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Also available as podcast (Episode #113)
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Can I Join A Custodian’s Client Referral Program?
Some custodians that also have a direct-to-consumer retail offering, have developed client referral programs. These programs are generally utilized when a client’s needs have progressed beyond what the direct retail offering is positioned to provide. When applicable, custodians will in turn refer such clients to select RIAs that retain assets at that custodian. As most of the referred clients are typically larger clients, with more complex needs, there is a natural interest from RIAs to be included in such programs.
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Full Transcript:
Can I join a custodian’s client referral program? That is today’s question on the Transition To RIA question and answer series. It is episode #113.
Hi, I’m Brad Wales with Transition To RIA where I help you understand everything there is to know about why and how to transition your practice to the RIA model.
If you’re not already there, head to TransitionToRIA.com where you’ll find all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers. All kinds of things to help you understand the model.
Again, TransitionToRIA.com.
Today’s episode will likely be a bit shorter than usual episodes, but it is a question I get asked from time to time. That is…. “If I were to start an RIA and choose a custodian, do you think I would be able to get on that custodian’s client referral program?”
On this episode I’m going to discuss what are these programs, and what is your likelihood of getting on them.
Several of the large custodians that you might choose for your practice have a retail presence. A direct to client model, maybe retail offices throughout the country. Through those channels they can serve most of those clients without too many issues. A lot of those are possibly very small clients.
But as those clients become more sophisticated with their needs, as their wealth grows, oftentimes the needs of those clients will outgrow what those channels were meant to service.
Instead of trying to keep them jammed into something that’s arguably maybe not a good solution any longer for that client, several of these custodians have come up with – and they have different names for them – but it’s essentially a client referral program where with clients they feel might be better served by an RIA, they refer those clients to RIAs that use them as custodian.
And for the clients – if they choose to move their relationship to the RIA – they don’t have to move their assets. They stay right with the same custodian.
Obviously, you can understand why RIAs are excited to potentially be on the receiving end of such referrals. Because again, by nature of who’s being referred, these are generally larger, more sophisticated clients.
Now, the custodians are not doing this out of the goodness of their heart. They are for-profit businesses. They are essentially giving up the direct relationship, although the assets would be staying with them as custodian.
In return for the referral, and these rates might have changed, but generally the receiving RIA pays a 25bps fee perpetually goes back to the custodian.
The RIA might charge the client, for example, a 100bps fee. And in return, they provide the client with various services. The RIA then pays 25bps of that to the custodian.
Now, by that math, if you charge 100bps, the 25bps is 25% of your revenue. That is a big chunk that needs to be considered whether that math would work for you.
But if that is a client you arguably might not have been able to get on your own, and here it is referred to you, it can be very lucrative for the RIA, and lucrative for the custodian. Because now, the custodian not only generates revenue as they traditionally do as a custodian, they now also make the 25bps as well.
As a prediction, I think we might see some of this coming out even in the independent broker-dealer world going forward. There are a couple independent broker-dealers – some of which have custodial channels as well – but some are starting up programs where they will be the acquirer of their 1099 independent broker-dealer channel advisors at the end of their career.
As opposed to maybe selling to another advisor, selling to whoever, there are starting to be independent broker-dealers who say… “We will buy your practice. It’s going to be easy for you. It’s going to be easy for the clients. We will be a buyer.” I think we’re going to see more of that going forward.
Now, what that has to do with today’s episode is as they buy those practices, those broker-dealers now need to service those clients. They either need to staff that from the home office team, or possibly take over physical presences in different cities around the country.
There’s a chance that some of these independent broker-dealer firms might adopt a similar kind of strategy where they acquire the assets, and then they look to reassign those out to perhaps geographically located advisors of theirs.
This would have a similar kind of arrangement where they make the referral, but the “receiving” advisor in turn pays an ongoing referral fee back to the broker-dealer. It will be interesting to see if that occurs as well.
But at a minimum, such client referral programs already exist with some custodians, and they are very large programs.
So, the question is, if you were to start an RIA, could you get into one of these client referral programs?
Sometimes I hear when advisors or teams are talking to custodians, that the custodian might say… “We might be able to get you onto the client referral list.” It’s part of their pitch.
On today’s episode, I want to basically say except for very rare circumstances, the answer is likely to be, no. You will not be able to get onto the client referral programs.
Now, there are exceptions. There are RIAs that do it. But to set expectations, it’s not likely, and I want to share a couple reasons why that is the case.
For starters, for the custodians that have these arrangements, it is limited how many RIAs they allow into the programs to begin with. Some programs are measured in dozens, maybe a hundred and something, maybe a little larger.
