In 2019, Charles Schwab introduced its acquisition of TD Ameritrade, setting off a prolonged, usually criticized integration course of with TD’s RIA custody enterprise. The conversion of TD advisors to the brand new platform is now scheduled for Labor Day weekend 2023. The merger makes Schwab the biggest RIA custodian by a large margin; in actual fact, a brand new report by Cerulli Associates estimates Schwab controls $3.7 trillion, or 54% of RIA belongings, together with inflows and shoppers from the TD acquisition.
The Cerulli report states that 4 companies—Schwab, Constancy, Pershing and LPL Monetary—management 84% of belongings custodied within the RIA market. But, one in 4 RIAs is exploring including a brand new custodian within the subsequent yr, pointing to a chance for rising ones to fill gaps for current RIAs or assist breakaway advisors arrange new companies.
“We’re seeing a once-in-a-generation prevalence, which is Schwab buying TD Ameritrade. That in and of itself creates alternative for everybody else, just because advisors are pondering, ‘I ought to most likely diversify,’” stated Tim Welsh, president, CEO and founding father of Nexus Technique in Larkspur, Calif.
Cerulli factors out that whereas many advisors need to add new custodial relationships, they aren’t essentially seeking to swap from their current custodians. In truth, solely 4% of RIAs have switched custodians previously yr.
Welsh stated that factors to the truth that the chance for the rising custodian market lies on the level of sale.
“The elemental side of the custodian shopping for resolution is, ‘It’s straightforward for me as an advisor to take the subsequent account that comes within the door and begin a brand new relationship with another person,’” Welsh stated. “‘It’s very laborious for me to take my $100 million and 200 accounts from Schwab and transfer them over to Constancy. I’d must be actually pissed off to try this.’”
“The logistical challenges of switching custodians make it uncommon that RIAs drop an current custodial companion solely,” stated Marina Shtyrkov, affiliate director at Cerulli, in an announcement. “As a substitute, RIAs are extra seemingly so as to add a brand new custodian to fill any perceived gaps in service or capabilities.”
The plurality of RIAs (44%) work with only one custodian, but RIAs with greater belongings below administration are inclined to have extra custodial relationships, Cerulli finds. Seventy-one p.c of RIAs with three or extra custodians handle $500 million or extra in belongings.
“Now, everybody has a motive to diversify their custodian as a result of, ‘If I’m Schwab/TD, now I simply have one. I nonetheless need to present consumer alternative. I nonetheless need to have the flexibility to variety my back-office for quite a lot of causes,’” Welsh stated.
There are a variety of newer gamers coming into the RIA custody area, and lots of of them are constructing subtle expertise from the bottom up. Firms like Apex, Goldman Sachs, Axos Monetary and Altruist, a custody answer, have entered the market in recent times. Smaller incumbents embrace Interactive Brokers, Shareholders Service Group, TradePMR and Fairness Advisor Options.
“The expertise that’s popping out of those platforms—like an Apex, like an Fairness Advisor Options, like an SEI—all of them have these alternatives to construct a greater mousetrap,” Welsh stated.