SEC rules require that registered investment advisors have a qualified custodian to hold client assets. Your assets under management (AUM) can make a difference when deciding which custodian to work with, as some custodians have a higher barrier to entry than others. However, finding the best custodian for a small RIA goes beyond just AUM.
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Best Custodian for a Small RIA: What to Look For
Choosing a custodian as a small and independent RIA begins with inventorying your needs, goals and expectations for your financial advisor business. Ask yourself the following questions:
- What is your firm’s current AUM?
- How do you expect your AUM to grow year over year?
- How much are you comfortable with paying for RIA custodian fees?
- What kind of tech tools are appropriate for your firm?
- Does the custodian’s brand visibility or reputation matter to you?
With that in mind, here’s what to look at as you consider what might be the best custodian for a small RIA.
1. Minimum AUM
A small RIA is typically defined as an RIA with less than $100 million in assets under management. That’s a significant amount, as some RIA custodians require you to have at least $100 million in AUM before they’ll work with you.
Does that mean your options are limited to smaller custodians? Not necessarily. Schwab is one of the largest RIA custodians, and has no minimums for independent RIAs.
That could be a plus if you’re preparing to start an RIA with zero AUM or minimal assets under management.
2. Business Model and Scaling Potential
You may have big goals for your RIA. And in that case, it’s important to work with a custodian that understands your business model and is equipped to serve your needs now and in the future.
Why? Because switching to a new custodian can be time-consuming, especially if you have a larger client base than when you started. Not to mention, repapering, for instance, is a tedious but necessary part of the process.
As you compare RIA custodians, consider:
- Your niche and business model
- The range of services you offer
- The type of assets your clients bring to the table
- What level of support you want or need
A custodian’s brand statement and mission can tell you a lot about what they do and who they serve. Axos Advisor Services, for instance, caters to the needs of independent advisors with a client-centered, growth-focused strategy.
The best custodian for a small RIA is the one who understands who you are and goes the extra mile to help you grow. That may involve offering continuing education classes to help you maintain financial certifications, sponsoring RIA conferences and other networking events, or providing tailored services to help you attract and retain your ideal clients.
3. Fees and Custody Pricing
Custody fees matter when you have a smaller RIA. RIA custodian fee structures typically follow one of two paths:
- Asset-based pricing, which sets fees as a percentage of your AUM
- Ticket-based pricing, which bases fees on transaction activity
Some custodians may charge other fees, such as platform fees to access their technology or 12b-1 mutual fund fees.
It’s possible to find custodians that charge no custody fees. Schwab is one example. Other RIA custodians, like Altruist, charge no platform fees and waive transaction fees for certain types of assets.
Apart from understanding what a custodian charges, it’s important to decide whether you’ll absorb the fees yourself or pass them on to your clients. Either way, you’ll need to be fully transparent with clients and disclose how your fees work.
4. Technology and User Experience
Technology is always evolving, and the best RIA custodians evolve along with it.
As a smaller RIA, you may still be building out your tech stack, so it’s helpful to choose an RIA that can meet you where you are, in terms of digital capabilities. And again, consider whether there’s a fee to access the custodian’s tech platform.
User experience also makes a difference. For instance, does the custodian offer training to help you learn how to use their platform? How easy is it to contact support if you need help or have questions?
A larger custodian may have more support staff available to address help requests, but there may also be more demand for those services. A smaller custodian, meanwhile, may have a smaller support staff but be able to offer a more personalized experience.
5. Brand Reputation and Experience
In the RIA custodian food chain, a handful of recognizable brands — Schwab, Pershing, Fidelity and LPL Financing — sit at the top. These are established firms that have built solid reputations in the financial services space.
So, how much of a difference should that make to you? Does the best custodian for a small RIA have to be a household name?
Working with a larger RIA custodian can be reassuring to your clients if they recognize the name. That assumes, of course, that they have positive associations with that brand. A larger firm can also bring valuable experience to the table.
However, brand power alone shouldn’t be a deciding factor. The best custodian for your small RIA may be one you haven’t heard of — yet.
Frequently Asked Questions (FAQs)
What Is the SEC’s Custody Rule?
The SEC’s custody rule requires registered investment advisors to hold client assets with a qualified custodian, such as a bank or broker-dealer. This rule exists to protect client assets from theft, misuse, fraud or misappropriation.
What Is Repapering?
Repapering is the process of updating client paperwork and obtaining new signatures on contracts and other agreements. If you plan to switch to a new RIA custodian or you’re going independent and taking some of your clients with you, you’ll need to repaper those accounts.
What Is the Best Custodian for a Small RIA?
The best custodian for your small RIA is one that understands your business model and client base, has reasonable pricing, and offers tech tools and support to meet your needs. Comparing RIA custodians can help you find the right one to work with.
Bottom Line
When it comes to custodians for your small RIA, you’ve got plenty of choices, and it’s easy to be overwhelmed. Knowing what to look for in a custodian can help you narrow down your search with minimal stress.
Tips for Growing Your Advisory Business
- One of the biggest challenges of starting an RIA is marketing your new business. Acquiring new clients is all about fine-tuning your messaging and knowing where to share it. Working with an advisor marketing platform can help increase your visibility online while leaving you free to focus on other growth tasks. SmartAsset AMP (Advisor Marketing Platform) is a holistic marketing service that financial advisors can use for client lead generation and automated marketing. Sign up for a free demo to explore how SmartAsset AMP can help you expand your practice’s marketing operation. Get started today.
- Compliance is another important consideration when choosing an RIA custodian. It’s important to work with a custodian that observes all compliance rules, as mandated by the SEC and other regulatory agencies. Taking a look at the firm’s regulatory record can give insight into how thoroughly compliance is addressed.
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