But when a custodian services hundreds, if not thousands of RIAs, it is a very small subset that are allowed onto these referral programs. So just that alone shows that they are very picky, they are very choosy. Understandably, they have some very good RIAs to work with. For them to add someone new, that saturates the current partnerships they already have.
So, just number one, they are not very big programs (with respect to the number of RIAs participating) to begin with.
Number two, if anything, the number of RIAs participating in those programs has seemed to shrink.
Over the past several years – particular example is Schwab acquiring TD – if anything, the trend seems to be that the total number of RIAs in these programs – I don’t have the hard data, but anecdotally through feedback I’ve seen – these programs have shrunk in RIA count over the last couple years, not grown.
It’s already a relatively small number, and if anything, that number seems to be getting smaller not bigger. So hence, again, a bigger hill to overcome if you wanted to be added to it.
The next example, typically the RIAs that are in these programs have billions in assets with that custodian already.
That’s part of why the custodians essentially, to a degree, “reward” them with this opportunity, with this relationship. And so, if you come in and you might have a very nice sized practice, let’s say you have $500 million, $600 million, and you’re going to choose a custodian, that’s a great relationship for the custodian. That’s a wonderful practice you’ve built. But you’re up against firms that already have billions with that custodian.
As consider the RIAs already in the programs can remind the custodians of all the revenue the RIA generates for the custodian (due to their size). And how if the custodian adds more RIAs to the programs, it dilutes their opportunity with it.
So unfortunately, that’s another challenge of getting into these programs.
The final example is something I don’t think a lot of advisors even realize is occurring.
These client referral programs have evolved to the point that some, if not all, of the participating RIAs that are on these programs, have built out teams of people at the RIA whose sole job is to – essentially, they’re sort of like a wholesaler – is to go out to that custodian’s retail offices, and each of those retail offices has an advisor (or multiple advisors) whose job is to decide which RIA to refer clients to.
These RIA team members sole job is to go out and foster relationships with those advisors, and to maintain those relationships over time so that when that opportunity comes along where a client is perhaps going to be referred to an RIA, that their RIA is top of mind with the advisor.
The custodians know that these big RIAs are putting these resources into fostering the program, trying to make it as good of an experience for the client, for their own retail operations. And so, if you come along and you don’t have any of that, again, that’s going to be difficult to be able to get on those lists.
I just want to be a straight shooter on this. I’m not saying it’s not possible. Custodians might change how they approach these programs over time. It might be doable for your firm. Every circumstance is different. But just realistically speaking, take it with a grain of salt, but if you’re ever told… “we might be able to get you on the program,” know that it is a heavy lift.
Now, I will leave you with one suggestion of how to maybe overcome some of these challenges, particularly if you don’t already have billions in assets, and you don’t have a team already built out that’s going to foster the relationships, etc.
If I was an RIA, and I was hoping to get on one of these programs, I would be positioning it with the custodians – now, you must be able to back this up – but if you have a highly specialized niche, an expertise you and your team are very good at, particularly if it’s a complicated subject…. maybe it’s equity compensation for highly compensated executives, and you’re dealing with equity grants, RSUs, stock options, etc and you and your team are very good at that.
I would pitch to the custodian that not every RIA has that unique expertise, and that when those client scenarios arise, they will want a capable RIA to refer the client to. As not just any RIA can necessarily handle those issues.
You would like the custodian to think of your RIA when those opportunities arise. You realize they might not think of you with other scenarios, and that is fine. But when the need is there, you are a good solution.
It’s not up to me (to decide what RIAs custodians allow into the programs), but if I was an RIA and I was hoping to get onto one of these programs, I think that’s the angle you’d want to try. But even then, you’d still have to come up with resources to communicate it out to all the possible referring advisors.
But just merely showing up with a couple hundred million in assets and saying… “I’d love to be on this program,” is going to be a heavy lift for all the reasons I just noted.
With that, as I said at the top, my name is Brad Wales. This is the type of thing I help advisors with. How the RIA model works. Where are the opportunities in the model. How you might be able to take advantage of them.
I am a straight shooter, I don’t paint everything as always rosy. I tell the tale where it needs to be said, and where something may or may not be possible, so you can make a fully informed decision about whether you should transition into the model and what it might look like for your practice.
As a starting point, head to TransitionToRIA.com. You’ll find all the resources I make available from this entire series in video format, podcast format. I have articles, I have whitepapers.
At the top of every page is a contact link. Click on that and you can instantly and easily schedule time to have a one-on-one conversation with me. Whether you want to talk about today’s topic or anything else RIA related. I’m happy to have that conversation with you.
Again, TransitionToRIA.com.
With that, I hope you found value in today’s episode, and I’ll see you on the next one.
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