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Redefining the Relationship Between RIA & Custodia ...
Recording - RIA, Custodian Relationship
Recording - RIA, Custodian Relationship
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Welcome to the webinar. I'm Heidi Tennant, NFA's Senior Coordinator of Membership and Continuing Ed. We're joined today by LPL Financial's Steve Erner and Adrienne Larson. Steve is the head of the RIA custodian platform at LPL Financial, where he and his team lead the development, innovation, and expansion of the LPL RIA custodial offering. Prior to joining LPL, Steve led the strategy and build out of Raymond James's RIA and custody services division and was previously in a role directly supporting the strategic initiatives of their chairman and CEO. Adrienne Larson is the vice president of RIA custody at LPL. His role is to lead, design, and execute RIA custodial platform strategies from transitions, RIA service delivery, and business development to technology and marketing. Prior to LPL, Adrienne spent 23 years at Fidelity Clearing and Custody, eight years in RIA Transitions, and 11 years in RIA Client Service. Thank you, gentlemen, for joining us today. Thank you for having us, Heidi. The floor is yours. Hi, and thank you, NAFA members, for the opportunity to be here with you today. We're here virtually, but we're looking forward to seeing everybody at the NAFA Spring Conference in person so we can connect with you while we're we'll have a booth there for everyone to meet us. So I want to start the day off and kick it off with a discussion topic with a live poll. And the question is going to, as soon as it pops up, is what, if any, are the current pain points you have with your custodian? And four choices, downgraded service, lack of support and capability, which I need to grow and manage my business, pricing and value, or none. I have no issues with my custodian and I'm satisfied with it. We'll give about a minute for the responses to come in, and then Steve and I will make points and commentary based upon the responses. The responses are up. Do you see them? I do. Okay. All right. Perfect. Well, it sounds like the good thing is the majority of you are satisfied, which is great. Some of you are experiencing some pain points. So it seems like service and growth capabilities are the main ones. So we'll make sure to weave in some context for those who responded that way. Excellent. Yeah, so I'll list a headliner. So let's talk a little bit about trends that we're seeing in the space, Steve. And if you want to head off, like, what are you seeing as a trending-wise that's going on right now in the market? Yeah, sure. I mean, there are a number of trends that we've been experiencing over the last few years. We can talk about M&A, talent management, consolidation. There are a number of others, but why don't we hit a few of those? So in regards to M&A, right, everybody loves to talk about acquisitions, M&A. When you look at the stats, everybody, or most people at least, are saying that they want to acquire, and that's fair. A lot of people are acquiring, but what is happening now, right? We've seen for the last few years a real uptick in acquisition activity. People are paying more. People are transacting more. They're trying to get that high multiple, right? Well, the last six months or so, we've seen a big change, right? We had a lot of private equity money come into this space, into our industry over the last few years because of the detractive returns. We've seen 12, 13 years straight of increasing assets. They're seeing very strong cash flows. They had really cheap financing, right? It was a perfect situation for private equity to come in and finance it, and that's what they did. And so you've seen a lot of RAs and smaller shops turn into these billion, two billion, 10 billion and plus aggregators or consolidators. Well, now fast forward to now, and it's not the same experience. We've seen some activity, but it has slowed down. These same private equity shops are facing two main challenges, right? Their cost of financing is a lot higher, and so with that, they're expecting a higher return, and their hardware rates are harder to hit, so they have to be more selective. And then the other part is we've all experienced a drawback, right, in the markets. And so those high cash flows they were expecting, they've taken a haircut. And so when you marry the two, you've seen this trouble, if you will. That's not to say that activity isn't happening. It certainly is. And on the top end, the large deals are still getting done, and they're getting done at large multiples. But when we start looking into the smaller and medium-sized firms that are being acquired, those multiples aren't existing anymore. They're a lot smaller, and the deals aren't, they're not getting done as quickly. And there's a couple reasons for that, right? I just went through the demand side, if you will, and what's causing some of the frustrations there and the hesitations. But even on the supply side, there are challenges. There's always been more demand than supply, at least for the last few years on the M&A side. But right now, because of that pullback I was mentioning in the marketplace, which we're still experiencing some of, even though we've had some recent uptrends, you have this barrier, if you will, because there's a gap between who perceives what is the value of their book, right? And so when we're talking about an RA, they're expecting to still get top dollar from where they peaked, right, while some of the acquisitions are on the opposite side. And so all of this creates a real interesting opportunity for new entrance into the market from an M&A standpoint. And one of the things that we've experienced at LPL is why not facilitate some of this? And so as a custodian, you know, we're trying to show up as a value provider. If people are looking to do M&A and grow inorganically to help improve their firm and their books, that's what we're trying to do. And so we have two solutions, really. So talking about the smaller end of the spectrum, we have an M&A solutions offering where they'll source internally within the whole spectrum of LPL. And so it could be an independent advisor, it could be a team, it could be someone on our W2 channel, or an RA. And they play matchmaker. And then they also have the ability to provide