Q17 – As an RIA can I use more than one custodian?

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As an RIA can I use more than one custodian?

Unlike perhaps with your current broker/dealer affiliation arrangement where you are required to keep all assets with a single firm/custodian, as your own Registered Investment Advisor (“RIA”) you have the flexibility to use as many custodians as you desire. There are a number of important variables and disclosure requirements to consider though before perhaps making such an addition.

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Full Transcript:

As an RIA, can I use more than one custodian? That is today’s question on the Transition To RIA video series. This is question #17.

Hi, I’m Brad Wales with Transition To RIA where I help advisors just like you understand everything there is to know about why and how to transition to the RIA model.

Today’s question, we’re going to talk about as an RIA, can I use more than one custodian? A little backstory to begin with. If you are currently at one of the large traditional firms, the wirehouse type firms, let’s consider what your current situation is now. Assuming you offer currently both commission accounts and fee-based accounts, you are technically wearing two hats underneath that firm.

You are wearing an RIA hat, so the corporate RIA of your firm. You are operating under that as an investment advisor rep. That is what allows you to offer fee-based accounts to your clients. And then you’re simultaneously, to the degree you also have a Series 7 with that firm, which most likely you do, and you can offer commission accounts, you’re also wearing the hat of a registered rep of that same firm’s broker-dealer.

Again, that firm has an RIA, often referred to as the corporate RIA, and a broker-dealer. And you are wearing two hats underneath both of those.

Let’s think of the RIA on the first part. Like any RIA, the RIA of your corporate firm, has a custodian that holds the assets and clears the trades for the clients. If you’re at one of the large traditional wirehouse type firms, they own the custodian themselves, they are the custodian. They are as they say, self-clearing. That’s why you have your same name that is on your business card is on the client statement because again, the custodian is self-clearing. The RIA is self-clearing and they’re in-house.

Then the broker-dealer, the same thing, basically, self-clearing and with their own custodian.

Underneath that RIA is one channel, but then what becomes a little more of a challenge for you is under that…when you’re wearing that broker-dealer hat…because of broker-dealer regulations, your firm is required to, among other things, provide compliance oversight of you and supervision oversight of you.

Because of that, that’s where it starts to restrict your ability and why you have to generally have all your assets there at your firm. As an example, the reason you can’t have either your own personal trading or investible assets elsewhere or certainly a client’s assets elsewhere that you’re trading is because the broker-dealer part of your firm has to be able to supervise you and they can’t do that if those assets are held elsewhere.

Another example, if you were to offer an investment product away from your broker-dealer, for them, that’s selling away. That’s a serious infraction in the broker-dealer world because again, they can’t supervise you doing something away from them. It’s for those same reasons that you could never be a registered rep of one broker-dealer, say Wirehouse Firm A, and simultaneously also be with Wirehouse Firm B as a registered rep. That is not done in the industry, and again, one of the main reasons is supervisory responsibility. To the degree you’re with some other firm, the first firm has no way to supervise your activities, which they feel they’re required to do because you have that Series 7 with them.

The reason I set that up is you are basically a single custodian now if you are with one of these firms. You have a single option and a single place to open client accounts. It’s not the RIA that’s forcing you to essentially do that. Now, your firm’s management, right, they would not want you necessarily having assets elsewhere just for business purposes. But it really comes down to that broker-dealer that’s required from that supervision standpoint, that even if management wanted to somehow make this possible for you, it becomes more difficult because of the ability to supervise that. So, you’re essentially a single custodian now.

As your own RIA, you no longer essentially have that handcuff of the broker-dealer required to oversee you. As your own RIA, keep in mind, you are responsible for your own compliance. I’ve already done a number of videos on this. I encourage you to look at those as well. The benefit of that is all of a sudden, when you have that responsibility (yourself), now you can decide….“okay, can I do things here, here, and here.” Whereas opposed to when you’re under the terms of your current firm, they dictate to you….“no, it has to be done here.”

As your own RIA, you do have the option. And to answer the question, can I use more than one custodian? You absolutely can use more than one custodian as an RIA. Now, I would tell you, most RIAs when they first start, and I’ll do a separate video on this because there is a lot of pros and cons to consider of, should I be single custodian or as they say, multi-custodial? Most RIAs when they start, if you’re breaking away from a traditional firm with one custodian and then perhaps over time, I’ll give some examples here, become multi-custodian as they move along.

