Establishing a registered investment advisor (RIA) firm requires making some important decisions. Among them is selecting a custodian or multiple custodians to maintain client assets and securities holdings. Understanding what the RIA custodian does (and does not do) is the first step in choosing one to work with. Ready to scale your business? SmartAdvisor can bring new client leads to you.
Understanding the Role of an RIA Custodian
Registered investment advisors offer investment and securities advice to clients. They may also help clients manage their portfolios, though they don’t carry out trades directly. The Investment Advisers Act of 1940 requires that a separate entity do this, which is where the RIA custodian comes in.
RIA custodians assume responsibility for maintaining the assets and holdings of an RIA firm. The purpose of requiring an independent custodian is to prevent RIAs from abusing or misusing client funds. Custodians must maintain client funds or securities in individual accounts, either under the client’s name or the name of the advisor who acts as the client’s agent or trustee.
Registered investment advisors, meanwhile, must meet certain reporting requirements when working with a custodian. Under SEC rules, that includes:
- Providing clients with the RIA custodian’s contact information, along with details about how funds or securities are maintained.
- Tracking deposits and withdrawals for each client account.
- Producing itemized statements to clients showing disbursements for custodian accounts.
- Sending written notices to clients when there are changes to how custodial assets are maintained.
Investment advisors who have custody of client assets are subject to annual surprise exams conducted by an independent public accountant. The accountant may contact some or all of the advisor’s clients to confirm their holdings, based on the records maintained by the advisor.
What Entities Can Be an RIA Custodian?
The Investment Advisers Act states that registered advisors must use a “qualified custodian” to hold client assets. In terms of what institutions count as qualified by the SEC, the list can include:
- Federal or state-chartered banks or savings associations
- Certain trust companies
- Registered broker-dealers
- Registered futures commission merchants
- Certain foreign financial institutions (FFI)
In order for foreign financial institutions to be qualified, they must maintain client assets separately from their own. Regardless of the type of entity, the RIA custodian’s primary role is transacting trades, though custodians can also handle bookkeeping and more specialized services.
RIA custodians may work exclusively with investment advisory firms, but they can also serve investors directly. For example, a custodian may hold assets on behalf of one or more registered investment advisors while also offering brokerage accounts or retirement accounts to their own clients.
Choosing an RIA Custodian to Work With
Finding the right custodian matters as it plays an integral role in how you manage your business. Knowing how to compare options can help you to find the best RIA custodian for your needs.
Here are some of the most important factors to weigh when choosing a custodian.
Experience and Reputation
Some custodians have been assisting RIAs longer than others, which might make a difference to you when choosing one to work with. Additionally, you may also want to consider the types of RIA firms that a custodian typically works with to ensure that it’s a good match based on your chosen business model and the type of clients that you serve.
For example, if you’re running a smaller boutique firm that targets a specific niche, you may prefer to work with an RIA custodian that understands the unique needs of your clients. Overall reputation also matters as you want to entrust client assets to a legitimate, reputable institution.
Minimum Asset Requirements
Some RIA custodians may establish a minimum threshold for assets under management before working with an advisory firm. For example, you may need to have $10 million, $50 million or $100 million in AUM in order to enter into a custodial relationship. That’s an important consideration if you have a smaller or emerging firm and are still building out your client list.
Service and Support
Another key consideration in choosing an RIA custodian lies in the range of services and support provided. For example, beyond the basics of maintaining assets and executing trades, can you rely on your custodian to help you advance your business or streamline operations? Should you have an issue that requires prompt attention, how quickly will you be able to get help?
Asking those kinds of questions matters because scaling an RIA firm can present a variety of challenges, ranging from time management to acquiring new clients. A good custodian understands those challenges and can help by offering solutions or guidance so you can grow at a comfortable pace.
Working with an RIA custodian can entail a variety of fees and it’s important to know what you’ll pay to establish and maintain a relationship. The more transparent a custodian is about fees, the better as you don’t want to be caught off-guard by unexpected costs.
Technology and Innovation
Technology is rapidly changing the landscape of financial services, most recently thanks to AI-driven innovations. Change can be a good thing if it allows smaller investment advisors to compete with larger firms, but navigating the shifts can sometimes be overwhelming. Working with a custodian that’s focused on keeping pace with or even getting ahead of, tech changes can alleviate some of the burden.
For instance, RIA custodians may offer access to tech tools in-house or connect your firm with third-party providers. When considering which custodian to work with, it’s helpful to consider any tech tools or systems you’re currently utilizing and how well they may complement or integrate with your custodian’s tech stack.
Last but not least, it’s important to consider what type of investments a custodian has to offer and how well that aligns with your advisory strategy. Custodians can offer a mix of equities, bonds, mutual funds, exchange-traded funds and even some alternative investments. The investment options available should help you to build portfolios for clients that fit your strategy while making it easier to rebalance and adjust as needed.
Adopting an RIA model usually means finding a custodian to work with, so it’s wise to familiarize yourself with what they do if you’re considering taking that step in your business. Taking time to research different banks or broker-dealers can help you to find the best RIA custodian option for your needs.
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