financing, structuring, et cetera. So that's a really interesting opportunity. And they're typically smaller deals. And so within LPL's ecosystem, we actually see a pretty steady amount of activity, which is exciting for those RAs that do want to grow. They may be smaller, and they want to double up, triple up, and see where we can go. And we see a ton of deals getting done there. And then on the other side of the house, we're actually participating as LPL. And this is more so as a liquidity and succession offer. So it gets really interesting for those who are looking to pass the baton, if you will, to whether it's an identified person or not. And so offering those unique experiences for how to transition your business or how to grow your business is just one way that some custodians, especially us, are standing up and trying to show up in the industry. Another trend we're seeing is really how do we deal with talent management, right? Whether it's here at LPL or you at your shops and your RAs, there's a need, right? If you go back to Q4s, there was the great resignation. I'm sure a lot of you in the audience have experienced struggles with that. We certainly did here, right? You had a shortage in not even good talent, just talent in general. People withdrew from the marketplace. And so I think we've all taken a step back because of that and tried to think, how are we going to figure out how to run our businesses more efficiently and staff them more efficiently? And so what we've done, we've really done two things at our home office, right? Service is a huge component of how we show up as a good custodian, a good partner to all of you. And one of those ways was, all right, we need to hire more. We need more redundancy in our system. And with the scale that we have, we can do that, right? We can afford to do that and provide you guys a great experience. But that may not always be the case when it comes to running a smaller RAA or even a larger RAA. And so some of the solutions that we're rolling out to help in that custodial space are what we call our business solutions. And they're basically middle back office solutions where we can augment or support in terms of replacement, even some of your back office. And so that could be, hey, I have somebody retiring or somebody left, like my admin. And so we can step in either in a temporary basis or a full-time basis and provide admin support. Similarly, on the marketing side, right, you may not have marketing in-house expertise. Well, we can do that. And so you have these off-the-shelf solutions where you don't have to go and find all these different vendors, manage separate contracts, have these different relationships. And so we're basically building a store shelf for you with all of these talent management opportunities for both running your business as it is today, but also how to scale your business, right? A lot of people start consuming these solutions when they're acquiring, when they're growing organically, because they're running out of capacity with their existing team, and this is a way that a custodian can show up as a true partner and provide that. Because then we're doing the sourcing, we're doing all the payroll. You don't have to worry about doing any of that. You're just paying a fee for these services. They're getting done by people that are really well-trained on the custodial platform, and then are understanding your business as you teach them. So talent management, I'm sure you guys are facing issues. We have, but that's one way that we're really thinking through that. And then consolidation, right? I mean, we've been living through consolidation in many industries, but, you know, in our industry, especially on the custodial side, there's major consolidation happening right now. I don't have to tell anyone. Everybody knows the headlines of who's consolidating in the next few months. But it's disruptive, right? And we being another large participant on the custodial side, we face some benefits because of it. A lot of people, I'm sure some of you guys are questioning, what is the role of my custodian? Should I consider other custodians, right? I shouldn't be forced into a custodial relationship. And so it's being disruptive to everybody. The client service ratios are changing, right, where you may have had a great custodian, and now they're being acquired, and thus, we don't have the same ratios, the same people, the same attention, if you will. People's business models are different, right? Each custodian focuses on different spaces. So while one custodian might support smaller, growing RIAs and groups of independent advisors, if they get consolidated into a larger team that really doesn't care to support that group, you're going to have a different experience, right? And so that's a disruptive piece of the puzzle. And, you know, you used to think maybe the custodian is just there. It's a piece that we have to consume. It's not really that meaningful, but I think people are now realizing that each piece of the puzzle is pretty meaningful to their business. So, yeah, the consolidation, it's interesting. Every industry, if you see consolidation where one person or one company is consolidating to more than half the market, it does a few things, right? It opens up opportunity, and it's ripe for disruption. That's really what happens, right? And so, again, if you take out part of that value prop, that value chain, if you will, and in this case, you know, it could be serving the smaller community or serving the growing community or serving people in a way differently, right, that they don't want to have a commoditized experience, if you will, well, now there's an opportunity for somebody to step up. And quite frankly, that's what we and other custodians are doing. And so, you've seen a lot of new entrants into the marketplace that weren't here a few years ago, right, either with a fintech platform or some other niche play, and, you know, they'll gain some traction. It might take some time. They're not going to be able to do it at scale, but over time, maybe they will. And then LPL, we've been doing it for quite a while, right? We've been doing it behind the scenes, not really advertising it, but we have over 500 RAs on our platform that we support every single day. And so, it's an interesting time. Consolidation is good. It's not great always in the immediate