Can you have too many custodians?

As custodians in the independent advisor market undergo mergers and consolidations, advisors can find it challenging to secure a stable home for their clients' assets. Many advisors are opting to use multiple custodians to mitigate risk and increase efficiency, akin to diversification in investment portfolios.

However, frequent changes in custodial arrangements add layers of complexity and concern. This instability can lead to tedious processes like transferring accounts.

This begs the question: is there such thing as 'too many' custodians? How many is too many? While most RIAs really only have one or two, Chuck Failla, CEO of Sovereign Financial says it ultimately depends on the size of the firm.

“Even more importantly than that, [figure out] what exactly is your firm is trying to do,” he added. “If you're a lifestyle practice where it's either a solo practitioner or a small group, there's not much need to be multi-custodian. Just find the one that's going to be best for you, and you're good to go.”

Failla is quick to say that’s the best plan of action because it starts getting “more complex the more custodians you add into the mix.”

The reason why RIA firms tend to bring on more than two or three custodians, Failla explains, is exclusively for recruitment, as they’re actively looking to bring in advisors.

“The more custodians an RIA has on their platform, the easier it is for them to have other advisors plug into their platform,” he explains.

Nina O’Neal agrees.

“Another benefit is if you're looking to attract certain clients that may have been with a competing RIA that used the same custodian,” says the partner & investment advisor at North Carolina-based AIM Advisors.

“If you’re able to say, 'We already use that custodian', the transition’s a little easier for them. If they're used to using Schwab, and you're using Schwab, then they're just logging on to that same platform and seeing the same look and feel of what they're used to.”

O’Neal highlighted that she decided to narrow down on one custodian, forming a relationship with Charles Schwab last year, after realizing that a multi-custodian approach wasn’t the best fit for her.

For Larry Sprung, founder and wealth advisor at Mitlin Financial, he finds using two custodians to be the right fit for his firm, despite being “heavily skewed” and having a working relationship with just one of them. He compares it to “finding the fine line in a portfolio.”

“There’s a line between being diversified and having enough investments in order to be diversified,” he says. “There comes a point where adding in another investment vehicle doesn't really add any diversification. It just adds overlap.”  

Sprung says the benefits of having multiple custodians is “having the optionality and being able to pick the path of least resistance.”

“Once you start going to three [custodians] you have to compare more, because what happens if all three do things differently? Your team now has to know which road to take with each option, making it a lot more difficult to lay a plan out and put it into practice from an operational standpoint.

“Having that optionality is great, but by having too many of these options, you create a paralysis by analysis,” he added.

For new independent advisors, Failla asserts they only need one custodian to start. “One really will do it and the operational headache of going from one to two is a lot more than going from two to three,” he noted.

O’Neal believes the custodian is one of the advisor’s “most important relationships,” and as such, advisors should invest in their decision carefully.

“At the end of the day, it’s where the money is held, and how you are able to execute your investment management. It can become very complex when you layer too many and it can cause distractions from what we're here to do, which is provide advice and client service and to build and grow our businesses,” she says.

That’s why she cautions new RIAs on getting “too many and feeling like you need a big menu of custodians.”

“Most people are coming to us as the human beings for help and are less concerned about having a multi custodial opportunity,” she says.