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Also available as podcast (Episode #156)
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Do Custodians Have Minimum AUM Requirements?
TL;DR – Choosing a custodian to hold your clients’ assets is one of the most significant decisions when transitioning your practice to the RIA model. Many variables are involved in deciding which of the roughly dozen custodians best fits your practice. Though just as you would perform due diligence on them, each custodian has its own criteria for which RIAs they will work with. For some custodians, one of those criteria is that the RIA must have a minimum AUM level to use them. However, there are many nuances as to how AUM is defined, whether it’s your RIA’s total AUM or just the AUM you have with the custodian, etc. It is important to understand how these requirements work, as there is no reason to be considering a custodian that you are ultimately not eligible for.
Host:
Brad Wales founded Transition To RIA in 2020 after nearly 20 years of prior industry experience, including direct RIA related roles in Compliance, Finance and Business Development. He has an MBA and has held the 4, 7, 24, 63 & 65 licenses. He has been quoted or featured in 100+ industry articles including in the Wall Street Journal, Barron’s, and most every other major industry publication. He is well known for his RIA video explanatory series, and Kitces named his podcast as a “Top Podcast for Financial Advisors.”
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Full Transcription Of Video:
Do custodians have minimum AUM requirements? That is today’s question on the Transition To RIA question and answer series. It is episode #156.
Hi, I’m Brad Wales with Transition To RIA where we help you understand everything there is to know about why and how to transition your practice to the RIA model.
If you start out by heading over to TransitionToRIA.com you’ll find this entire series in video format, podcast format. There are articles, there are whitepapers. There is a Vendor Profile Series. All kinds of things to help you better understand the model.
Again, TransitionTtoRIA.com.
On today’s episode we’re going to talk about are there essentially minimum requirements to work with a particular custodian?
Where this is relevant is when starting your own RIA, there are a multitude of things you need to solve for. Things like a custodian, technology, compliance, E&O, etc.
One of those components, as I noted, is what is a custodian that will hold your client assets?
And so the question is of all the choices that are out there, do they have minimum AUM requirements to be able to work with them?
As a starting point, and to make sure we’re speaking the same language, when I talk AUM, for those that don’t know, stands for assets under management. To cut right to it, some custodians do have AUM requirements, some do not have AUM requirements. We’re going to dive into the nuances of that.
But when I’m talking about an AUM requirement, keep in mind that is in the custodian’s viewpoint of the AUM that you will have with them.
What I mean by that is let’s imagine you have a practice, and presumably if you’re considering the RIA model the bulk of your assets are in fee-based advisory accounts.
But you possibly also have some assets that are still in brokerage commission accounts. I’ve done episodes on how you can perhaps handle those assets. Perhaps you’re going to use a friendly broker-dealer for those assets.
You might also advise 401ks at the plan level.
This is a simplified example, but let’s say those are the three buckets you have. Fee based advisory assets, you have some broker-dealer assets (which you plan to use a friend broker-dealer with), and then you have the 401k plans.
Well, when you add up all those assets, you come up with some number. But keep in mind, the custodian is only going to house your fee-based assets. So the broker-dealer assets are not going to be with them. The plan assets in the 401k plans are not going to be with them. Those are held by a TPA.
So when we talk about minimum AUM requirements, it’s not necessarily of your practice as a whole, it’s again in the eyes of the custodian, how much would you actually be moving to them?
So keep that in mind as we go through what this looks like.
Now, as a starting point, there are about a dozen custodians serving the RIA model.
A lot of times people think it’s only that the “big three,” it used to be called the “big four.” But the reality is there’s about a dozen custodians, and for different reasons, some of those are going to be attractive and maybe a fit for your practice, and others are not going to be.
But just know as a starting point, there’s about a dozen of them. And they each have their different value proposition in the marketplace.
Now, yes, there’s a lot of overlap in those value propositions. Holding client assets, clearing trades is essentially a commoditized part of being a custodian. But they all try to separate themselves apart by perhaps how they approach technology or how they approach lending and alternative solutions you can use with clients, how they price out their services, etc.
There are all kinds of variables that go into the decision of which custodian to use with your RIA. I’ve done an episode on how to choose a custodian with your RIA. That’s a big part of what I help advisors and teams with. I’m happy to have that conversation with you as well.
Now, you can do due diligence on these dozen or so and understand how they’re different and which ones might be a fit for you. But it’s a two-way street. You also have to say… “will that custodian work with me?”
While the custodian might be out there trying to promote and sell their custodial solution, they also say… “Do we want to work with this advisor, this team? This RIA they are starting?”
It’s a two-way street. And so part of that, and what the topic of today’s episode is, is several of these custodians do have AUM minimum requirements. So yes, they have this whole value prop and how they approach technology, how they price out their services, and all the bells and whistles they want to talk about.
But some of them do say… “we have a minimum AUM requirement for any RIA that wants to work with us.” Others do not have any minimum at all.
Now you might wonder why do some have minimums, why do some not?
Well, there are some custodians in the marketplace that the lane they have chosen to participate in is to only work with larger RIAs. Larger being defined as at least three, four, five hundred million and obviously upwards of there.
But the idea being that they’re saying… “we have built out our value proposition, built out our expertise, built out our resources, all aimed at the needs of larger RIAs, and that’s a different clientele than maybe an RIA that has thirty million in assets.”
So as a result, the custodian has chosen to niche, if you will, and just service the larger RIA category and so as a result they do have a minimum. So if you want to work with them, well if you don’t have their minimum, then they’re not able to accommodate you as an RIA.