term, but over the life cycle, if you will, of the consolidation, it does provide disruption, which usually leads to improvement because somebody has to come in and disrupt that industry. So. Yeah, and we have a live question, does LPL own a bank? And the answer is no, we do not own a bank. Yeah, so banks an interesting topic, right? If we start getting into the strategy, if you will, of some of the custodians and you look at their activity, there are a lot of people focusing on banking. And so, some of the largest have their own banks. Some of the middle players have banks as well, or they're outgoing and acquiring financing companies. And you have to think, what is their business model, right? Are they actually focused on supporting me as an advisor, me as an RIA? Where do I fit into their business model? And if you look at their earnings reports and listen to them, or you see their financials and look at their bottom lines, these players that are banks, they're making all of their money on interest, right? And so bottom line, more than 100 percent of their net income is interest. And I know very quickly they are a bank, right? And what do banks do? If we think about the bank down the street that you grew up with, with a checking account , they are retail branches. They go out, they collect retail dollars and they make money on those retail dollars. That's not dissimilar to a lot of the larger custodians out there right now. They are just going and getting retail dollars through a different channel, not through brick and mortar all the time, although some are. And they're acting like a bank. And so having a bank, you might have thought that might have been a great thing. But you don't have to own a bank to be able to offer banking services. You can partner for that. And so that's what LPL does, right? We have banking services and solutions that any RA or advisor can use, similar to if you had if there was an LPL bank. But we don't introduce the risk of having a bank, right? We're not being governed by having all of these decisions that need to be made because we're a bank, right? We're not being forced to sell things to create liquidity because we're a bank. We can hold until maturity, and then we don't have problems that we've seen with some of our competitors in the space, whether they're custodians or not, but just playing in the RA and the advisor spectrum. So, yeah, banking is interesting. We don't have a bank at LPL. We do have banking services, so you're not losing out on anything. It's similar to some of the other players in the space. You may even think they have a bank and they don't. Yeah, along your thread there about commoditization of the service and custodianship in general, what does that mean to you? What is your perspective on what commoditization of that means? Yeah, sure. So about three years ago, I guess, we saw the industry or some of the players go to zero, right? Equities, options, ETF trading, transaction prices go to zero. Well, anytime you go to zero, you have commoditized something, right? If you're saying it's free, there's no value. That's commoditization, right? There is ubiquitous, if you will. But that's not really the case, right? So commoditization is custody commoditized. I would say, yes, the actual custodian piece, the basics of custody are commoditized, right? What does a custodian have to do? You guys need us to provide safekeeping of the client assets and process transactions. That's the baseline of what a custodian provides. Is that commoditized? It is. If you can't do that, right, you're not in the game of being a custodian and you're not servicing advisors or RAs. And so that piece certainly is commoditized. But what isn't commoditized is all of the other value a custodian can provide. And so when you think about who went to zero and why they may have gone to zero, you look at, all right, well, what's the experience been since then? Well, to finance going to zero, you have to cut other areas, right? And so we've seen service declines at some of these custodians that went to zero. We've seen people changing ratios where no longer if you're on the smaller end of the spectrum, are you getting relationship management or maybe you're not getting practice management? And so it really creates an interesting headline. Of course, everybody wants zero and they want cheap and free, but you get cheap and little with that, right? And so it comes down to what value you're getting. And that's really what happens with the commoditization play. And so we pride ourselves on not being commoditized in terms of a value play. We are a value added custodian. That's what we like to call ourselves at LPL, where we're providing service. We're providing relationship management and practice management to all of our RAs, regardless of size. You'll hear like minimums, right, at other shops. You don't have that at LPL. You can be a very small RAA. We'd be happy to support you on our platform. We want to be that player, right? We've realized that that player has been taken out of the market and a lot of people aren't focusing there. We want to be the home and we have been showing up recently as the home for small RAs that want to grow. And so we support RAs with the same service experience, whether they're smaller or larger, they get relationship management access, and they have growth consulting options as well. Yeah, so along that theme, so when RIAs are looking to evaluate or do some analysis on their vendors or their custodians, what should they be looking for? What are the key elements there? Yeah, I mean, the easy thing to look at is price, right? And so that's fine. I think everybody's gonna look at economics. When you're buying anything or consuming any service, you should understand what is it going to cost me? But the other side of the coin, as I was alluding to, is what do I get for that? And so how do you need to be supported? How do you want to be supported? I'm sure most of you have had frustrations at times with some vendor, whether it's your custodian or another vendor you're engaged with, where their service and the experience you got was subpar, right, and you thought differently about that. You thought, am I getting value for what I'm paying for? So we're trying to provide a different experience here, but it's an interesting time, right? The SEC just came out, right, with all their due