Once a back-office backwater, custodians are providing financial advisors today with an array of services whose breadth has grown sharply in recent years: customer relationship management technology, risk management, compliance assistance, and much more. “The advisors are absolutely asking for it, and custodians are starting to step up with everything from practice management teams that visit the advisors to newsletters and webinars and practice sessions,” says Chris Winn, president of AdvisorAssist, a Massachusetts-based consultancy.
So what's next? Many in the industry say there is no “next big thing” in the custodial space. Game-changing breakthroughs aren't the order of the day. Instead, much of the focus is on incremental improvements in existing services, especially as a growing number of advisors weigh the prospects of setting up their own practices. Custodians are tweaking and polishing services — extending advisor coaching services to practices with low asset levels, for example, or improving the due diligence on products appearing on their platforms, or trying new variations on helping brokers go independent.
“There's nothing new per se in practice management. It's really about how you deliver it, how customized is the advice, can you deliver it in a scalable fashion, and what difference is it making at the end of the day,” says Zohar Swaine, managing director of institutional strategy & product at TD Ameritrade.
For example, some custodians offer M&A listing services, which allow advisors who are looking to buy, merge or sell their practices to connect. TDA launched its PracticeLink program about two years ago; later this year it plans to upgrade the service with an assessment tool that buyers can use to evaluate whether sellers fit their profile for potential acquisitions. Swaine says TDA also has expanded PracticeLink to embrace brokers who are more interested in joining an existing practice than in starting their own.
It's a variation on the matchmaking theme. Some RIAs and breakaway brokers are simply more interested in joining existing practices, finding advisors who have similar business philosophies, rather than buying or selling a book of business outright. That shifts the conversation, says Swaine, from “How much equity do you have, and do you have enough to buy my practice,” to “Let me understand the way you would operate your business, and what does this mean from a partnership perspective.” (We wrote about this emerging model for independence in our March 2007 issue, “Join Up or Start Up?”)
In January, TDA also expanded an existing advisor coaching program, extending it to those with assets of $20 million to $50 million, Swaine says. The smaller advisors must have a client relationship with TDA of at least a year, and they must demonstrate “high-potential” entrepreneurial skills, he says. The company has worked with smaller players before, but there's never been a full program dedicated to them. The needs and dynamics of small advisor practices are different from those of their bigger brethren, he says.
Take referrals. “In the small shops, you might want to focus on tactics to mine your client base, while in the larger shops you might be thinking more about systematizing your referral process,” he says.
Of course, advances in practice management are often driven by technology. TDA is focusing on how to use data to customize practice management solutions for individual advisors. To date, most benchmarking data has been limited to a few variables, he says, such as number of clients per associate. But custodians are well-positioned to capture far more detailed information about each advisor's practice and use it to create new benchmarks that drill down on operation metrics — the percent of account applications that come in with faulty or misleading information, for example. TDA is completing work on a benchmark database that employs information from a survey of a segment of its 4,000 clients; it hopes to have a diagnostic tool in the third quarter of this year that can measure an individual advisor's operational metrics.
“How do some advisors actually know what their pain points are?” Swaine says. “An advisor may feel everything is OK. I think it might be interesting for them to know how they compare to benchmarks.”
Practice Efficiency, M&A, Due Diligence
Even though big changes are not afoot, innovation, driven by advisor demand, is a common theme among custodians today. The last few years have seen advisors retrenching and reflecting. 2011, by contrast, “is a year of growth and general improvement in operating efficiency,” says Mark Tibergien, president and chief executive of Pershing Advisor Solutions. “I think what we're finding is that advisors are emerging from their bunker mentality and looking more at the world in terms of opportunity.
“From a practice management standpoint, the three things that we continue to hear, and it's more acute now that the advisors are coming out of the mud, are, ‘How do I get more efficient? How do I grow my top line? How do I attract and keep good people?’” says Tibergien. “That is informing the way we develop white papers, our web casts, our seminars, our one-on-one consulting. The basics of the custody business are commoditized. This is a way to differentiate.”
Pershing sees a special opportunity in firms with multiple locations. (Fifty percent of wealth managers have at least a second office, Tibergien says.) The pace of mergers is likely to pick up in 2011, he believes, driven by the need for achieving scale and a desire by some older advisors to prepare business succession plans. “The implication is RIAs are starting to look a lot like broker-dealers in terms of having locations in multiple places. As much as RIAs would hate to admit it, there are probably some lessons that could be learned from their broker-dealer brethren as to how to manage, expand and control,” he says.
“The opportunity resides in the smaller firms that need to merge into larger firms. We do through a value alliance help advisors to negotiate and consummate mergers and acquisitions,” Tibergien says. “It is a growth strategy for advisors who are trying to enter new markets. It is a condition in the market that we have to be aware of and help our current clients take advantage of.”
