Q22 – Does my custodian send account statements to my clients?

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Does my custodian send account statements to my clients?

As a Registered Investment Advisor (“RIA”) that manages assets, you will need a custodian to formally custody your client’s assets, and provide clearing (trading) services in those accounts.  While your RIA is completely unaffiliated with the custodian, the custodian itself is required to send statements directly to clients showing the assets and activity in their account. Positioned properly with a client, this is actually of benefit to both you (the RIA) as well as client themselves.

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Full Transcript:

Does my custodian send account statements to my clients? This is the Transition To RIA video series. It is question #22.

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 is, does my custodian send account statements directly to my clients? We’re going to go over how that works. The short answer is yes. That’s a good thing, which I’m going to explain.

First, quick recap of the RIA-custodian relationship. If you were to start your own RIA, you establish that RIA and then assuming you have assets that you manage, you will need a custodian. You can actually have more than one. I’ve done a whole number of videos on having a single custodian or multi-custodial. But you need a custodian to hold your clients’ assets and to facilitate the trades. There is that custody and clearance.

You would have your RIA, you need at least one, sometimes you have more than one, a custodian to hold your assets. So that’s a quick recap on the RIA custodial relationship.

And reminder, as your RIA, you are not “affiliated” with a custodian. There’s no ownership interest. You are an entirely independent RIA company. The custodian is essentially a vendor of yours, like you might use other vendors. In this case, the service they provide is custody and clearing of your assets.

Every custodian is required to send statements to the client, because that client does have an account open with them. It’s generally no less frequently than quarterly. It will happen at least once a quarter, and then if there’s activity in the account, generally often as frequently as monthly. Nowadays, a lot of it is done electronically as opposed to actually being mailed out. But the custodian does have an obligation to send that client directly, not via you, a statement of….here’s the assets in your account, and here’s the activity that occurred.

On that statement, most custodians would generally allow you to somewhere on it have your logo and maybe contact information so that the client sees that and realizes how it’s all connected. But make no mistake, that statement will still show the custodian’s name on it because it’s the custodian that is holding those assets that’s responsible for that. It’s notifying the client here’s the assets in the account, here’s the activity.

An example I give – as sometimes you might think….“I don’t want my custodians sending these statements or reports or whatever you want to call them because as an RIA, I plan on sending my own monthly or quarterly reports to clients with the performance or with a snapshot of their account, and here is some commentary”, or whatever it is you plan to put in place. And that’s pretty typical. Most RIAs do do something like that.

You might think….“I want to be able to send that. I don’t want the custodian sending something as well.” Which for starters, you don’t have a choice. The custodian is required to send that.

I’ll also give an example which I think really helps a client understand why it’s important that the custodian is this independent entity and how you can use that to your benefit when you explain it to a client. Most clients don’t understand what this RIA concept is and a custodian and how are they related and so part of it is helping the client understand that.

The example I always give is let’s say I am an advisor. I’ve been an advisor for 20 years. I’ve been at one of the large traditional brokerage firms that entire 20 years. I have a client named Jim, and we’ve worked together almost that entire 20 years. So Jim surely trusts me. We have a great relationship. I know if I were to leave and start my own RIA, that Jim absolutely would want to still keep working with me. But all Jim has ever known is this large traditional brokerage firm arrangement.

One day I do transition to the RIA model and I get in contact with Jim after I’ve left and I say….“Jim, fantastic news, after 20 years and a lot of soul searching and a lot of consideration and with all the changes in the industry, it was a great choice, I moved to what is called a registered investment advisor, and I’ve started Brad Wales Wealth Management. We are now live and I’d love to have you move your account over to me.”

Let’s put aside any concerns about solicitation or anything like that. I’ll do a separate video on that.

So there I am, I’m out there. I launched my RIA. I get in touch with Jim and say….“Jim, we’ve worked together 20 years. I know you’d want to keep working with me and here’s the new setup.”

Jim might respond….“Brad, you’re the greatest advisor I’ve ever had. I trust you. I trust you entirely. You’ve given me great service. My account has done fantastic over these 20 years. But here’s my concern, Brad. No offense, but you just started Brad Wales Wealth Management, and I know you’ve got your office and you got all that, but I guess my worry is this is all I’ve ever known over here. So yes, if I move my account to you, I trust you entirely, I know you’ll keep giving me great service. But what happens if this doesn’t work out and six months from now, you go out of business?”

That’s obviously not the plan, that’s not the goal, and in almost all cases that’s not what happens. But you can understand where a client might have concerns. They don’t initially understand how this relationship works. And so again, Jim might be coming to me and say….“Brad, I want to do it. I just have some concerns. Please don’t take any offense to it.”

So as the advisor, I say….“Jim, completely understand. Let me explain to you what the RIA model, the registered investment model is.” And at that point, you explain to him all of the benefits like how you now have complete autonomy and independence and flexibility to provide solely what is best for your clients. That you no longer have some of the handcuffs that you perhaps had before. You’d walk the client through all the benefits of why this is such a good thing for you as the advisor and for them as the client.

