Boston-based custodian is on service crusade and economics need to work

September 24, 2010 — 3:52 AM UTC by Brooke Southall

11 Comments

Brooke’s Note: What I wrote about TD Ameritrade the other day in relation to its innovative UMA program is also true with regard to Fidelity: Neither company is content any longer to merely follow Schwab. Fidelity showed yesterday that it continues to making bold moves with its technology. Today’s article shows it is also willing to take a risk with how it charges RIAs for services. Typically only market leaders dare to pioneer price increases. Fidelity’s new $10,000 annual fee on micro-RIAs won’t be popular with those affected but it may be the right move for its business.

The smallest RIAs on the Fidelity Institutional Wealth Services platform will soon have to pay a much larger custody fee.

Registered investment advisors who keep fewer than $10 million of assets parked with the Boston-based RIA custodian will need to pay a quarterly fee of $2,500, starting with a bill on Dec. 31.

This represents a doubling of the current $1,250 fee it charges these micro advisors and it may be the largest such fee in the industry; Schwab charges advisors of this size $1,200.

Industry ramifications

Fidelity’s move is having ramifications in the industry, with custodians including Scottrade, Trade-PMR and Shareholders Service Group that don’t charge a fee saying they already see signs of an uptick in business. TD Ameritrade has traditionally been a haven for emerging advisors and it will continue to capitalize on the market without imposing any fees, according to a spokeswoman.

Fidelity, which notified advisors about the change a couple of months ago, is working on upgrading its service across all of its advisors – an effort that is requiring an investment in more people, according to Mike Durbin, president of Fidelity Institutional. The timing of the fee increase is tied to this service effort. See: Goldman aims to make red carpet service for RIAs universal at Fidelity Investments.

Formerly Fidelity made heavier use of call centers, but now every client has a Fidelity relationship manager in addition to a dedicated service team. See: Fidelity names buck-stops-here service czar for all of its financial advisory channels.

The fee increase is not popular with the advisors, Durbin allows.

Negative reaction

“We’re very comfortable with the move but as you might imagine, advisors have reacted negatively. They can intellectually understand what we’re trying to do. It’s an increase and they are small businesses so any increase [hurts].”

Other Fidelity RIAs say they have been recently subjected to other changes. Advisors with less than $30 million of AUM can no longer park alternative assets with Fidelity, confirms Steve Austin, spokesman for Fidelity.

“Fidelity continues to support alternative investments for many of our clients, as we have for years. Clients with less than $30 million in total assets under management need to choose a new custody solution for any alternative investments on our platform.”

And these less-than-$30 million RIAs have less discretion. They can no longer direct funds between accounts without the move getting signed off on by clients.

“As an industry leader, we regularly evaluate the business environment and make adjustments to our offering as needed,” Austin says.

Alternative investments

Catherine M. Paulo, president of Staten Island-based Paulo Financial Advisors, which has $18 million AUM, says the latter two changes didn’t bother her much. She had only one client with alternative assets and clients are perfectly willing to sign a standing order to direct funds.

But, she said such a large custody fee would be bound to hurt an advisor who is just starting out.

“That’s a good chunk of change for a small advisor,” she said. “Fidelity took me when I had no assets.”

Fidelity’s move is bold, but may also be necessary, according to Philip Palaveev, Seattle-based president of Fusion Advisor Network.

Push comes to shove

“It seems like push is coming to shove and everybody has to look at their business and make the right decision,” he says. “You’re likely to see a variety of such moves across the industry. Advisors are doing the same thing with their bottom of the list of clients – establishing a [set minimum] fee rather than firing them.” See:What Meg Green was thinking when she purposefully shed $40 million of assets

Some custodians, like RBC Advisor Services and Raymond James, have no custody fee [see note from Mike DiGirolamo of Raymond James in the comments section below clarifying his company’s position] for low balances but have established a minimum of $50 million of AUM. See: Raymond James shows it’s serious about winning bigger RIAs.

The need for such changes is being prompted in the custodial business by adverse economics. Low interest rates on money market funds have killed the spreads that created the profits, Palaveev adds.

This shift to smaller custodians by some clients is a positive development in some respects, Palaveev says. “Somebody is going to say: These are my people and I can make a business model that fits these people.”

TD Ameritrade does not plan to implement a low-balance fee and Schwab Advisor Services has no plans to increase its $1,200-fee, according to spokespeople at the firms.

“Our scale allows us to successfully serve the emerging advisor market while maintaining profitability,” says Kristen Petrick, spokeswoman for TD Ameritrade Institutional. “We are able to deliver the tools and service they need to grow their business.”