diligence of vendors, and they're talking about all of this, and what does that mean, right? That's not just, hey, I'm using a third-party tech solution. I need to go due diligence them and understand that I am doing my fiduciary duty in vetting them from a due diligence standpoint. You have to do that on your custodian now, right? You have to do that on every piece of vendor, if you will, that you're consuming. And so, like, even the regulators are pointing out that, hey, guys, it's not just price. You actually need to understand what risk is associated with that. And so it goes back to the comments I was making about the banks, right? You might think of just the custodian, but what else is that company, right? What other things are they doing? I think it's interesting in terms of like a transactional relationship. Some firms are strategically positioning themselves to get full value, right? So when we talk about like third-party tech, like I was just mentioning, it's a cost, right? There's a cost to doing that. And so, you know, some custodians don't have any tech or they have very limited tech. Others have full tech. Others provide choice. So when you're thinking about what does it look like at a custodian, you also think, what is the next step, right, what else do I need? Am I gonna continue using my tech stack? Do I wanna plug into someone else's and maybe save money because I'm not using the whole tech stack? And so at like LPL, for instance, we have a tech stack you can consume. And regardless of how you affiliate or join or onboard at LPL, if you're an RA, you can still use all the technology just as if you were on our W2 platform, or you can plug in with third-party tech. So usually you start with price, you start with the risk assessment, if you will, of that platform, and then you start going into technology. And some of the other things, as you can see now on the screen, are really what else do you do from a service standpoint, right? We talked about how that's part of the commoditization issue but there's more than just normal service, right? So we focus on growth a lot. Growth is an easy part to talk to from our relationship management team to you. And so we've actually stood up a group that is focused on just growth. So we have growth consultants that you have access to here that do provide the practice management support and they can map out, all right, this is my business plan as an RA, or how do I want to consume custodial experiences and solutions, and how can we as a custodian partner with you to help you unlock and enable that and be your accountability partner? And so we talked about M&A before, we talked about liquidity solutions, if you will, if there's need for financing, we have the practice management skills. And so that's a lot of it. But the other parts you see here are conflict, right? We talked about banking as a conflict, if you will, and it used to be more of an enabler until recently. Other conflicts I constantly hear about when I talk to RAs that are looking or considering moving their custodial relationship are, I don't want to wake up at night knowing that someone is going after my end clients, right? And so at LPL, we don't have a direct to consumer business model. We're not in the retail channel, if you will. And so we're not standing up brick and mortar sites next to you where your clients might be mistaken and go into there because they saw the name of a custodian on their statement. We're never going to do that. We don't have a direct to consumer, so we're never going to steal anyone's end clients. Our focus, our business model is the advisor. Everything we do is investment into the advisor. The other side of it is we don't have proprietary products, right? And so when you, the fiduciary that's out there operating in the best interest of your end clients is trying to run a sound practice, it's hard to do that when your custodian or others are trying to force product on your throat, right? And hey, look, they might give you a break on pricing and you might think that's great, but it's really hard to do that. So those are the few of the things in terms of that. Another, just one more comment on this, I guess, is really, I know here in this group, we're not going to talk about brokerage, but I just want to touch on it in the context of M&A. I know a lot of you in the audience are looking to, or have done some mergers and acquisitions and growth through inorganic growth. And when you're thinking about who can I acquire, if you're a full fee-based advisory only shop, that doesn't mean you can't acquire somebody who still has brokerage assets, but it's what do you do with them, right? And a lot of other people will coach you, oh, just take them, leave them, you're good. Don't worry about it. It's not a big part of the book. But we found that, no, that's not always the case. Whether it's a large part of your book or a small part of your book, it could be a large part of an individual client's need, right? And so we have a solution to actually facilitate you doing some of these acquisitions or even just going full fee only if you still did have some brokerage, where LPL can purchase the brokerage. We can manage it in-house. We never sell it. We never try to sell them advisory or anything. We basically act as an execution arm for you. And then you can still have that experience with that end client. You can still do the planning. You can still have that holistic relationship and then guide them on their needs on the brokerage side and have their client execute with us. And so those are some of the value props, if you will, that we provide and things you should consider asking about when you're evaluating any vendor, but especially your custodian. So that's a segue good from Christopher Johnson. He asked in the live chat, what are the different ways you see advisors being charged for custodial services, differences between custodians, different options within the same custodial platform, and then comment on options for charging advisors versus client accounts. So custodial pricing, always a big question, always a big topic of discussion. Yeah, so I would say pricing's a bit in flux these days. We've had zero at some custodians for a while. Some custodians have come off of zero. So historically, the main way was transaction pricing. Now, whether that was consumed by the end client or the