For most financial advisers, deciding where to custody client assets is all about the big four brand name conglomerates represented by Fidelity, Schwab, TD Ameritrade and Pershing, which control more than
$2 trillion in assets.
But 30 years ago, when modern independent financial planning was just gaining traction among individual investors, banks were still the primary providers of custodian services.
Today bank custodians only have about 15% of the RIA market, but it is a firm and dedicated grasp, according to those banks focused on doing business with registered investment advisers.
"We don't need to beat Schwab and Fidelity to be successful," said Alan Markarian, national manager of RIA custody services at U.S. Bancorp. "We just need to win in the spaces where Schwab and Fidelity can't."
One of those areas that remains the topic of polite dispute is the matter of security.
Whether it is accurate or not that there is an added level of safety when assets are held at a bank custodian is irrelevant as long as some clients continue to subscribe to that notion.
"There is this general belief that asset safety is different at a brokerage then it is at a bank, and what matters is that some clients live by that," Mr. Markarian said. "Some clients have in investment statement that specifically says their assets have to be custodied at a bank."
U.S. Bancorp, which has about $1 trillion in total custody assets, but only $100 billion of that from RIA business, has spent the past five years
beefing up its RIA channel and leveraging its status as a bank custodian.
"In 2011, we put together a team to do some research into how aggressively we wanted to go after the RIA space, because we decided it was underserved by banks," Mr. Markarian said. "We realized there's still a lot of business there, and we've had robust growth over the past five years."
There are subtle distinctions between brokerage and bank custodians, which can be debated as pros or cons of each model, but both sides ultimately acknowledge that the safety argument is mostly a matter of perception.
"For most clients, the decision to use a bank over a brokerage custodian is more about comfort," said Mark Tibergien, chief executive at Pershing Advisor Solutions.
"In some ways, banks are viewed as safer," he added. "But the difference is nuanced."
For example, brokerage custody is regulated by the Financial Industry Regulatory Authority Inc., and bank custody is regulated by the Office of the Comptroller of the Currency.
And while brokerage custodians are insured by the Securities Investment Protection Corporation, bank custodians are insured by the Federal Deposit Insurance Corporation.
"Some clients see banks as safer, even though the traditional custodians are now also legally banks," said Charles "Chip" Roame, managing partner at Tiburon Strategic Advisors.
"Also, banks can often hold some more unusual assest than the traditional custodians," he added.
Pershing represents a rare position of
straddling both the brokerage and bank custodial space, because a dozen years ago Pershing merged with BNY Mellon, the world's largest custodian, with $30 trillion.
But it was only two years ago that Pershing "went across the street" to start leveraging the banking parent's custodial services, according to Mr. Tibergien.
"Now the BNY Mellon custody business reports into Pershing, because we've made it one," he added.
Mr. Tibergien said Pershing custodies about $200 billion for RIAs and of the 600 RIA clients, 130 only use the bank custodian platform.
The blending of the custodial platforms at Pershing and BNY Mellon makes it difficult to specifically categorize Pershing's unique platform, said Mr. Markarian of U.S. Bancorp.
"You have to decide what color you're going to paint Pershing," he said. "We consider them a bank custodian competitor, but with an asterisk."
Beyond the smaller community and regional bank custodian platforms, which are typically limited to just holding assets with limited additional services, the larger bank custodians generally cater to wealthier investors.
"When we came into the RIA market it was already dominated by three outstanding firms [Schwab, Fidelity and TD Ameritrade], and there was no way we could do exactly what they do and compete," Mr. Tibergien said. "So we decided to focus on large professionally managed firms that serve clients with complex lives. Now we're delivering the private banking solutions of BNY Mellon that no other custodian can do."
Out of an estimated 28,000 RIAs nationwide, Mr. Tibergien said "about 3,000 fit our profile."
Jeff Feeney, head of correspondent trust services at Northern Trust, said some RIAs are uniquely drawn to bank custodians.
"As we hold their assets we're agnostic as to the type of broker-dealer or number of broker-dealers that an adviser could use or leverage," he said. "Whereas, if an RIA is custodying with a broker-dealer, they might be more limited."
Northern Trust has $110 billion in custody assets, but RIAs make up just 5% of the business.
Joel Bruckenstein, president of Technology Tools for Today, said the bank custodian slice of the RIA space is likely to remain where it is, without significantly growing or shrinking relative to the brokerage custodian market.
"I see the appeal of bank custodians for a slice of the RIA market, because there are certain things you can do better through a bank custodian," he said. "They also tend to target higher-end RIAs."
On the brokerage custodian side, the party line is generally against commenting about a specific competitor, but they often argue that their RIA services are deeper and superior to those offered by many bank custodians.
On that note, Mr. Markarian of U.S. Bancorp, tips his hat to the success of brokerage custodians in "building holistic solutions for advisers."
"In some areas, they just do it better than the banks," he added. "But bank platforms are generally really good at things like showing positions and statements of record."
One of the areas Mr. Markarian admits U.S. Bancorp is lacking is with many of the extra practice-management type features for which brokerage
custodians have become known.
"We don't do practice management, or newsletters, and we don't have an outlet for research," he said. "That's all on our road map, but we're just not there yet.
