Editor’s note: In some ways, choosing an asset custodian can be the biggest decision that you can make about your financial advisory practice. To provide good service, good technology and good capabilities to a client, your custodian needs to do the same for you. It’s the nature of the news media that we cover the various aspects of custody choice piecemeal. In this excellent piece, Steve Disenhof not only lays out a meticulous checklist for choosing a custodian but he also offers thoughts and anecdotes about the subject based on his own recent experience. His company, Litman/Gregory Asset Management of Larkspur, Calif., put Schwab Advisor Services, Fidelity Institutional Wealth Services, State Street, Pershing Advisor Solutions and TD Ameritrade Institutional to the test. Disenhof writes with a sure hand. He has long made a living not only as part of a team that runs his own $3 billion RIA [rated in Barron’s Top 100 Independent firms] but in offering practice management counsel through his company’s newsletter, AdvisorIntelligence.

There are a host of firms that cater to the RIA community and over the years we’ve spoken with many of them. We have strong relationships with Charles Schwab and Fidelity, but have periodically taken thorough looks at others as well. In particular, others we’ve met with include TD Ameritrade, State Street, Pershing, and we’ve had initial talks with many others. Given the due diligence processes we’ve engaged in over the years, here’s how we would set about choosing a custodian.

Our first filter would be whether or not they were a full-service broker/dealer and custodian that could handle the range of services and investments we offer to our clients.

Once we narrowed down the field, we would begin to explore a wide array of questions we consider key to this relationship. Where possible, we’d match our key people with their counterpart at the custodian (for instance, someone from our client service team with a representative of the custodian’s client service team).

Technology:

We’ve found technology to be a crucial differentiator between firms. Fidelity, Schwab and TD Ameritrade in particular have been pouring resources into developing excellent platforms for both RIAs and clients. For instance, we looked at TD’s platform two years ago and were disappointed in its “clunkyness.” When we looked again this year, it was clearly best in class. Meanwhile, Schwab launched its new Schwab Advisor Center on September 1 and Fidelity is close to launching its new Wealth Central platform.

Client service structure and location:

From our own experience and the anecdotal experiences of our peers, the service offered by the broker-dealer’s team will make or break the relationship. We know it and they know it, and this issue was one we spent the most time on. Having a great relationship with our Schwab team, any new custodian would have a high bar to reach. The key points:

1. Having a single point of contact rather than “whoever picks up the phone.”

2. That contact being empowered to solve most problems without having to embark on an endless string of communications up and down the organization.

3. Even with the single point of contact, our having the ability to directly access other operations specialists when necessary.

Most of these firms have spent considerable time thinking about and tweaking their team structures. Note that there will be differences in what they offer based on firm size. The more assets a firm has with the custodian, the fewer firms their relationship manager and client services representative will be covering. This makes some sense since, with more assets, they will have more work to do for those firms. But it does mean that smaller firms may be sharing their representatives with more firms and/or be working with a “team” rather than a single point of contact.

Organizational structure and commitment to their RIA business:

Most of these firms have other businesses as well: retail brokerages, investment banking, retail banking, families of mutual funds, and networks of their own advisors. It is important to us to understand how their RIA business fits into their overall corporate structure and what kind of commitment they have to it.

As part of this evaluation, we also look at the historical evolution of the firm’s RIA business and its current management, resources, and commitment.

Average size of client firms:

Similarly, we want to understand how our firm stacks up against their other clients. For at least one of the custodians we talked to, we are clearly a minnow. For most of the others, we are a medium to large RIA, which means we can expect a certain meaningful level of service.

Reputation within the industry and public perception:

Regardless of what we may be thinking about a particular custodian, there’s no question that the public persona of the firm is important. At least one of the firms we’ve looked into is essentially unknown to the public. No matter how good they may be, it’s unlikely we would decide (especially in the “Madoff era”) to ask our clients to move their investments to an unknown custodian when there were other better known options available. There’s no question that Schwab and Fidelity are the most familiar names for our clients.