advisor slash RIA, some custodians allow you to choose one way or the other. They'll facilitate, I don't want my client paying, so I'm gonna charge the advisor. So I'd say that was the traditional way. And so some people still have charges depending on if it's equities. Most of them have charges if their mutual funds are fixed income, and fixed income might be a baked-in cost that you may not see visibly, but there are transaction costs typically. I would say that's still the predominant way that RIAs and advisors are charged today. You've seen a much larger setup, if you will, in usage of custodial platform fees recently, so an asset-based pricing model. I think originally this was to match the income, if you will, the revenue stream of advisors, right? And so it's easy to say, hey, it's gonna cost me X basis points for my custodial needs or for my third-party technology solution, and I'm making Y in basis points, because AUM is still the predominant way that advisors make it. And so I think you've seen a trend where a lot of custodians are moving that way. They're not just offering that. So a lot of custodians do offer choice. We at LPL do offer both. You can have transaction-based pricing, or you can have a platform fee, if you will, and then access everything else. The nice part about some of the platform fees, though, is while it's a cost, it's wrapping everything together, right, so it's simplified pricing where you understand and have visibility to exactly what I'm being charged. It doesn't typically have any of those ticky-tacky fees for things that you might do once off or twice off a year, and so it's a lot easier to manage. You've seen some people try to do subscription fees. That really hasn't taken off too much from a custodial standpoint. I'm sure we'll see some others there, but it's still predominantly those two models. It's an asset-based pricing model or a platform-type fee or custodial fee, or it's the transaction-based pricing. I would say that- What are your thoughts on how are smaller firms being priced or custody-priced differently, platform-priced differently than, say, larger firms? There's a big, wide range, and we've seen it at other custodians, so just your thoughts on that. Yeah, it's a good point, Adrian, and thanks for bringing that up. So again, some of the custodians that have come off of Xero, if you will, have introduced platform fees, and while it may be a few basis points for larger RAs, we find that they have minimums, if you will, that they need to hit their hurdles at. And so we hear a lot from smaller RAs that, hey, my custodian or this custodian I am suggested to go to and I am considering going to, they're charging me a fee that is as if I was a $100 or $300 or $500 million RA, because that's who they want to service, right? And so whether they have a minimum AUM for you to join the platform or an inherent minimum through their pricing, you're seeing that. And so if you talk to pricing, I've seen at some custodians some really high double-digit custodial fees on the small end of the spectrum for RAs, because they have hurdles to hit. And it's really tough for you, the advisors, to manage your business if that's the case. How are you growing when they're eating away at your bottom line right when you need it the most, when you need it to plow back into your company and invest? So we don't have that. We have pretty low, we don't have any minimums. So we'll start with that. There are no minimums to access our platform. I mentioned that before, but on the pricing side, we're offering small RAs, the same pricing as we are through those smaller to medium-sized RAs. We do offer price breaks for growth. We want to incentivize you to grow just like we do. And then on the transaction-based pricing side, we're not jacking up our prices because you're small. You're getting the same transaction-based pricing, whether you're small or large. So with that, how was, so thought-wise, if I'm an RIA, I'm looking at, what's the value? Like, what is my custodian providing that, what is the value prop? So how are custodians differentiating or approaching that topic of like, when an advisor asks them, like, what am I getting for the platform? What do I need to stay here for? Yeah, so we've touched on it a little bit, right? I think there are a number of custodians with large names that all of you are familiar with that have a very commoditized feel. We've talked about it a little bit already today. And so you're getting a digital 1-800 number for service, right? You're not getting relationship management. You're getting an experience where it's all DYI. You can come here and you won't pay much, but you're gonna have to do everything on your own. We're not gonna provide you any tech. You have to go build that yourself. You have to manage those vendors, and we're not gonna really support you in the way that you may think we should. So like, that is a story that's out there. And unfortunately, a lot of advisors and RIAs are facing that. And so again, we're trying to create a different experience here with, you need to get something, right? If I'm paying for something in any industry, I wanna make sure that I'm getting commensurate value, at least perceived value for what that is. And so for us, we're trying to do that through support, right? We want a different experience here. And so when you call in, right, we want you to be answered by a person on a team that you know. And so we're giving that differentiated, elevated experience on service with better ratios without having to go to a digital 1-800 call center. And so you're not just getting some junior person who doesn't know what they're talking about. You're getting someone who has a year plus of experience in our group, supporting our RIA industry. That's one of the ways. We're trying to build nuanced interaction models, if you will, through our relationship management and practice management teams, right? And so again, what can my custodian provide? They can provide a roadmap. They can provide that accountability, that partnership for how do I get to my goals. Now, what are those goals, right? Everybody's not trying to grow. Growth is the easy one to talk to because a lot of people do want to grow, whether it's their bottom line or they want to create enterprise value for a sale at some point or to pass on to another generation. And so there's a lot