Q27 – Can I start with a single custodian and then become multi-custodian later?

Also available as podcast (Episode #27)

Apple  |  Android  |  Spotify  |  Amazon

Can I start with a single custodian and then become multi-custodian later?

A meaningful benefit of the Registered Investment Advisor (“RIA”) model is the ability to work with more than just one custodian.  There are a number of pros and cons as to why you might consider being “single custodian”, vs “multi-custodian”. You have complete flexibility to decide if/when to perhaps move from single, to multi. Accordingly, you can absolutely start with a single custodian, and perhaps become multi-custodian at a later date.  No matter when such a step might be taken though, there are a number of important variables to be aware of with respect to what a multi-custodian arrangement entails.

Found This Video Helpful?

Want to learn even more by better understanding what a transition to the RIA model might look like for your own practice?  I encourage you to schedule a Discovery call, and I’d be happy to begin that conversation with you.

Full Transcript:

Can I start as single custodian and become multi-custodial later? That is today’s question on the Transition To RIA video series. It is question #27.

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

In today’s conversation, we’re going to talk about the idea of when you first transition and start in the RIA model, should you have one custodian, or should you have multiple custodians? I did do a separate video on this, the idea of can you even have more than one custodian and how does that look? I encourage you – I jump into a bunch of the nuances of that – to look at that video as well if you haven’t already seen it.

Today’s video we’re going to be talking about on that initial launch point, should I start single or should I start multi-custodial? Why might one be better than the other?

A quick recap on, and again, I don’t want to rehash all of it because I did a separate video on it, but the idea of being multi-custodial, so, a quick recap. As an RIA, you will start your own RIA, but you will need a custodian to house your assets and facilitate the trades and whatnot. You are not affiliated with this custodian. You do not have any sort of ownership with this custodian. They are essentially a vendor of yours to provide custody and clearing services.

That’s one of the big things I help advisors with – because there’s a lot of custodial options out there. Why might you consider one versus another, and the pros and cons, and the different services each offer. I’m more than happy to help you think through that if you’d like.

As an RIA, you have your RIA but you will need at least one custodian, could have more. The quick recap on that is that the answer is yes, you can have multiple custodians. You don’t have to have only one. You don’t need anyone’s permission to have more than one.

If you start with one custodian, you don’t need to go to them and get their permission to go with another custodian. You have full flexibility to do that as you wish. Further, you don’t need to hide it from your custodian either. It’s not like if they found out that they would necessarily do anything about it.

They might say….”We didn’t realize you had a second one,” or, “We didn’t realize you had a third one.” The only thing they might do, and this is pretty typical if they find out that you have (for example) $200 million with them, and then it turns out you have $200 million with another custodian, they’d of course love to earn more of your business. Maybe some of that $200 million you have elsewhere, they’d love to have you bring to their custodian. You don’t need to keep it a secret. They might outright ask you….”are you using more than one custodian?”

So just a couple of nuances in the RIA world, how you have that flexibility, you don’t need anyone’s permission, you don’t have to keep it a secret, anything along those lines.

Next, I wanted to go through some of the pros and cons to being either single custodian versus multi-custodian because that will help us address how should you start when you first transition, what’s the best path. A couple of pros of being single custodian – I’ll preface it and say I’ve known very successful RIAs that are single custodian, and I’ve known very successful RIAs that are multi-custodian. There’s no rule that says to be successful, you have to be one or the other. There’s different reasons these RIAs have stayed in their proverbial lane, if you will, that they either stayed with one custodian or they became multi-custodian. It’s not to say one is necessarily better than the other. There’s been very successful RIAs under both approaches.

Let’s go through the pros of single custodian. One of the pros of being single custodian is it’s only one system to learn. Even though you’re going to have your own RIA, you’re still going to have to learn the system of your custodian. How do I open a new account? How do I transfer money between accounts? All of those operational steps you will need to know about your custodian. To the degree you only have one custodian, that’s only one set of processes that you need to learn and understand and implement in your workflows going forward.

Another pro is you only have one home office team of that custodian to get to know and to know who to turn to. If you do have a question about a (for example) specific kind of trust account you’re trying to open, you might establish a contact there at the custodian that knows that sort of thing and you can turn to that person for help on that topic. When you only have one custodian, that’s only one set of home field folks that you need to know about and to build those relationships with.

The last one, and this is not exhaustive list, is you also only need one tech integration. Some custodians offer a fully integrated technology suite as part of their offering and you could use solely that offering for 100% of your needs as an RIA.

