Schwab's Clark, Fidelity's Canter challenge Kitces over custody fees

While it might seem improbable that the girth of the multi-billion-dollar custodial industry could be moved by the antagonistic actions of one financial adviser, there is at least potential for a candid and heated debate between prolific blogger, podcaster and financial services industry influencer Michael Kitces and the top-level executives at the major custodians.

The main topic will most certainly be custody fees. Kitces wants custodians to completely reconfigure their fee models for RIAs, and the custodians appear intent on the status quo.

During a panel discussion, executives from Fidelity Investment Co., Charles Schwab & Co., LPL Financial and BNY Mellon Pershing were asked about Kitces’ ongoing campaign to revise custody fee models by directly charging RIAs for the services.

The responses from the panelists, which was part of the InvestmentNews RIA Summit earlier this week, was enough to spark a sporty social media reaction that got the attention of Kitces, head of planning strategy at Buckingham Strategic Partners and co-founder of the XY Planning Network.

“I am going to make an offer right now; I’m happy to come on and talk to Michael Kitces in a debate, because I think he’s asking the wrong question,” said David Canter, executive vice president of the RIA segment at Fidelity Institutional.

Canter, along with his fellow panelists, suggested that Kitces might be oversimplifying the models for custody fees and the services custodians provide.

“All of us, I believe, relationship-price our business,” Canter added. “One of the things we could do, and maybe educate Michael on a little bit more, is make more transparent how we make money. Historically, it’s been a third-party payer model where the investors are basically responsible for paying our custodial fees by virtue of how the investments in their accounts create revenue for the custodian.”

In emphasizing his willingness to debate Kitces on the topic of custodial fees, Canter said he would welcome the opportunity to “try to educate Michael, so he stops with what I think is a little bit bombastic headline grabbers.”

Bernie Clark, managing director and head of adviser services at Charles Schwab, also expressed an interest in meeting with Kitces on the topic, then made the sign of an X with his crossed forearms in front of the camera while saying: “There will be no custody fees in our future. That is not the direction we’re going.”

When the calls for a debate found their way to social media, Kitces responded that he’s “happy to take the debate,” and included a link to his 2018 blog post entitled “Why custodians should start charging a basis point fee.”

“The short answer is that it starts by restructuring their custodial services to have something differentiated and worth paying for, first,” Kitces tweeted.

As the Twitter thread gained steam on Wednesday afternoon, Kitces added: “The greatest irony, though, is that a bunch of custodial platforms that serve RIAs who eschewed commissions to get paid fees for their value, instead want to debate me whether it's viable to operate a business that eschews their commissions to get paid fees for their value instead?”

In an interview Friday morning, Kitces reiterated his interest in debating the custodian execs while restating his case for why custodians should consider “fundamentally reconfiguring their model” of letting RIAs ride for free while making money off the RIAs’ clients.

Kitces understands that his idea of custodians charging RIAs an asset-based fee of around 25 basis points would require a near-full redesign of the custodian business model. “They can’t charge (RIA) fees on top of the other fees they’re making on the underlying platform,” he said, referencing the revenue custodians collect from things like cash management, execution and order flow.

 “My custodian is trying to figure out how to make money off me and my clients,” he added.

Kitces said he doesn’t begrudge the custodians efforts of making a profit but insists the way the custodians are making profits makes his job harder because he has to advise clients to hold cash off the custodial platform and constantly monitor for best execution of trades and pay close attention to shelf space fees being charged to fund companies.

“We’ve all still managed to grow, but I have trouble believing we all couldn’t grow better if our interests were aligned,” he added.