that a custodian can do for you there or should be able to. Some of them can't or won't, but we at LPL think that is a place that a lot of RIAs want help with, right? They may have the goal, but they don't know how to get the execution plan in place to do that. And that's where a partner who's been in the business for a while can help support there. Yeah, that's good. Now with the attractiveness and the movement and the disruption that's in the custodial space now, what do you thought about the new entrance to the custodial space? And what is the attraction? Like why are they entering into the fray? Yeah, I mean, again, you think consolidation is ripe for disruption, right? You've taken out some players that had niche needs, filling niche needs, if you will, in the space. And so there are needs for people to be disrupted. So I think you see here, the top four custodians, one of which we are, there's a lot of consolidation and concentration there, right? Even with one of the firms being taken out recently, it's still all concentrated by a handful. And so in any industry, right, when there's only a handful of custodians or players, if you will, in the industry, somebody is going to come along and try to disrupt it. Whether they can or will is a different story depending on the circumstances. And so you think about the history of custodians and even you think of wire houses and other players in the marketplace, right? Yet everybody learned to be an advisor at a wire house. Well, then you have the independent broker dealers stand up, because there wasn't a good experience. And the independent broker dealers gave advisors ownership of their clients. That was a huge thing, right? They also gave them better technology because there wasn't investment because there was such consolidation at those wires. Well, then a lot of people started setting up their own RAs, why? Because they wanted to consume other technologies, right? Technology needed to be invested in, and so you had all these FinTechs stand up. And so to consume those, you set up your RA, you consume those separately. And so when you set up your RA, you're looking at the custodians, right? And so it's this constant circle of evolution and investment and who's going to stand up and disrupt, whether it's, again, through things like book ownership and the history of this space, or through FinTech. Right now, we're seeing a lot of that as well, right? We're having another cycle of interesting investment in technology. I'm sure some of you have dabbled in chat, GBT, and other things like that. It'll be really interesting to see how that takes over our industry, right? Where can we leverage those types of new innovations and who's going to stand up and utilize some of those things? But the new entrance to this space, while they're small right now, their focus has typically been on a niche part of the business. And so either focusing on smaller advisors that don't have a home today, or they're focusing on specific tech needs to enable a population that may need a certain technology or workflow. But typically on the smaller side, it's hard for those smaller new entrance to the custodial space. Often they're not self-clearing, right? And so there's an inherent cost for them to run their business. It's higher than some of the larger custodians, or they don't have all the capabilities yet, right? Because they haven't been able to build them. So they may not have the ability to do fixed income trading or offer margin or options done for a client's accounts. And so they get boxed out of certain places, but they're coming, right? I think there's going to be more and more, and they'll continue to be more. And we look at that as an opportunity for us too, even though we're in the top four in terms of custodian market share, we're always looking to disrupt and constantly innovate. And again, going back to an earlier comment I made about how we are constantly focused and solely focused on the advisor, all of our investment goes there. So when we're making $300 to $400 billion in investment a year in technology and solutions for the advisor, that's our business model, right? We're disrupting it as well. Whereas some of these larger players, as we mentioned earlier, they're not focused on how do I support advisors and RIAs, they're focused on how do I grow my retail space, or how do I grow my bank, right? Things that aren't focused on the core, how do we build wealth management solutions, right? How do I help an advisor support their end client? So I think there'll be a lot of innovation and workflow, a lot of technology focus, everything should be simplification and efficiency focused on how do we help advisors help their end clients. So it'll be interesting to see where the space goes, but with only a few at the top, I do expect some disruption to happen in the next few years. Well, you touched on it a bit and if you could expand the thoughts on, so custodians make money and they make money different ways, but how do you see how the strategy is for them to make money on the custodial platform and the investments they make in order to get them to economics, to make it sustainable? Yeah, sure. Look, I mean, every custodian is a for-profit business, just like the advisors are running for-profit businesses, right? And so we're all trying to make money. How much money, you know, everyone wants to make as much as they can, of course. So how are custodians making money? Well, we've gone through some of the headlines, right? Hey, custodians make money because they're charging me, the advisor, a ticket charge, or me, the advisor, I'm going to charge the custodial platform fee. And that's true, right? That covers the cost of offering some of their custodial services, whether it's just purely holding those assets and safeguarding them and all of the systems and security around that, or if it's actually the movement and transactions and putting them through all of the routed areas they need to be and the little fees that are attached to that, that we as custodians have to pay, or is it how do we support you, right? Those services I was talking about, whether it's just pure service or it's growth solutions or it's practice management, right? There's a cost to that. And so there has to be some economics for the custodians to think about. And so we talked about interest, right? Most custodians, all