That might fit you well, but in addition, a typical thing a lot of RIAs use is they also use third-party software with different providers and different vendors. That’s one of the things I help advisors think through….why you might want to do that and what are the options? If you are going to use, which is quite typical, some of these third-party providers, you have to make sure that they’re integrated with the custodian and that the data flows properly. If you only have one custodian, that’s only one connection between that vendor and the custodian that you need to worry about.

Those are some of the pros, not an exhaustive list, but a couple of things I wanted to throw out there.

Now for some cons. The first is the idea that, essentially all of your eggs are in one basket. I’ve heard some RIAs say….”I will not under any circumstances, essentially have all of my eggs in one basket.” They want flexibility or control over the matter.

If you only have one custodian and they make a change of some sort, whether it’s how they price out their services, the service level they provide to you as an RIA, maybe they have some sort of reputational hit that comes along. If you’re entirely wedded to a single custodian, it’s not to say that if any of these things occur that you couldn’t use that as an opportunity to say….”I’m going to add another custodian,” but you would be reactive at that point. You would only be giving yourself that flexibility after the fact.

There’s some RIAs that say….”I want to be multi-custodian because I don’t want all of my eggs in one basket.” Going on right now in the industry, Schwab is acquiring TD. I’ve talked to existing RIAs that were multi-custodial. They were using Schwab and TD. The reason they’re (now) maybe looking at other options is not because they have any issue with Schwab, or have any issue with TD. But once those two custodians join and they’re one, all of a sudden that RIA now has one custodian. For their own reasons, some of which I’ve explained, they don’t want to have just one custodian. There is a school of thought where some advisors feel strongly about it, some advisors won’t necessarily feel strongly about it, but there is this idea of all eggs in one basket.

Another challenge with only having one custodian is you’re dependent on their solutions. A couple of examples of this. First one is mutual fund availability. I did a whole separate video on this. I encourage if you use mutual funds, I encourage you to look at that video talking about….will my custodian make available every mutual fund I either currently use or want to maybe use in the future? Would that be available to me on their platform? There’s a whole bunch of nuances with that. Make sure to look at that video.

The short answer is the entire universe of mutual funds is not available on every custodian. A challenge when you only have one custodian is when you attract a prospective client, and you’re trying to ACAT in those positions. This new client you’re bringing on, they’re using a particular mutual fund, and maybe you’re going to keep them in that fund, maybe you’re not. To be able to transfer it in, the custodian needs to have a selling agreement with that mutual fund. And certainly if you want to use that fund going forward, maybe additional purchases and those sorts of things. For the reasons I stated in that separate video, your custodian might either be unable or unwilling to add that mutual fund to their platform. If you’re single custodian, that’s your only option at that point.

If you’re multi-custodian, you might be able to turn to your other custodian and say….”Do you have this mutual fund?” “Oh, it turns out they do have that mutual fund, I’ll open the account at that custodian instead.”

Another example is if you have a client that has (for example) a margin loan or needs a margin loan. Or it’s a prospective client that currently has a margin loan elsewhere. That’s where you often see this (interacting with multiple custodians) come into play.

Let’s say you’re trying to earn a new client’s business and they have a million-dollar account at another firm. They have a $200,000 margin loan on that, and whatever the interest rate is, it’s a 5% interest rate or whatever the case may be, and you want to bring that account on.

If you’re single custodian, you go to your custodian and say….”will we be able to do the same rate, the 5%?” Clearly, a client is not going to agree to pay more to transfer their account somewhere else. Ideally, they’d even love to pay less. But if you go to your custodian and say….”can we do this?” again, this example, $200,000 loan, a million-dollar collateral, 5%. Maybe your custodian can do that, it’s not an issue at all. But maybe they say….”no, the best we can do is 6%.” When you’re single custodian, that’s it. Take it or leave it. Unfortunately, you don’t have a lot of flexibility there.

If you’re multi-custodial, you could at least go to the other custodian – it might not be successful there either – and say….”I have a million-dollar client, $200,000 loan, can we do 5%?” Maybe that custodian can do that. All of a sudden, now you simply say….”ok, I’ll set the account up over here and we can make it work.”

However, to be realistic, both custodians might tell you they can’t match a particular rate. It’s not to say being multi-custodial guarantees you flexibility, but it at least sets you up to potentially have the option for that.

