Last month's Charles Schwab-TD Ameritrade merger sent ripples of concern through many RIA custody clients — and now rivals are looking to swoop in. Executives at BNY Mellon Pershing say they're receiving a lot of interest from RIAs and feel confident they can differentiate on one crucial point: Unlike the new custodial behemoth, they don't compete with advisors for retail business.

Custody not competition, says Pershing

“As you look at that Schwab-TD merger, and [look at] the percentage of revenue that’s derived from their retail business versus their RIA business and how they’re looking to continue to capitalize on that -- that’s not a business we want to be in,” says Evan LaHuta, managing director, client experience for Pershing’s Advisor Solutions.

And that’s the message the firm is looking to get across to advisors in the market.

“We’re picking our heads up and really starting to be more vocal about the fact that we are a custodian and only a custodian, and if they want to grow their business we are the place to do it,” says LaHuta.

A Schwab spokesperson said via email that “the unsupported notion that our retail business is in competition with our Advisor Services business is not new.”

“Our retail business and independent RIAs share many common values about investing, and collectively, we strive to put the investor at the center of everything we do. Today’s investors decide what type of relationship they want based on their own specific needs and preferences — many find appeal in the nationally-branded, wealth management services of a large firm, like those provided in our retail business, while others seek the highly-customized wealth management approach of independent advisors. No two investors are identical and choice is important when selecting an advisor — we’ve always believed in encouraging a range of choices and flexibility to choose the right approach to managing their money,” the Schwab spokesperson added.

A TD Ameritrade spokesperson asked FA-IQ to direct the request for comments to Schwab.

Scroll down to see an interactive chart how Schwab and TD-Ameritrade dominate custodial relationships among Top FT 300 RIAs

But Pershing is not alone in approaching potential clients with the pitch that it does not compete with them.

“The largest product push in RIA history, in my opinion, is about to ensue. Our business model is unconflicted. There’s no product manufacturing in the retail side and no competition from existing RIAs, which is increasingly important as the competitive ecosystem really narrows,” E*Trade’s head of Advisor Services, Matt Wilson, told FA-IQ in a prior interview.

Mark Tibergien, CEO and managing director of Pershing’s Advisor Solutions, believes the industry is built on inertia and while it's uncomfortable to make change, “Whenever there’s disruption, that’s an opportunity for every business to say, 'Is it time for me to re-examine the way in which I’m doing things?'”

“I think that you just kind of look at the market, and you say, the more that we can remind ourselves that we’re open for business and we’re eager to talk to any firm that is contemplating its options, the burden’s on us to persuade them that we’re a right match for them,” says Tibergien.

The $4 trillion RIA custody marketplace is dominated by four large players — Schwab, Fidelity, TD Ameritrade and Pershing. The four companies account for close to 80% of the market, according to research from Cerulli Associates.

The Schwab-TD Ameritrade merger will no doubt create a custody giant, though Pershing believes it is well-differentiated and the deal presents a big opportunity.

Sweep accounts and fiduciary concerns

“It’s really crystallizing for the RIA firms' minds, that their custodians in those cases are competing with them, like the amount of revenue that’s generated from the retail business. The acquisition of that, the focus on the deposits in their bank, and the spread that Schwab is keeping on those deposits, is really starting to crystallize that they may be in a suboptimal relationship. And so, it’s created a ton of opportunity for us,” says LaHuta.

But the arrangement between the advisor and the custodian regarding sweep accounts could raise some questions of fiduciary obligations, according to Tibergien.

“Small advisors will have a challenge being served at the same price that they are today.”
Mark Tibergien
Pershing Advisor Solutions

“Imagine that your current proposition is that you get free trades. But the quid pro quo is that you have to sweep all cash into a proprietary product of your custodian. And the nature of that relationship will define the nature of the service you get for me. So, your client is paying the custodian's fee. They’re getting a low yield on cash. You as the advisory firm get all the benefits of whatever that means. Is that a conflict of interest or not? Now, you can disclose it and there may be a degree of transparency, but is it in the best interest of the client? Or, as a fiduciary, should you be looking for choice?” says Tibergien.

“I think that this whole notion of what it means to be a fiduciary, and what it means to act in your client's best interest, forces real scrutiny on the nature of the relationship that some firms have with their custodian,” Tibergien adds.

But Schwab disagrees with that premise.

“We have one default sweep option for highly-liquid cash used to pay bills and manage daily expenses, which automatically sweeps cash to Schwab Bank, which in turn provides a yield similar to most bank checking accounts. For longer-term savings and investment cash, we provide a range of purchased money funds and CDs that provide higher, highly competitive yields, but those are not sweep vehicles. Advisors and clients must proactively choose to invest their cash in those vehicles, which is easily done online. We are confident that this range of solutions empowers advisors to fully meet their fiduciary obligations to their clients based on their specific cash investing needs and goals,” a Schwab spokesperson said.

Impact on advisors

As custodians battle it out to woo RIAs, it changes the dynamic for the advisors, says Tibergien.

Mark Tibergien

“I think that the small advisors will have a challenge being served at the same price that they are today. If they participate in referral programs, the cost of that will likely go up. Firms will charge a platform fee because custodians have to make money,” says Tibergien. But, he adds, advisors will have some leverage.

“I think it is going to be a challenge, though, for advisors to be good clients too. When you’re being coveted by so many firms, then you have a lot of negotiating power. But this dynamic is one of a partnership, not of a vendor. So, in a way it puts a little pressure on advisors to be good customers too. And so, I think that that will be an interesting dynamic as we unfold.”