custodians are making money on interest. Some of the assets you guys hold as advisors are in cash and that cash is swept. And so there's a cost to that where the custodian consumes the cash and overnight it's lent out and brought back in. And it's all FDIC insured and everything like that. And CIFIC insured as well. But we make interest income off of the cash that sits there. And so what do we do with that? We're able to invest it. And so it comes back to where are we investing it, right? Is it investment to help support you, the advisor, or is it investment to help the custodian in other areas make money? So I think that's really important. We talked about some custodians have banks. So not only are they making even more money in terms of interest, they're lending out money in different ways, right? And so they may make money through lending. Margin lending, right? A broker usually has the ability to offer margin lending. They're making money there. And then they may offer other services, right? So we talked about a number of services we offer where we consolidate and make that very easy to consume. That's not our main business, right? That is a way that we're providing that to you. So it's not the primary lever. And then there's the traditional, right? We have product on our platform. Some of the products, they have economics associated with them as well. But you, the fiduciary, you can consume how you want to, right? We're not providing that. We don't have our own products. And so a lot of custodians, they have own products. And so they make more money if you put money in their products. And so while they may say it's zero, they're making money other ways. That's, I think, the biggest thing to take away from this. But look, you want your custodian to be profitable. Let's be very clear. You do not want them to go insolvent as we've seen some of the banks do, right? You want to be able to stand up in front of your end clients and go, I was a fiduciary. I chose the best custodian and other things for you to reduce the risk and make sure that your assets were safe, regardless of the industry insurance that we have against your assets, right? If your custodian fails, that's going to be a bad day explaining to your end client, how was I a fiduciary selecting my vendor for you? So I think it's important that everybody makes money and there's plenty of money to be made in this industry. So that's a good ender topic. So what about the future of like service, custody service fees, fee arrangements with the RIAs? We touched on a bit with Christopher's question, but in the, like looking way forward, like what do you think is on the horizon? In terms of fees? Yeah. Custody fee services arrangements to get RIAs either, you know, to make it stickier, to provide more services and products that they can stay with the custodian, to actually increase the value prop. Yeah. I mean, again, our focus here at LPL is really to figure out how do we support you, the RIA, you, the advisor better. So you don't have to run around and question, what should I be doing? How should I be doing it? Who should I be doing it with? Right. And so I think it'll be really interesting to see how this all plays out with the commoditized custodians, if you will, that are more focused on different parts of the industry, i.e. a retail business or a product business with those who are focused on the advisor. And I think a lot of the investment that is being made and that we're making, and other custodians are making to help support those advisors is really what's going to differentiate it. And so how does that look? Well, I think you're going to continue to see how do we support you more holistically, right? So there are going to be players in the industry that are going to add services, whether it's through partnership, whether it's through buying things to help you do that better. I think that's really where we're going, right? Where the industry needs to go. If you think about who were the custodians 20, 30 years ago, they were the center of the advisor ecosystem, right? The advisor came to the custodian to use their technology, to consume their product, to consume everything. And it's been intermediated over time, as we were talking about before with some fintech and some other players in the market. But I think you're starting to see some of that come back. And it's interesting, right? You've seen some of those fintechs start dipping their toes in as new entrants into the market. And so they're starting to offer some custody solutions. And we'll see how that plays out, right? They're just starting to do that. But I think you're going to see some of those new entrants coming more. I think you're going to start seeing more innovation, more consolidation of technology side, which we've seen quite a bit of recently. But the one thing that remains is this business is a people business, right? Everything comes back to the individual advisor, to you serving your clients the best way possible. Regardless of how much automation we enter into this business and how much AI we can add to certain parts of it, there's always going to be the focus on the person. Because the consumer is the person, right? They can go think they can do this on their own. We've seen robos try to stand up and haven't gone as well as they'd hoped. We're still standing. All of us here can be advisors still. We don't have robots running everything. So I do think what you're going to see as the future is a lot more automation, a lot more AI, taking a much different approach to how I can scale my business. And so you're going to be able to handle more clients. You're going to handle them more efficiently. You're going to be able to do off board, if you will, solution or things that you need to that may not be your core, right? So as we were talking about before, we're providing services. So if marketing isn't your forte, we'll do it for you. Or a third party will do it for you, right? And so I think you're going to see a lot of more consolidation from how do we provide all of those types of support experiences you want as an advisor. I really think that's where this goes. Oh, excellent. Thank you. So let's open up to Q&A. We've got one question out there. The question, what training should an advisor expect from a custodian, both as a new client and then ongoing? That's an interesting question. Yeah. So