The last example of a con of being a single custodian is client choice. Some advisors want to be very fiduciary, above board, fully transparent. Part of that messaging is to say to a client – besides saying….”Here’s how I’m paid. I’m only paid by you. I have no conflicts from a compensation standpoint, no matter what we invest or how frequently we trade. I keep it very clean.” And one of those things is….“I give you the option of, I work with two (or maybe it’s three) custodians. Here are the pros and cons to each one. Which one would you like me to open your account at?”

I’m not sure that alone is a good reason to become multi-custodial because there is a lot of additional logistical work with being multi-custodial. Nonetheless, for some advisors, I have talked to advisors that they say…they at least want to be able to say that in their messaging. Even if ultimately every client ends up choosing option A 99% of the time, they feel it’s important that they can give that choice to clients. To each their own, it is indeed something I’ve heard of with some advisors that have concerns about it.

Being multi-custodial, it’s essentially the exact opposite of all this. I already gave examples of the pros and cons of being single and how that would look being multi and the flexibility that will give you. But with that does come a lot more additional logistical responsibilities.

I talked about how one of the pros of being single custodian is only having one system to have to learn. If you become multi-custodial, you now have two (or more) systems to learn, two sets of paperwork to understand and implement in your workflows, two sets of (custodian) home office teams that you have to get to know to get something done. So, yes, it gives you more flexibility, but it absolutely makes it more logistically challenging as well.

That might be well worth your effort to go through all of that because of the benefits that come with it. But just know, it’s not all pros and no cons to go multi-custodial. There are some challenges there as well to be aware of.

I know I’ve already given some scenarios, but I’ll give you a typical example of sometimes how advisors end up multi-custodial even if they didn’t necessarily set out to become multi-custodial.

A typical example would be an RIA that uses one custodian. They could be extremely satisfied with that one custodian. They maybe never run into any of these challenges that I laid out, with mutual funds or anything like that and it’s a great relationship. They have no interest in moving their assets elsewhere or opening another relationship with another custodian.

However, maybe an opportunity arises. There’s someone local in their town, an existing RIA (that uses a different custodian), and the advisor is ready to retire and so is looking to sell their book of clients, and this RIA lines everything up and acquires that book of clients.

The buyer RIA has two options at this point. Option one is….do I want to now work to bring all of those clients, transfer all of those clients over to my, as they say, primary custodian? Certainly there are benefits to that. They would keep all the benefits of being single custodian. The challenge of course is, having to move the accounts and the leakage that could occur with that. When trying to work with these new clients, do you want to also try to move them at the same time as part of that process?

An alternative is the buyer RIA says….”I’ve never desired to be multi-custodial, but it turns out the RIA I’m buying uses a different custodian. It might be easier for me to reach out to that custodian and see if I can enter into a relationship with them as well, and we’ll simply leave the clients at that custodian. They’re all (the clients) going to be eventually put under my RIA, but the clients themselves will stay on that custodian. And so yes, now I’ll be multi-custodial and yes, I’ll have the challenges from an operational and logistics perspective. But that might be the easier path, going ahead and becoming multi-custodial, than actually moving the clients over here.”

That’s a personal choice of each RIA or each advisor of what’s easier for them or better for them or better for their clients. That’s a typical example though I wanted to share of how sometimes even someone that’s fully satisfied with a single custodian can sometimes find themselves all of a sudden being multi-custodial.

My advice on this, the original question here is….if I transition to the RIA model and I start up an RIA, should I – no matter what you think about what I’ve said here, as maybe you think….”single custodian is absolutely what I would want” or maybe “multi-custodial is absolutely what I want,” let me at least give you my advice of what I think you should consider doing with the initial transition, the initial launch of your RIA.

Quite simply, I think you should absolutely start with a single custodian. There’s a lot involved with a transition process of getting your RIA set up, getting your new office set up, all the steps involved, and that’s absolutely what I help advisors understand. Trying to juggle multiple custodians at the same time, multiple paperwork, learning multiple logistics. I strongly encourage you to find a good custodian that you like, start 100% with that one custodian.

Even if you think….“but I like the pros of being multi,” I encourage you to start single custodian, and simply be prepared to one day be multi-custodial. What I mean by that is there are some decisions that go into setting up an RIA – for example, what technology you’re going to use. If you think….”ok, one day I certainly do want to be multi-custodial….even if I like your advice Brad, and even if I start as single custodian, my plan is to do that for at least two years before I explore something else.” – you want to make sure the decisions and the things you’re putting in place when you’re first setting up can accommodate that future plan.

