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Will my custodian offer every mutual fund I might want to use with my clients?

The majority of large custodians make available a vast array of mutual funds for Registered Investment Advisors (“RIAs”) to use with their clients. While this availability generally includes the bulk of the mutual fund universe, there are certain scenarios in which a custodian is unable, or simply unwilling to include a particular fund on their platform. The nuances behind those limitations are important to be aware of as you evaluate custodial options.

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Full Transcript:

Will my custodian offer every mutual fund that I might want to use with my clients? That is today’s question on the Transition To RIA video series. It is question #19.

Hi, 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.

On today’s question, we’re going to talk about….if I were to make that transition, would I be able to use every mutual fund that I want to use with my clients? Basically, does my custodian offer every mutual fund that I might want to use with my clients?

A couple of things I want to go through on today’s video to discuss that. The first thing is a recap of that RIA-custodian relationship. I talk about this in a couple of different ways on prior videos. The idea is if you were to start your own RIA, transition to that model, you will have your RIA….however, you will need a custodian to actually custody, and as they say, custody and clear, your clients’ assets. You’re the RIA, you rely on a custodian to hold those clients’ assets and to facilitate those trades. So you do have that relationship.

Now what that means is if you use one custodian, and I’ll do some videos on this, you can actually use multiple custodians as well. Regardless whether it’s one or two or three, you can only offer what that custodian has available on their platform. So today’s question is….what can I expect if I were to transition into this? “I use mutual funds now, and/or I plan on using them in the future, what can I expect my custodian to make available to me, to be able to offer with my clients? And will I have any problems with mutual funds in that regard?”

The short answer is every major custodian offers thousands of mutual funds and makes them available for you to use. So right out of the gate, the good news is, call it ballpark 95% of the time, whatever you’re currently using, is probably not going to be an issue. So if you have it available to you, whatever your current firm is, if you were to transition, choose a custodian, I’d venture to say out of the gate, call it 90%-95% of the time it’s going to be available, it’s not going to be an issue. Sometimes it’s even 100% of the time. I’m going to give you some examples of where you might have to start being concerned about maybe falling outside of that.

The thing to keep in mind is you might think….“well, come on, a large custodian, why don’t they have every mutual fund out there and make it simple for the RIAs that use them for custodial services?” A couple of things to that.

The first is keep in mind, there’s three prongs of what has to be available. First, they have to be working with the actual fund family for starters, that you want to utilize. Then within that, they also have to make available the specific mutual fund within that fund family that you want to use. And then within that, they have to make sure that the various share classes that the fund has…that the share class you want to use or have been using is available.

There used to be a time that share classes, 15 plus years ago, were literally A, B and C. It was relatively simple. Now, some mutual funds have a dozen or more different share classes. It’s not as black and white that….“oh, the custodian would have every share class possible, and so, hence whatever I’m using now, they will surely have.”

So again, three kind of steps that all have to line up for starters. That custodian has to have a relationship with the fund family, the specific fund you want to use, and then the specific share class of that fund that you want to use. That’s where it begins. Again, it starts to get a little more tricky here than a simple answer of, yes, this won’t be an issue for you.

Then you might say to yourself….“I get all that, but come on, why doesn’t the custodian take the time and take the effort and get a relationship so that you can use all of the fund families and all of the mutual funds and all of the share classes?” The reality is because there’s some challenges to that. I want to go through those real quick.

The first one is for a custodian to offer a particular mutual fund on their platform, they have to have a selling agreement, as they call it, with that mutual fund company. For starters, there is a whole contractual arrangement that has to be entered into a selling agreement between the custodian and the mutual fund company. And this is the same thing at your current firm. If you’re at a traditional captive type of brokerage firm or wirehouse type firm, they have selling agreements as well with all of the mutual funds that they make available on their platform for you to use currently.

That’s a process. That’s not some simple, one-page boilerplate template that everyone uses and they sign off. It’s usually a whole process that involves a legal review, sometimes a back and forth between the custodian and the mutual fund company…..that “we don’t like the verbiage in paragraph 8 on page 12, and we want to change it.” Then it gets sent over back to the mutual fund company, then the mutual fund company has to have their lawyers look at it. Entering into a selling agreement is a pretty big undertaking. So for that reason, custodians won’t do it with necessarily every opportunity that comes along because there are a lot of resources that have to go into making sure this selling agreement properly gets put in place.

And again, generally, part of that is a legal review. Which adds time and cost to that whole process for all parties involved, both the mutual fund company and the custodian. Then on an ongoing basis, the more of these selling agreements that a custodian has in place, there’s responsibility on an ongoing basis to make sure that all the terms of the selling agreement are being met by both parties.

So while there’s already thousands of these in place, every time you add one more, it is that much more responsibility, that much more complexity to make sure these agreements are being followed on an ongoing basis.

Then the last thing on that is, keep in mind one of the ways a custodian generates revenue is from these selling agreements. I’ll do a whole different video because there’s a whole lot of nuances to it. How a custodian generates revenue, one of those ways is with that relationship with the mutual fund company. It’s generally referred to as revenue share. That might be things like omnibus fees for certain record keeping the custodian does on behalf of the mutual fund. Or education and marketing fees, as they call it, for (among other things) making the fund available on the platform, and maybe some promotion of that out to advisors to make sure they’re aware that it’s available.