I mean, the core training, right, that you're going to get when you onboard with a new custodian is about their systems, right? It's how do you operate in the normal course? How do you open accounts? How do you move money? How do you do, right? How do you execute your needs for your end client? That's common, right? You're going to get that or should get that anywhere. Now I said should, because as some of you have probably experienced, and I certainly know, smaller RAs and smaller advisors may not be getting that training. It may be a DYI digital, you watch these videos and consume yourself and fumble along. But any good custodian is going to have that training up front when you're joining and onboarding onto a platform, just like you would if you went and bought an Apple computer, right? You can go into the store and they'll teach you how to use it. Well, that's how we operate at LPL, right? You come to our store, if you will, and we're going to teach you how to use it. And similarly, we're adding a lot of consulting services in terms of training when it comes to third-party tech. So how can you unlock all the value for what you're consuming on the third-party tech side? Or in terms of growth, as we talked about before, right? If your focus is growth, how do we help you enable growth? Or when it's M&A, right? If you want to grow inorganically, like we were talking about, we have M&A solutions consultants that will help you not only source potential acquisitions, but structure it and guide you and finance it if you need. So I think that's really where we're seeing from a training standpoint. I don't know, Adrian, if you have anything you want to add in terms of where do you think training's going or how they consume training? I would say, again, foundationally, everybody starts out with the baseline. Like, how do I create this new normal with the custodial platform I have right now? So basics, like trading, money movement, et cetera. But then after that, the discussion should be like, how efficiently are you consuming the platform? Are you maximizing the tools and resources at your disposal? And then what question should be exactly that? Like, let's look at how you are consuming us. Let's look at ways to make it more efficient and to really streamline your back office and make it the biggest and the best practice you can create with the platform you've got in front of you. Yeah, so two of the really interesting, I'll say, training consultation type experiences you can have at LPL. One on the planning side, right? Everybody in this room, I think, is a planner. But people have different experiences planning, right? They've been in the business longer doing it different ways. They might use one technology versus another. We have an internal planning team that anyone can consult with in terms of very complex or very vanilla plans, right? You might have a new high net worth client that you've never dealt with some of these things for. So you can call up our consultants internally on the planning side and go through that, right? They can help structure that plan. They can give you some context of what others have done. And the other one is high net worth consulting. We have a longstanding team internally for the same reason, right? You may not do high net worth consulting all the time. You may not have that many high net worth clients, or maybe you do, but there's a new thing that's come out, right? Or a new structure you have to figure out. So whether it's estate planning or some of these other complex needs on illiquid assets or different liquidity options, we have teams internally. So whether it's true training or more consultation, I think that's something you need to consider when you're considering who your partner is, right? Whether it's a custodial partner or somebody else, what value are they going to provide when you need it? Yeah. Yeah. Excellent. Heidi, I don't know if there's any other questions out there. I don't see any. So Steve, I will ask you for your final thoughts for us. Sure. Well, first of all, thank you again, Heidi, for inviting me. Thank you everybody for attending. I hope that some or most of you or your colleagues will be joining in San Diego next week for the conference. I certainly will be out there with Adrian and another woman on our team. As Heidi had mentioned, we're going to have a booth. And so it would be great if you'd swung by, introduce yourself, mention that you were on this. I'd love to talk with you guys about anything. It doesn't have to be about custody. We can talk about whatever you'd like. And then we're also having the cocktail hour. So again, looking forward to meeting you. If you aren't making it out there, you can feel free to reach out to myself or to Adrian. I think the contact, yep, here you go. It's on the screen now. But we have contact information that we can provide you. So I welcome a chance to talk with you all. So hopefully this was helpful for you guys. Hopefully you'll learn something. I'm always open to talk. Thank you. Thank you for such an informative program. Thanks for attending everybody. And please do complete the survey that pops up when I close Zoom, including your chance to request to be contacted by LPL. The recording of this session will be available in EFSA's Learning Center in a few days. Thanks everybody. Have a great afternoon. Bye now.
Video Summary
The video is a webinar hosted by Heidi Tennant, NFA's Senior Coordinator of Membership and Continuing Ed. The guests include Steve Erner, the head of the RIA custodian platform at LPL Financial, and Adrienne Larson, the vice president of RIA custody at LPL. The webinar discusses trends and challenges in the custodial space, such as M&A, talent management, and consolidation. They also address the importance of custodians providing value-added services to RIAs and advisors, including training, support, and consultancy. They discuss different fee arrangements and pricing models in the industry and highlight the need for custodians to differentiate themselves through service and innovation. The webinar concludes by inviting attendees to the NAFA Spring Conference to meet with LPL Financial representatives in person.
Keywords
webinar
LPL Financial
custodial space
M&A
value-added services
fee arrangements
differentiation
service
NAFA Spring Conference
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