Pershing also is looking at innovative approaches toward products on its platform. Alternative investments have been part of its offering for years, but some advisors were concerned about the risks posed by the investments. As Tibergien put it, clients were calling Pershing and saying, “Our current custodian has an inconsistent process around accepting alternatives. We need to find a solution. Can you do it?”
The result was an eight-step vetting process, launched last year, for putting alternatives on the custodian's platform. Among new rules Pershing put in place was a requirement that the Public Company Accounting Oversight Board certify the CPA firm auditing the product. “If a CPA firm is not PCAOB certified, then there's no process for peer evaluation or auditing of auditors. It helps you avoid a hedge fund manager that engages his brother-in-law to do the audit, or some strip mall accountant. It's a higher standard that includes a peer review that's critical,” Tibergien says.
The company's move on alternatives has drawn more than $3 billion in assets to its platform, he says. “What's different is the refinement of how they can be included. Because there are always concerns around transparency, pricing, verification, those kinds of things that give both the regulators and the clients anxiety. So we got ahead of the curve.”
New Custodian Service Models
Schwab Advisor Services is looking to offer more advanced services in its practice management program this year. Building on a benchmarking study it did in 2010, Schwab plans to roll out pilot workshops in February in Chicago and Detroit on client segmentation — the art of determining what level of resources an advisor ought to allocate to each client based on how much the client is contributing to the top line. The modeling that is involved in the process will help advisors understand when increases or decreases in pricing are warranted.
Again, client segmentation is not a new idea or approach, but it is the first time the firm has formalized its service offering in this area. “It's something we've done, but we've not done it at the level where we sit down with small groups of clients in a workshop setting with tools that help them actually do the modeling,” says Nick Georgis, vice president, strategic business. “We work with them, then we have a six-month follow-up period where we go into the office and work with the advisor team, to begin to understand implementation of what they've learned. It's a much more detailed practice management approach versus the more presentation-oriented approaches you might often have…What size do they want to grow their firm to? How long will that take? What is their unique value proposition? What is their ideal client profile?”
The modeling data tells advisors exactly which of their clients are the most profitable, at what level of service, and why. Advisors have to estimate the number of hours they spend with those clients in order to make those calculations; getting a fix on costs is critical to improving profitability.
“We all know that your largest clients pay you higher fees, but sometimes what we lose is understanding what the cost to serve is. And then clients provide value by providing referrals, and we want to acknowledge that and try to understand how you place a value on that,” Georgis says.
“The outcome is you want to improve your profitability and you want to understand better what levers you can have to do that. One of the things that eventually happens is our clients do see that they have segments. It creates a really good picture of what those segments look like. And the solution set becomes a tool,” he says.
Help For Hybrids
Fidelity Investments, eyeing growth in the hybrid advisor market, recently announced it was stepping up service in that segment. Michael R. Durbin, president of Fidelity's RIA unit, Institutional Wealth Services, says that while brokers are leaving wirehouses to form their own fee-only RIA practices, commissions aren't going to go away.
“There does tend to be a portion of a client's relationship, or an advisor's book of business, that is done on a commission basis. And clients and advisors want to keep it that way,” he says. “Although there's a shift toward fee, I don't believe you'll see it go 100 percent. There will always be some part of a relationship that an advisor or rep has with a client that may be best suited in a commission form.”
Among other things, Fidelity's Options for Independence program will provide a support staffer for each hybrid advisor to assist with the advisor's processing and back-office needs. A year ago, Durbin says, advisors had one support staffer work with the RIA business and another work with the clearing business at Fidelity's National Financial unit. “So we're pulling it together. It's a single point of contact for their Fidelity business,” he says. The company also says it is offering educational resources for advisors considering independence, including an on-line white paper and overviews of different business models such as forming an RIA or joining another firm.
Fidelity's technology is matching its outreach to hybrids. Last summer National Financial began offering fee-based trading tools on its Streetscape platform that appear on its WealthCentral RIA platform. The move stops short of outright integration, Durbin says. “We will maintain two separate businesses and platforms because we have such success and dominant market share position in each,” he says.
Winn agrees that advisors who transitioned from wirehouses were helping drive custodial innovation. They could outsource the services they needed once they left for their own practices, but the natural place to look to was the custodian. It grew more important as advisors began to specialize their practices, Winn adds. “The (advisor) model has morphed quite a bit. That really requires the custodians to step up to help them. You can see it from the flow of assets. They've opened their doors and say, ‘Hey, don't be afraid. We'll help you through these things, just the way you've had that help for X number of years where you've been successful” at the wirehouses, he says.