However, to calm Jim’s fears about…..well, what happens if I go out of business, I’d say….“Jim, you don’t understand how it works. I’m a registered investment advisor. I just told you all these great things about it and how it works. For these past 20 years I have been managing your assets and providing you (perhaps) a financial plan and services. I am going to continue doing that exact thing, managing your assets, and providing you financial planning services.”

“However, my firm, my RIA, Brad Wales Wealth Management, does not actually hold your assets. I will manage the assets, I will provide you financial planning services. But we use a third-party, independent, what we refer to as a custodian, that will hold your assets. And the custodian is extraordinarily well capitalized. Has been around for (whatever the case may be) 50 plus years. They have a trillion-plus in assets. Your assets are going to be safe at that custodian.”

Now you wouldn’t imply that the assets are still not susceptible to the market. The market’s going up and down and the account could lose value. But as far as the soundness of the firm holding on to those assets that….“Jim, even if you were correct, which I’m confident would not happen, even if I did go out of business in six months….my firm, the part that’s managing your assets and financial planning for you would cease…..but your assets are still safe. Sitting there right at the custodian. That’s why I’ve partnered up with a custodian to make sure you are comfortable, that your assets are sitting there safe.”

“And to further that, the custodian will send you directly a statement every quarter to show you what your assets are and what activities occurred in your account. I plan to send you materials as well, because I think it will be helpful and I think you’ll find quite a lot of value in it. But regardless of what I send you, the custodian will still send you directly a statement that shows where your assets are, and you have the ability to log into your account directly with the custodian to see your assets sitting there.”

And then you might add….“I’ve chosen Custodian X, which is a well-known firm. Everyone’s aware of it.” The whole idea is to take that concern away from Jim and that his assets will be there. That’s a benefit of keeping it separate.

As an example of where that can go wrong is Bernie Madoff. The problem there was, he was making his own (fabricated) performance reports or updates to his investors, but he was also his own custodian. The problem was he then had the ability to fabricate not only what he might want to show them from some quarterly update, he also was fabricating the custodian reports. That’s one of the reasons why that went undetected for a while because they were one and the same.

Whereas, you explain to a client….“I manage your assets and I provide financial planning, which is the exact thing I’ve been doing for you, Jim, for 20 years. I’m going to continue doing that exact thing. Your assets are going to be held at a different, very safe, very sound custodian. You do not need to worry about what happens with my firm. I’m confident it’s going to be successful anyways, but do not worry about it going out of business or anything like that.”

The key is how you position it all. That ultimately it is a benefit that you have a custodian, that the custodian sends account statements. It can give the client that extra degree of confidence of how exactly this relationship works. It’s something you just have to explain to them. I’ve never heard of an advisor or RIA come back and say….“I tried to explain it and either the client couldn’t understand it or the client still balked at that.”

The only instance you (might) have is if you went with a custodian that unfortunately, no one’s ever heard of before, or they’re really small. That’s why the selection of your custodian – and that’s a key part of what I help advisors with – is important for a whole host of reasons because they all offer different services, they have different pricing, there’s a whole number of variables. One of the big ones is you want to make sure it’s going to provide that comfort to your clients, that their money is going to be safe sitting in that account. Again, that’s a thing I help advisors with. It is very important to think that through.

Bottom line, and I know this was a long-winded way to say it, but I did want to help you think through how that RIA and custodian relationship is and how it can be positioned. But bottom line, your custodian will send statements. You do not have any control over that.

Generally, you can put your logo and contact information on it. Oftentimes nowadays, they’re sent out electronically and things like that. None of this prevents you from sending your own reports, your performance reports or quarterly update packets or whatever it is you want to do as your own RIA. You absolutely can continue to do that as well. But know the different dynamics of the components to this and how they’re involved.

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

This exact sort of thing….if I start my own RIA, do I need a custodian? How do I select a custodian? What are the differences between the custodians? And then by the way, will a custodian send my clients statements? How does that work? What can I expect? That’s how I help advisors, understand all of these variables.

If you are considering a transition to the RIA model, the key is you want to be fully informed of exactly how all of this works and what your options are. That is what I help advisors with. I’m more than happy to help you as well.

If you’re not already there, if you head on over to TransitionToRIA.com, plenty more videos, I have whitepapers. Then the easiest thing is right there at the top is a contact link. If you click on that, you can instantly and easily schedule an exact date and time that we can jump on a Zoom together and begin this sort of dialogue.

I help you by answering the questions you may have, but I also help introduce things that you probably haven’t even considered. I also help you think through….what is your current situation, your current affiliation model, your current firm, and what might that look like under the RIA model and all the variables that you want to be considering that go into that? I’d be more than happy to have that conversation with you as well.

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

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