The Ever-Changing Relationship Between Custodians And RIAs

The Ever-Changing Relationship Between Custodians And RIAs

In the early 20th century, it was common for saloons to offer a free lunch buffet to customers who bought at least one drink. This was a popular concept until bar patrons realized that the lunchtime drinks had been significantly marked-up and the food loaded with salt to boost thirst. Thus, was born the phrase: 

There’s no such thing as a free lunch.

Or

TNSTAAFL

That phrase, which describes a core truth of economics, should resonate with RIAs as we navigate the future with a key partner – our custodians. In recent years, we have rightly and successfully pressed custodians to lower the fees we pass on to our clients. Today, those charges hover near zero. While that’s great for our clients and us, it has put tremendous strain on our partners, who have been deprived of a significant revenue stream. 

I believe custodians will increasingly look to fill that void with custody or consulting fees charged to RIAs. And that’s just fine with me. Here’s why:

Partnerships need to make sense. A relationship isn’t a partnership if one side consistently benefits from the other’s costly concessions. While custodians still generate significant money from other activities, they need to replace the revenue lost in their givebacks to RIAs. If we want to maintain true partnerships with our custodians, we need to pick up some of the costs associated with the services we receive. Because TNSTAAFL.

Healthy custodians are an invaluable resource. RIAs stand to benefit when our partners are strong and able to grow their business. Our custodians have many more resources than we do, which gives them the ability to invest in technology and innovation. When properly funded, our custodians can develop scale and efficiencies may result in better services and more offerings for RIAs. 

RIAs increasingly look to custodians for help with practice management needs, technology implementation and growth decisions. We can’t expect our partners to expand their capabilities in those areas unless we are willing to support their efforts somehow. 

Sure, some custodians might use the fees solely to fatten their bottom line. But the beauty here is that competition will weed these firms out. TNSTAAFL, again.

Financial pressure can twist relationships. In the absence of trading fees, some custodians have instituted new revenue-generating policies, such as requiring the use of the custodian’s money market funds for our clients’ cash. Such efforts can misalign the needs of RIAs and the custodian. The fee void has also prompted custodians to expand their direct-to-consumer efforts, much to some RIAs’ irritation.

This dynamic is not unique to our industry. Take the airlines, for example. When consumers began demanding lower seat prices, the carriers said, you got it! Then began charging for checked bags, ticket changes, headphones and snacks – and jammed more people onto flights. The airlines did what they felt was necessary to cover their fixed costs, because TNSTAAFL. But the industry seriously damaged its image and relationship with the flying public.

Custodial fees, which have already been implemented on a limited basis by a few custodians, don’t sit well with some RIA principals. But such payments – either custodial or consulting fees -are the best way to address our current partnership challenges and opportunities. RIAs have to  accept some financial responsibility for the services we receive from the custodians. Not just because it’s the right thing to do, but because it’s the smart thing, too. The custodians are indispensable to our industry. They make it possible for us to serve our clients. We must make it possible for the custodians to continue to serve us.

That’s how it works. There’s no such thing as…. well, you know.