For instance, the technology you plan to use. If you’re convinced that one day you will be multi-custodial, you want to put technology in place that can accommodate that when that time comes. You don’t want to pigeon hole yourself into this box that now I’m single custodian, now it’s going to be this monumental task to become multi-custodial. Again, that’s another thing I help advisors with is to think through how that works. So I do suggest you think, start single but with a mindset – if that’s what you desire – set it up so that it’s easier to become multi down the road if you ever felt the need to.

The next tip is if….whatever your circumstance is, you take my advice, you start single or however it is in life you are a single custodian, and you decide for whatever the reasons to become multi-custodial. If it was the example I gave where you’re buying a book, you instantly are going to have assets at that other custodian.

Let’s say that’s not the case though. Let’s say you have $400 million with your primary custodian and for whatever the reasons you do decide that you want another custodian. My suggestion is you can’t tiptoe into that. If you’re going to become multi-custodial, you need to commit to both custodians and be willing to put meaningful assets with both of those custodians. That’s primarily for two reasons.

First is your team members, in your office. They’ve already had to learn all of the operational and logistics steps of your primary custodian, the paperwork involved, how do I transfer money, how do I wire things, all that.

If you say….“team, we’re going to add another custodian,” and all you ever do is open three, four, five accounts….trust me, your team is going to hate dealing with those three, four, five accounts because that’s not enough accounts for them to ever get comfortable with all of the processes and paperwork, and the home office team they need to be aware of. There’s not enough incentive for them to go through all those steps to reach a comfort level. They’re going to tremendously dislike working with those clients. That’s not fair to the clients, and not fair to the team members.

My suggestion, if you are going to become multi-custodial, you need to commit to it and give that custodian a meaningful amount of assets. That’s the second part is how this impacts the custodian.

For starters, some custodians have minimum. Just because you want to become multi-custodial, even if you do your due diligence on the custodian and it seems like a good choice, and even if they like you, some of them will still say….”For us to enter into this new relationship, you need to move at least $X million, or be able to within 12 months have at least $X million on our platform.” So for starters, there’s the potential for these hard minimums.

And then two, imagine if you have $400 million here (your primary custodian) and you only put $5 million with this other custodian, and it turns out you need a favor (from that other custodian) for something in one of those clients’ accounts. You need something expedited or you need a better discount on a margin loan a client has. When you call that custodian, and you have $5 million with them, that is nothing in their minds. Some of these custodians have trillions of dollars (total) on their platforms.

You need to make sure the relationship is worth it for the custodian as well. If you only move – even if they don’t maybe have minimums – if you only move a small amount, you’re not going to have much weight with that custodian when you need help with something.

If you’re going to commit to being multi-custodial, commit some assets, both for your team’s sake and for the relationship with that other custodian.

To reiterate, I’ve given a lot of pros and cons and given you a lot to think about. I’ve known some very successful single custodian RIAs, and some very successful multi-custodian RIAs. Do not think that you definitely have to go one way or the other. It really comes down to your particular circumstances, what your current situation is, what you might envision for the future, for your practice.

I can help you think all of that through, but there is no perfect answer to any of this. It’s simply to be aware of how this works and what these options are. That’s exactly what I do for advisors.

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

Today’s topic is a perfect example of….how does this custodian thing work? Should I use one custodian? Should I be multi? What are the pros, cons? Should I start with one and change down the line into something else? This is absolutely the sort of thing I help advisors with. I’d be more than happy to have that conversation with you and help you really start to think through if you were to make a change from what your current situation is and transition to the RIA model, what would that mean for you? I’m happy to have that conversation.

If you’re not already there, head on over to TransitionToRIA.com. You can see plenty more videos I’ve made. I have whitepapers. At the very top is a contact link, simply click on that. You can instantly and easily schedule a specific date and time that we can begin to have a dialogue like this. Whether you have a very specific question you’d like to learn more about, or simply begin the more broad macro conversation of what would this mean for me to maybe make that change into that RIA model? You can instantly schedule a time for us to begin that dialogue.

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

Want To Learn More?

Schedule a Discovery call and lets begin a conversation.

Share this post

Read my free whitepaper!

Get instant access to my free whitepaper on "11 Ways The Economics Of The RIA Model Are Superior To Other Advisor Affiliation Options".
FREE WHITEPAPER:  “Steps To Take Now If You Anticipate Transitioning Your Practice To The RIA Model Anytime Within The Next 10 Years.”