Broker-Dealers

Eyeing assets, custodians aim to help advisers grow

Competition is stiffening among firms that keep assets under custody — and that situation could lead to cheaper, faster and better business for independent registered investment advisers.

The largest keepers of advisory client assets recognize that the number of independent advisers is on the rise and each of them wants to gain custody of new client assets. As a result, custodians are investing millions in technology and personnel to fashion and deliver new services that will encourage advisers to send assets their way.

The giants of the custody business — Schwab Institutional of San Francisco, Fidelity Registered Investment Advisor Group of Boston, and TD Ameritrade Institutional and Pershing LLC, both of Jersey City, N.J. — are rolling out new systems designed to enhance adviser efficiency. Custodians are offering independent investment advisers tools with a goal of building up their businesses, which in turn, will boost assets that end up in custody.

“We always want to be providing superior service because advisers always have an option of where to put the next new account,” said Scott Dell’Orfano, executive vice president of Fidelity Institutional Wealth Services. “In this non-contract environment, they can use any custodian they choose.”

Most agree that a future tied to registered investment advisers offers custodians a bright outlook.

In fact, the number of RIAs grew 26% in the past two years to a total of 13,622 advisers at the end of 2007, according to a report issued by Cerulli Associates Inc., a Boston-based research and consulting firm. Most of the growth is due to advisers’ leaving the commission-based model to work under a fee-only structure, the firm said.

Dually registered advisers — who plan as RIAs and sell products under the aegis of a broker-dealer — also increased over those two years, rising 31% to 23,099, from 17,649 advisers in 2005, the report said.

Meanwhile, the number of advisers in the independent broker-dealer channel fell 5% over the two years, to 88,802 at the end of 2007.

Custodians are expecting their businesses to grow because they anticipate RIAs will prosper as baby boomers retire, said Rebecca Pomering, practice leader for the financial services consulting group of Seattle-based Moss Adams LLP.

Firms that keep adviser client assets under custody are teaming with other organizations to provide advisers with business tools. They are focusing on non-traditional practice management areas, including firm succession and training sales teams to be integrated relationship managers, she said.

“The custodial model has changed in the last 10 years,” Ms. Pomering pointed out. “They keep raising the bar for one another, which is all to the benefit of advisers.”

Fidelity, which has about $355 billion under custody for 3,500 advisory firms, has invested about $50 million to upgrade and enhance its adviser platform, Mr. Dell’Orfano said.

The firm is completing development of a web-based system for advisers that will integrate portfolio management, financial planning, portfolio rebalancing and transaction management into one system. Previously, something as simple as an address change had to be updated on multiple systems, he said.

The new system, which is scheduled to be rolled out in October, will save advisers time they could be using to help their companies grow, Mr. Dell’Orfano said.

In fact, many of the services that custody firms are developing for advisers focus on cutting out a number of administrative duties to allow advisers to focus on their core advice business. Some custodians are targeting advisers who are striking out on their own for the first time.

Schwab Institutional, a division of The Charles Schwab Corp. in San Francisco that keeps about $569.7 billion in RIA assets under custody and serves 5,500 independent financial advisers, has recently introduced support services that include health care benefits, payroll services, company retirement plans, recruitment help and guidance on how to best structure efficient advisory firms.

In the past year, Schwab Institutional also developed trust services designed to help independent RIAs retain client assets as baby boomers transfer wealth to the next generation. Banks have traditionally been the recipient of trust assets.

“Our job is to make advisers’ businesses better,” said Charles Goldman, president of Schwab Institutional. “We’re focusing on technology that automates the adviser’s work flow and broadening access to platforms and products, such as trusts, alternative investments and retirement programs.”

In the coming months, TD Ameritrade also plans to roll out a new, quicker platform for advisers who keep client assets in custody at the firm. Advisers will be able to trade within client accounts and keep track of account performance more easily and quickly, said TD Ameritrade spokesman Jim Frawley.

Advisers will be able to see real-time intraday balances, individual positions and consolidated account views, the firm said. The platform also will allow advisers to move money electronically, an enhancement to what are known as cashiering services.

TD Ameritrade, which has custody of more than $100 billion in financial adviser assets from about 4,500 firms, in recent months also introduced a new program to allow advisers to build client-specific recommendations with certain investments, including unified managed accounts and other types of separately managed accounts.

At Pershing Advisor Solutions, which has about $76 billion in assets under administration through relationships with 480 advisory firms, executives are focused on boosting the firm’s practice management group, said Jim Dario, managing director of Pershing Advisor Solutions. This group helps advisers recruit new talent, train new advisers and build a practice for the next generation of leaders, he said.

It also helps advisers transfer business to new advisers. “We’re providing a technology and service infrastructure to allow advisers to build relationships with their customers,” Mr. Dario said.

Pershing also is focused on providing a global platform that can accommodate multiple currency transactions, foreign exchange and other global services that its executives believe will be a growth area for sophisticated clients, according to Mike Geller, a spokesman.

The firm is selective about the advisers it serves, seeking to work with growth-minded RIAs who target those sophisticated clients, Mr. Dario said.

The Bear Stearns Cos. Inc. of New York, which was acquired by JPMorgan Chase & Co. on May 29, was also in the business of holding assets for independent investment advisers. Bear officials said in March that the $45 billion it had in custody would be transferred to JPMorgan in the acquisition. At press time, JPMorgan officials could not be reached to confirm the value of the assets transferred

While the four top custodial players duke it out for new advisory client assets, they’re also alert to new players that may want to enter this burgeoning sector.

For instance, Boston-based broker-dealer LPL Financial is expected to roll out its own custody platform for RIAs later this year.

Although large companies may decide to get into the custodial business, Moss Adams’ Ms. Pomering cautions that it isn’t a sector for small players.

“You must be in the industry in a major way,” she said. “The technology is expensive and constantly moving.”

In fact, the expense of financial services technology is one of the reasons that the suite of services that custodians offer advisers can be especially important for smaller advisory firms, said David Tittsworth, executive director and executive vice president of the Investment Adviser Association, a Washington organization that represents SEC-registered advisory firms.

In addition to the technology offerings and assistance in building their businesses, many small advisers find custodians’ compliance solutions save them time and money, he said. And, of course, custodians take on the important role of objectivity.

“Having this independent third party has been a defining characteristic of the independent investment advisory business, as opposed to brokers or banks that actually custody and perform advice,” Mr. Tittsworth said.