It’s not an exaggeration to say that your choice of RIA custodian is one of the biggest and most impactful decisions you can make as an individual RIA or RIA firm. After all, your chosen RIA custodian reflects your brand and, most crucially, handles your client’s accounts and assets.
Many RIAs today simply choose one of the Big 3 RIA custodians and barely give that decision a second thought. For many RIAs with at least $100 million in AUM, Schwab, Fidelity, or Pershing – the largest RIA custodians by assets – are the prime choices.
But what if your RIA firm does not meet their minimum asset requirements? There are thousands of other smaller RIA custodians that cater to RIA firms with assets that are below the minimum asset requirements of the big three. How do you choose the right one for your business? What is the best custodian for a new RIA? We’ll tackle these and other pertinent questions in this article.
RIA custodians are independent entities tasked with managing or maintaining client assets on behalf of the RIA firm that partnered with them.
RIA custodians help ensure that RIA firms do not betray their clients’ trust and misuse their clients’ assets.
One example of why an RIA custodian is necessary is the recent high-profile fraud case brought against FTX and Alameda Research CEO Sam Bankman-Fried and other co-accused. In the case, he and several colleagues were convicted of fraud, partly for comingling client funds, then using them for investments.
RIA firms are required to have an RIA custodian under the Investment Advisers Act of 1940. The Act states that RIAs should have a separate, independent entity to handle their clients’ assets, such as funds and securities.
The SEC does not directly regulate RIA custodians. But in a way, since the SEC requires that RIA firms fulfill their fiduciary duty and act in their clients’ best interest, RIA custodians are held accountable by RIAs.
In the future, there may be a more specific set of rules governing RIA custodians, if the SEC amendments on Custody Rule aka the Safeguarding Rule, is passed.
To hold client assets, the Investment Advisers Act of 1940 requires that RIAs enlist the services of a separate RIA custodian. Entities that can work as qualified custodians include:
RIA custodians can work with RIA firms, but it’s not uncommon for RIA custodians to work directly with investors at the same time. For instance, an RIA custodian can hold assets on behalf of hundreds of RIA firms and still offer brokerage or retirement accounts to several individual clients.
These four RIA custodians make up 84% of all custodied assets in the United States:
| Metrics | Schwab | Fidelity | Pershing | LPL Financial |
| RIA assets | $3.37 trillion | $1.5 trillion | $350 billion | $194 billion |
| Year established | 1971 | 1946 | 1939 | 1989 |
| Years in operation | 53 | 78 | 85 | 35 |
| Trading platform | thinkorswim | Active Trader Pro | NetX360+ | ClientWorks |
Advisory firms that have yet to fulfill the minimum asset requirements of larger custodians, want to add another custodian, or prefer other alternatives won’t have to worry about a lack of choice. Here are some smaller custodians that can make interesting if not beneficial options:
RIA assets: undisclosed
Number of RIA firms serviced: 3,300
Year established: 2018
Years in operation: 6
Trading platform: Altruist
Possibly the newest custodial firm, Altruist has great potential to become a strong rival for the larger ones, thanks to its advanced trading platform and attractive pricing--such as the first one hundred accounts of yours being free every month. The company offers fractional shares, attractive yields on cash, native tax management solutions, and a suite of tools and integrations. Last year, the company eliminated software fees for Altruist brokerage accounts.
Fees can include:
RIA assets: $1.37 trillion
Number of RIA firms serviced: 160
Year established: 1962
Years in operation: 62
Trading platform: RJET
This brokerage house based in Florida is a reputable and established firm that has only recently ventured into the custodial space. Raymond James caters to HNW clients, although their minimum investment requirement of $5,000 is manageable for most clients.
In general, Raymond James uses a wide variety of investment products, programs and strategies to invest client assets. This may include anything from a more traditional mix of investments, such as stocks, bonds and mutual funds, to a portfolio of managed or alternative investments, like hedge funds.
RIA assets: $43 billion
Number of RIA firms serviced: 950
Year established: 1978
Years in operation: 46
Trading platform: IBKR Trader Workstation
This brokerage house is the largest subsidiary of Interactive Brokers Group, Inc., which was founded by Chairman Thomas Peterffy. Peterffy was an early innovator in computer-assisted trading.
