I love the article that Bob Veres wrote last week in VettaFi Advisor Perspectives titled; How Custodial Competition will Transform the Advisor Space. The reality is that advisors have more custodial partner firm options than they have ever had. I don’t think that anyone would argue that this is a bad thing. While the choices in the past were more limited, there seems to enough choices now to meet the specific business models and needs of most advisors. With that said, Bob raises some important points in his article and shares some of his own data on the current level of satisfaction advisors have with their custodians. Without calling out specific custodian partner firms, here are a few thoughts and questions I have after reading Bob’s article.
- Will technology solution providers push further into the custody business as a way to cross sell their core solutions and use custody as a loss leader? Does the client value proposition for the next generation of custodian partner firms become more about providing the technology and business solutions advisors need rather than traditional custody services?
- The idea that an advisor can get a lot of the technology and business solutions they need from their custodian makes logical sense, but is it realistic and do advisors want to have all of their eggs in one basket? For many advisors, especially multi-custodial firms, they generally have sought solutions that are custodial agnostic for any number of reasons.
- Adding on to the number 2, Bob makes a great point about the fact that software solution providers can often deliver on richer interfaces and better user experiences than the legacy technology solutions offered by larger custodians. Later in the article he goes on to say that “…the much improved, more convenient digital onboarding technology will gradually, as advisors become more aware of them, make custodial relationships less sticky, more fluid.” He goes on the predict that we will see a less concentrated custodial landscape because of this.
- Bob’s article also raises the question about the likelihood that advisors would switch custodians. His own data from the 2022 T3/Inside Information Software Survey points to generally high satisfaction levels that advisors have with their current custodian partner firm (interestingly, the highest satisfaction levels are being experienced at smaller custodial partner firms). For me, this raises the question of what would be the driving force(s) for an advisor to change custodians? Are advisors taking a “if it isn’t broke, don’t fix it” approach to their custodial relationships?
- Bob brings up early in the article about whether custody is a low margin business. I suspect that the margins of custody partner firms are all over the place, but is there an opportunity for these firms to deliver on a differentiated user and service experience that advisors would be willing to pay a premium for which in turn would result in a higher margin business?
The bigger picture for me is that advisors stand to win in the end by having more custodial choices that can more effectively align with their business models and client value propositions. These choices should also ultimately result in advisory firms being able to deliver on better client experiences and higher client satisfaction. It’s an exciting time to be in the wealth management business!
Thoughts?