I’ll do a separate video because there are a bunch of nuances. A couple of high-level things just to point out here. As an RIA you absolutely can be single custodian, only use one custodian. And a lot of RIAs do only use one. Or you can be multi-custodial. There’s no limit to what that is. In theory, you wouldn’t want to use too many because it becomes logistically unruly to try to manage that. But I’ve certainly seen plenty of RIAs that have two, maybe three is kind of fairly common.

Of particular note here, let’s say you start single custodian and then you become multi-custodian at some point in the future. I’ll do a separate video on this because there’s a lot of variables you’d want to think through before you perhaps do that. But keep in mind, you do not need to get the permission of your first custodian, sometimes referred to as your primary custodian, you do not need to get their permission to establish a relationship with another custodian. Not at all.

I used to work at a custodian and so I can tell you that the only way a custodian even knows that you as an RIA have a secondary or third custodial relationship is a couple of ways.

One, a custodian could just outright ask you, “Hey, are you using more than one custodian?” The reason they’re asking that is not if you answered yes…again, you don’t need to hide anything…but if you answer yes, at a minimum, they’re going to want to try to win, as they say, your share of wallet. If you have $200 million with one custodian and they discover you have $300 million at another custodian, they’ll probably try to build upon their relationship with you to try to earn more of that business that you currently are doing elsewhere.

So, it’s not unheard for them to ask and by no means do you have to hide it from them at all. Because quite frankly, if a custodian doesn’t ask you or you don’t tell them, there are some other ways a custodian could just look this up themselves. For instance, on your website where your clients would go to maybe log into their accounts. Generally, on an RIA’s website they have links to the custodians so a client could go there. And so, if a custodian just looked and, “Oh, I see you have the link to my custodian and you have a link to this other custodian,” clearly, you’re multi-custodial at that point.

Then usually in your ADV. It would list out who you’re using as custodians as well. There is a disclosure requirement generally applied.

The only thing is a custodian, just to the degree they know you have another custodian as well, just wants to earn more of your business. That’s all there is to it. There’s nothing you need to ask permission for. There’s nothing you need to keep secret or anything along those lines.

I’ll give you one quick example in this video of how someone might end up multi-custodian. You see this kind of fairly frequently. An RIA will start out single custodian and maybe be very satisfied with their custodian, and has no desire to move assets or start building assets at another custodian as well. Again, there are complexities with that.

Something you sometimes see is an RIA, they have one custodian, and that RIA has the opportunity to buy another practice or buy a book of clients from another RIA. That other RIA is currently using a different custodian. So, the buyer, the buyer RIA, has the chance to…or the option to….”I’m going to acquire this practice and move all of those accounts to my primary custodian.” But oftentimes, they’ll look at that and say….“yes, it will be more complexity for me to become multi-custodial and the logistics of that, but if I do that and I just leave those accounts where they are, perhaps the added complexity and logistics of that is simpler or easier or better than trying to move the accounts over to the current single custodian.”

So, that’s an example of a path of sometimes how an RIA goes from single to multi-custodial. And there’s other reasons, I’ll get into again in that separate video, but at least on this one, I wanted to give you an example of that.

The main takeaway is there are pros and cons to being either single custodian or multi-custodian. It’s not a black and white easy decision. A lot of things you have to think through. The beauty of it is though as your own RIA, you get to decide whether you want to be single custodian or multi-custodian. You have full flexibility on that. You do not need to seek anyone’s permission. You do not need to hide it from anyone.

One of the benefits of the RIA space is you have flexibility. Think of a custodian as one of your vendors. If you’re not fully satisfied with your current vendor, or you want to add depth to your resources of vendors that you use, is a reason you might add more custodial options for your clients.

With that, my name is Brad Wales with Transition To RIA. I help advisors just like you understand everything there is to know about why and how to transition to the RIA model. Today’s question is a perfect example of that. If you were going to make this move, how does this custodial relationship work? Do I need one custodian, multiple custodians? What are my options over time? I’m glad to have this kind of conversation with you. I could walk you through as many details regarding it as you would like.

If you’re not already there, head on over to TransitionToRIA.com, I have lots more videos you can look at. I have whitepapers. And then the easiest thing is right there at the top is a contact link. Click on that, you can instantly and easily schedule a specific day and time that we can have a dialogue and begin this sort of conversation and really look at….“What is your current situation? What kind of firm are you at now? What kind of affiliation model are you at now? And what might that look like in the RIA model? Would that be a good move for you?” And then ultimately if it is, then I’ll help you understand the “how” part, how do you go about transitioning to that model? I’d be more than happy to have that conversation with you.

I hope you found value in today’s video, and I’ll see you on the next one.

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