report notes.
And given the composition of the RIA channels, most firms have a single custodian. Among all RIAs, 73% manage less than $250 million and, therefore, the plurality (44%) only works with one custodian. In contrast, 71% of RIAs with three or more custodians manage $500 million or more in assets.
Inertia is also an advantage for incumbent players. Despite complaints about poor client service quality or outdated technology, advisors generally are willing to overlook these frustrations with their custodian because unwinding a custodial relationship is operationally difficult and disrupts the client experience, the report observes.
“The logistical challenges of switching custodians make it rare that RIAs drop an existing custodial partner entirely,” says Marina Shtyrkov, Associate Director at Cerulli. “Instead, RIAs are more likely to add a new custodian to fill any perceived gaps in service or capabilities.”
Consequently, while barriers to entry have made it difficult for new and boutique custodians to compete with these firms, Cerulli finds that RIAs are more likely to add a new custodial partner than unwind an existing relationship.
To that end, Cerulli notes that, as firms grow or their needs evolve, RIAs may begin to evaluate the number of custodial relationships they maintain. For instance, RIAs will oftentimes add custodial partners if they engage in M&A and are onboarding a new advisor or team that custodies elsewhere.
Emerging custodians can capitalize on this opportunity by filling in perceived gaps for existing RIAs where others have made limited headway or by helping breakaway advisors establish new independent RIAs, the firm suggests. What’s more, newly created RIAs lack any pre-existing custodial relationships or loyalties and represent a growing pool of assets as more employee-based advisors transition to the independent model.
“The transition process for breakaways is already a period of disruption for their clients and repapering is unavoidable, rendering those common objections irrelevant,” adds Shtyrkov. “Emerging custodians interested in the breakaway opportunity should build out experienced sales and support teams that can expertly navigate these advisors through the transition to independence,” she concludes.
[1] Schwab, Fidelity, Pershing and LPL.