Whereas other custodians say… “nope, we feel we can accommodate the full range (of sizes) and we’ve bifurcated our resources and our service levels for different size RIAs to be able to do that.”
So as a result, some custodians don’t have minimums at all. And a good number of these 12 or so custodians have trillions in assets in custody with them. So they have the scale to cover the full range of RIA sizes.
And there are some that have enormous scale, but just again, still choose to only accommodate certain size RIAs.
So just know that again, it’s a two-way street. You want to understand, of these dozen custodians, which ones might be attractive to you. But equally, you need to know if you are even eligible to use them because of whatever minimums they have and how that compares to your practice.
And that goes back to what I was just saying a moment ago. Again, it’s in the lens of the custodian. So your 401k plan assets don’t count towards that number. Your broker-dealer assets, if you’re using a broker-dealer solution, don’t count towards that number. It’s just your fee-based assets that would.
I want to give you a few additional thoughts, but before I dive into that – you’ll see how this is relevant to the additional thoughts – I just want to clarify something called often referred to as single custodial or multi-custodial.
As an RIA, if you are going to manage assets, and when I say manage assets, that may or may not be you the advisor doing it. While that is the value prop of some RIAs that say… “we do asset management in-house,” whether with a team or it’s an individual advisor. Or you could outsource and use SMA managers or model marketplaces.
So when I’m talking about as part of your value prop doing asset management, it could be either one of those.
And you might say… “What RIA doesn’t do that?” Well, there are some RIAs that are, for instance, financial planning only RIAs. They don’t actually do asset management. They do financial plans for a fee, and that’s the extent of their services.
The bulk of RIAs do asset management though. And assuming that’s going to be you, you need to have at least one custodian to hold your client assets. And again, you have about a dozen custodians to potentially select from.
Usually though, all new RIAs start with one custodian, which is often referred to as being a single custodian RIA. Sometimes you’ll refer to that custodian as your primary custodian.
That’s pretty typical when first launching an RIA to only have one custodian because you have enough moving parts involved in a transition. It’s going to simplify your life to have one custodian.
However, as you progress forward, and particularly if you become an RIA of size, it is very likely you will one day have more than one custodian, and that is what is referred to as being multi-custodial. Particularly if you have hundreds of millions and certainly billions in client assets, it is quite common to have two, maybe three custodians.
Some RIAs even have more than that, but generally you want to keep it to an at least relatively modest number because every time you add a custodian, it adds operational complexity to the RIA. But it is common, again, once you get large enough, to be multi-custodial.
There are several reasons and motivations for why RIAs become multi-custodial. It’s beyond the scope of this episode, but I’m happy to chat with you about that directly if you’d like. But it is common that they become multi-custodial at some point.
So, with that context, on to my additional thoughts.
Let’s assume you start an RIA and you grow it to $500 million in assets. Well, maybe you want to add a custodian at that point. You are interested in a custodian, which happens to have a minimum requirement of $500M. And so it would appear you meet their minimums.
But keep in mind, the minimum applies to the amount of assets you have with them. You could be a $5 billion RIA, but if you’re only able or willing to have $50M with them as a custodian, and their minimum is $500M, that’s not going to work for them.
So when we talk about the minimums, even if you’ve understood what I’ve said prior and you’ve excluded the 401k plan assets, and you’ve excluded the broker-dealer assets, well just because you have $500M in fee-based assets as an RIA, the custodian would say… “How much of that is going to come to us?”
So keep that in mind, when they think of minimums, it’s what comes to them, not what you happen to have in total, perhaps with some other custodian.
And then a related example, if you’re trying to add a custodian (again perhaps, with a $500M minimum), you can’t go to them and say… “We would like to add you as a custodian, and here’s what we’ll do. We’ll open all new accounts with you going forward. And so we’ll eventually get to your minimum assets. And look over here, we have a big chunk of assets over here (at another custodian.) So that shows we’re able to gather client assets.”
Typically, custodians that have a minimum will not go along with that. If you are adding them as a second or third or perhaps fourth custodian, and they have a minimum, they will typically want to see a commitment of assets moved within a reasonable period of time.
Now, this depends on your size and your potential going forward. They can sometimes be flexible on that. It’s not like they expect you to do it within 30 days. But they typically do not say… “Yeah, we’ll just wait around for a couple of years while you open new accounts.”
Even if you’re growing fast, that could still take you years to get to their minimum. They typically want to see a commitment of assets, and moved within a reasonable period time. That could be three months, that could be six months. Depends on the circumstances. Perhaps they’d go a little longer than that.
But just know, if you are adding custodian that has a minimum requirement, they are going to want to see assets moved in a relatively reasonable period of time. Not just a slow climb of you opening new accounts to reach their minimum.
So, that’s a longer answer to what seems like a short question, again, do custodians have minimums? As I’ve said, some do, some don’t. But just know there are these other nuances that go into it as well.
And keep in mind minimums is just one of the pieces of the pie when evaluating a custodian. Obviously, it’s an important piece of the pie though because if you don’t, or can’t meet those minimums, there’s no reason for you to even be considering that custodian.
Again, that’s a big part of what I help advisors and teams do is understand not only the entire RIA landscape, understand all the pathways into the model (as I speak about frequently), but in the case where you’re starting your own RIA and you need a custodian, which of the 12 should you be looking at, why might you choose one over the other? And as we’ve been talking about today, which are you even eligible for or not?
I’m happy to have that conversation with you as well.
First things first, head to the website at TransitiontoRIA.com where, as I said prior, you’ll find this entire series in video format, podcast format. There are articles, there are whitepapers. There’s a Vendor Profile Series.
And 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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