Similarly, while we very much like what we see at TD Ameritrade, the perceived “discount brokerage” persona of “Ameritrade” might keep us from moving forward in that direction. (I keep thinking that this was where Schwab was in the marketplace 20 years ago.) That being said, their executives are well aware of that obstacle and they have launched an advertising campaign to overcome that perception. I think if one looks at them again in another two years time, the company may be a significant player in the RIA space. I should add that several of our peers use TD Ameritrade and are quite happy with the service and technology.

Availability of branch offices for clients and whether or not the custodian has its own advisory network and/or fund families:

We like that firms like Fidelity and Schwab have nationwide branch offices. While they are clearly retail-oriented, they do provide access and convenience for some client transactions. They also provide a clear statement of separation between us as the RIA and them as the custodian.

Contrast that with a few of the custodians that work in the background, to the point of providing “branded” reporting as if the reports emanated from our firm. Again, in this “news cycle,” we want the clients to feel there are multiple organizations, independently accountable to verify their investments.

One issue that we’ve heard about from a couple of sources has to do with institutional clients not getting good service from the retail side of custodians. Some custodians’ retail and institutional sides don’t always work smoothly together; occasionally the retail representatives just don’t seem to know what to do when an institutional client makes a request.

Obviously, if the client has an account with the custodian, the representative is obligated to honor the request. But this isn’t always smoothly handled. (Schwab is particularly good at integrating their retail and institutional arms.)

Custodians with their own advisory networks create the possibility of being in competition with them. We want to feel that, if our client goes into a branch office for service, they will not be recruited by the branch.

Custodians with their own fund families also have the potential for conflicts of interest. We’ve heard stories from peers of being solicited for business by other arms of their custodian.

Price structure and pain points:

Yes, larger firms will have some leverage in getting better terms for particular items, but most custodians/broker-dealers do have standard rates for their services. What we’ve tended to see is that competition has driven most of them to comparable levels between firms and, while there are some firm-specific differences, the overall costs tend to even out.

As l’ve learned over time, it never hurts to ask. So, if there are particular pain points for you in a pricing structure, you should ask for a modification. You might also ask for help in paying for transition costs (closing costs from the former custodian, for example) and help with any startup costs (implementation costs for a custodian’s software platform, if necessary).

Transition team structure and plans:

All the firms we’ve looked at have had dedicated transition teams. We want to thoroughly understand the transition process and how much time and energy we are signing on for (extensive) and how much hands-on and consultative help we could expect from the custodian.

Site visits:

Several of the custodians have offered us the opportunity to make site visits to their operations centers around the country. While we might decide to forgo the remote locations, we would certainly visit with any local service team to put faces to names and understand the environment and structure that they work in. This is something we’ve done over the years with Schwab’s Phoenix service team and Fidelity’s San Francisco team.

Reference checking:

We would ask each custodian for at least three references and call them all. The questions we would ask would parallel the more important ones from the areas above.

We would also contact firms we know used that custodian so that we could get a more independent read on the custodian.

And finally, we would search message boards and/or other Internet chatter about the custodian.

To be fair, we did like what we heard from TD Ameritrade and Pershing–both firms seem to be committed to the RIA market and have made evident strides to backing up this commitment. But, for a variety of reasons, Fidelity and Schwab have what we’re looking for.

Multiple Custodians

Taking the step of adding more than one custodian is one that should not be taken lightly. But we believe that having more than one offers the advantage of choice for our clients and more flexibility in some of the service we can provide. But it also adds a significant extra layer of complexity to our back office work–and also to the front office. Processes and data systems have to be retooled and our client services team and advisors must learn multiple platforms. This extra work should not be underestimated.

Steve Disenhof, a partner at Litman/Gregory, writes a blog for advisorintelligence.com that shares his views on a variety of topics pertinent to advisors – everything from choosing technology to benefit options to managing stress.