That adds a whole additional dynamic to it because not only is it a matter of….we need a selling agreement. Not only do we have to make sure the legal part of it goes through. What is going to be the economic arrangement? Or sometime there is no economic component. And that creates a host of challenges. Then within that…..“okay, we’re going to have some sort of arrangement, well, how much is that going to be for?” And there could be a lot of back and forth on that as well. That adds complexity to the whole issue of….“why don’t we add every mutual fund onto the platform?

So there’s some challenges there and, it’s worth keeping in mind, when we say why isn’t there 100% of mutual funds available? Because there are challenges to getting mutual funds available on a platform.

However, custodians realize they need to have a very deep bench of mutual funds available for the RIAs, that are going to utilize them with their clients. They have done this legwork with thousands of mutual funds to be able to get them available for your use. In most cases, whichever ones you’re currently using, are most likely, again, assuming you go with one of the bigger custodians, are going to be available.

Let’s go over a couple examples of where you might pause a little on….is this almost by default going to be available scenario?

A couple of examples, if you either currently or desire to use mutual funds. As an example, a small upstart mutual fund company. Either the mutual fund family as a whole. Or for instance, if they launched a new particular fund and it’s new, so there’s not really any track record to it. It hasn’t been in existence for a while, and the assets perhaps are very small as well.

A custodian is not necessarily going to run out the day a mutual fund company launches a new mutual fund to try to….“hey, let’s make sure we get this on our platform.” Because again, there’s a lot of work that goes into that. And unfortunately, sometimes some funds fail to launch, if you will. They never…while they technically go out there in the marketplace…they don’t catch on and they never get growth and never are able to scale. Then the fund family ends up merging it into some other fund. So a custodian doesn’t necessarily want to jump that gun and do all that work for a mutual fund that might not even stay around all that long.

If you want to use a new fund or a small fund, know it’s potentially possible to work with your custodian to get a selling agreement if one does not already exist. But that is a bit more of an uphill climb than a traditional large fund that’s been around forever.

The next caveat is the share class. This is where it gets complicated nowadays because there are so many share classes. A custodian could have the large universe of fund families, and within that could have the large universe of funds, but it is hard perhaps to have as many of the share classes. Some of the share classes are not even meant to….they’re specific only to (for example) 401K plans. So a custodian couldn’t necessary have every share class, even if they wanted to. It’s not applicable.

As these share classes expand and expand, and become higher in number, that’s where it gets a little trickier. Currently you are using this fund family, and this fund and this share class. That particular share class may or may not be within the custodian’s selling agreement. So that adds a little challenge as well, the increase in the number of share classes that are out there.

The last kind of challenge, and thankfully we’re seeing less and less of this, is if you are at a firm now and they offer some sort of proprietary in-house mutual fund. Perhaps they attempt to position it as….“oh, this is for your benefit, that we only make it available to our advisors that are with us on our platform.”

You see less and less of this nowadays, but it still exists to some degree. The challenge is, maybe there are some benefits to you currently that you have access to this particular mutual fund that’s only available to advisors of this brokerage firm. The challenge with that is more than likely almost guaranteed, if that’s how they’re positioning it, that no other firm or custodian will have a selling agreement for that fund. If you have clients in that proprietary fund that’s not meant to go anywhere else, you probably will have a problem that your custodian will not have a selling agreement for that fund. That of course creates its own challenges of how do you maybe move clients out of that fund into something else instead?

The point is to know that the large bulk of whatever you might be currently using is probably available already on a custodial platform. But there are potentially some instances where it could be a challenge.

The typical process, and this is something I coach advisors on and walk them through these steps, is if you decide the RIA model is what you want to pursue, and then you’re working with custodians – which again, I help advisors understand how they’re different and why one might be better for their particular situation than another – but a typical step in that process, no matter what path you go on is to, ahead of time go to that custodian and say, “Here is the exact mutual funds and share classes I use currently. Do you have them available?” That’s a pretty routine thing for any custodian. They’ll do a scrub and come back and say, yes, we have them, or no, we don’t.

In some instances they might even come back and say….”Well, we don’t have the particular share class you asked about, but it turns out we actually have a share class that’s even less expensive to the client.” You and the client aren’t going to have any problem with changing into that share class. So that actually can be a positive, that maybe the share classes don’t match up perfectly. But that is something you will want to know so you go in with eyes wide open.

This is not a giant thing to be worried about because the mutual fund universe is generally covered, but it is important to be aware of these caveats. It is important to take that step and have your custodian do that scrub, ahead of time to make sure that you’re not going to have any issues there at the eleventh hour as you’re making that transition.

With that, like I said, I’m Brad Wales with Transition To RIA. This is the type of thing I help advisors with. I want to help advisors understand everything there is to know about why and how to transition to the RIA model.

Today’s conversation about…..”How do mutual funds work with a custodian?” That’s a perfect example of the sort of dialogue I have with advisors and really want to educate you on everything you need to know, so you can decide, is this the best path for me? And then if so, how do I actually go about making that transition? I’d be happy to help you with that as well.

If you’re not already there, jump on over to I have plenty more videos. I have some whitepapers. And then the easiest thing to do is right at the top is a contact link. Click on that, you can instantly and easily schedule a specific date and time that we can have a dialogue like this and I can begin to walk you through anything and everything you want to know about the RIA model. And specifically, how your unique practice would look under the RIA umbrella and what that might mean for you. I can help you to begin to explore that as an option. I’d be more than happy to do that with you.

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

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