Interactive Brokers boasts of clients in over 200 countries, trading stocks, futures, options, currencies, bonds, and cryptocurrency in over 150 markets from a single trading platform.
Some benefits of working with them include:
The company remains the largest electronic brokerage firm in the US and the largest forex trader.
RIA assets: undisclosed
Number of RIA firms serviced: 400+
Year established: 1998
Years in operation: 26
Trading platform: Fusion
This is an RIA custodian that was established in 1998 by Robb Baldwin, a former RIA himself.
As its CEO was a Registered Investment Advisor, TradePMR prides itself on knowing firsthand the challenges that RIAs face and the support they need. TradePMR provides cutting-edge tech tools and custodial support services that can help advisors grow and manage their business.
As with most financial decisions, thorough research is a must. Choosing the right RIA custodian to manage your clients’ funds and securities is no exception. As Jon Beatty, Chief Operating Officer of Advisor Services at Charles Schwab says, “advisors selecting a custodian may find it challenging to navigate their options – every custodian brings something different to the table.”
Here’s what you should look for in an RIA custodian when you make this crucial decision:
Look for a custodian that has enough years under its belt serving the type of RIA firm that is similar to yours. An entity that has at least a decade of experience in working with firms that have your type of clients can better ensure your growth.
As an independent financial advisor, you have the luxury of choosing your relationships, but it's the technology that defines client experience. Make sure that you prioritize a custodian that's committed to innovation. Choose one that has specialists who can help you tap the latest tech in the RIA model. If you also find a custodian that can merge their tools with your current tech stack, even better.
Apart from manpower and resources, it takes a lot to manage and grow an RIA firm. Instructional tools and industry tips are also helpful. Whether you're transitioning accounts, adjusting a business strategy, or streamlining operations, you should have a custodian that's willing and able to show you the ropes.
Custody fees can eat into your returns. Some custodians charge them while others don't. Apart from having transparent pricing, look for a custodian that offers the high-value services that you want and that your clients demand. As client wants and expectations change, services like integrated banking experiences and charitable giving strategies can help your practice thrive.
Some RIA custodians may have a minimum threshold for assets under management before working with an advisory firm.
For example, some custodians may require that you have $10 million, $50 million or $100 million in AUM to qualify for a custodial relationship with them. This is an important consideration if yours is one of the smaller advisory firms or one that’s still building the business.
Make sure that the custodian you’re looking at charges fees at reasonable rates. Few things are more disappointing than discovering undiscussed charges before the ink has even dried on your contract.
RIA custodians can have a variety of fees, and it’s important to know what you’ll pay to establish and maintain a business relationship. The more forthcoming and transparent a custodian is about fees, the better – especially when your firm is entirely new.
Speaking of costs – if you’re looking into an RIA custodian, find out how much they charge. Here’s a video on how you can find out:
Experience and AUM are one thing, reputation is another. Consider a custodian that typically works with firms like yours to ensure that it’s a good match. Remember, the custodian you work with becomes an extension of your duty to your clients.
You’ll want to entrust client assets and their wealth management to a legitimate, reputable institution with a good track record.
“The size of a custodian is less important than their ability to help advisors meet their clients’ specific needs,” says Beatty. “However, there can be distinct benefits to working with a larger custodian.”
Beatty also says that bigger RIA custodians offer more investment products and access to new tools and technology.
It does not mean that RIA firms can only hope to reach the minimum asset requirements before they can choose from one of the top RIA custodians. There are at least two financial institutions that are often overlooked: Raymond James and LPL Financial. Both have been around for decades and have billions in assets. It’s unclear why many advisors are unaware that Raymond James is also an RIA custodian, as is LPL. In fact, as with Raymond James, LPL has made moves to recruit some RIA firms affected by “Schwabitrade”.
When choosing the right RIA custodian, carefully consider their important aspects. Look at their technology, support services, investment options, and cost. Also, do not compromise your firm's goals and objectives, and ensure your clients get the services they’re looking for. Thoroughly researching each custodian's offerings can help you make an informed decision that’s in the best interests of your clients and your firm.
Managing and growing your RIA firm can be both tough and fulfilling. Make sure to bookmark our RIAs page and get advice from the experts featured in InvestmentNews!
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