Jon Beatty, head of sales and relationship management for Schwab, explains why his company has no plans to raise its $1,200-fee: “Smaller advisor firms are very important clients for us. We have specialized, dedicated teams to serve them, and more than 90% of small firms consistently rate our service to be very good or excellent.”

Source of business

The Fidelity changes for the under-$10 million crowd are likely to be a welcome source of new business for up-and-coming custodians, including Scottrade, Trade-PMR and Shareholders Service Group.

“We see an uptick in new business inquiries as well as new business being moved to Scottrade” as a result of Fidelity’s announced fee increase, says Carrie Trent, spokeswoman for St. Louis, Mo.-based Scottrade Advisor Services. Scottrade, which serves 750 RIAs, has no minimum asset levels and charges no fee for low balances.

Peter Mangan, principal of La Jolla, Calif.-based Shareholders Service Group, says that his company is also hearing about Fidelity’s change from prospects.

“I can tell you we have brought in clients from Fidelity. I can’t tell you if that’s the reason,” he says.

Frederick Van Den Abbeel, executive vice president/RIA service for Gainesville, Fla.-based Trade-PMR says that the imminent fee increase has also been noticed by recruiters at his company.

“It has affected us in a very positive way,” he says. It has resulted not only in Fidelity RIAs looking at Trade-PMR but in referrals from Fidelity RIAs, Van Den Abbeel adds.

Zero trades?

The prospects have expressed concerns and frustrations about whether the fee is a harbinger of more increases to come. One active trader told Van Den Abeel: I trade rather frequently – AUM alone doesn’t bring revenue; so if I deposited $20 million and did zero trades – is that what they prefer?

Final note: Palaveev points out how this is just the free market sorting itself out. The one potential downside of the fees is that a certain number of reps looking to leave broker-dealers to become RIAs will decide to stay in the IBD world where such fees are unheard of.


Mentioned in this article:

Scottrade Advisor Services
Asset Custodian
Top Executive: Brian Stimpfl

Shareholders Service Group Inc.
Asset Custodian
Top Executive: Peter Mangan



Share your thoughts and opinions with the author or other readers.

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Frederick Van Den Abbeel said:

September 24, 2010 — 11:28 AM UTC

Thank you Brooke for a good article. Will be interesting to see if Fidelity, Schwab and the others will also require their customers working with their competing retail side to also pay a quarterly fee if they don’t have enough AUM themselves? Seems logical to me this might also be a possibility given 'economics.’

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Laura Kogen said:

September 24, 2010 — 2:27 PM UTC

This makes perfect sense. I’m actually surprised the $10M isn’t higher. For new advisors perhaps they can give a refund if you can end your first year above the minimum. No reason Fido shouldn’t charge a minimum, just like RIAs do.

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Mike Di Girolamo said:

September 24, 2010 — 4:33 PM UTC

Broke,

Interesting article but I would like to make one correction relative to fees at Raymond James for smaller relationships through our Investment Advisor Division. For RIAs who custody less than $10 million, we have a $1,000 per month platform access fee and for those with less than $20 million, but more than $10 million held at Raymond James, it is $500 per month.

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Stephen Winks said:

September 26, 2010 — 2:16 PM UTC

Fidelity has made a most prescient move in the face of the certainty of regulatory reform. It is making plans to support a much higher level of advisory services support which will transform the industry. Advise is no longer incidental to trade execution, but trade execution is incidental to advice.

Brokers and advisers are largely at the mercy of the support of their b/d or custodian in their ability to be responsive to the needs of their clients. Under Dodd Frank the broker/adviser must act on behalf of the client in the client’s best interest where prior to Dodd-Frank it was a violation of internal compliance protocol for brokers to acknowledge they render advice or have a fiduciaty obligation to act in ther consumer’s best interest. Dodd-Frank fundamentally changes the industry in profound ways. If fiduciary standing of the broker is to be supported and made safe and easy to execute—fiduciary liability must be effectively managed—truely the devil is in the details. This means, the broker and adviser must be properly resourced with (a) prudent processes (asset/liability study, investment policy, portfolio construction and management) tied to statutory documentation to assure the advisers fiduciary duties are being fulfilled, (b) technology which supports continuous comprehensive counsel and transparency in cost and compensation, (c) work flow management tied to a functional division of labor (Adviser, CAO, CIO) so advice is safe, scalable and easy to execute, (d) conflict of interest management (not just disclosure) and (e) expert advisory services support for each of the ten major market segments in which advisers serve. All this requires broker/dealers and custodians to shift their focus to prudent process in response to adding value in the context of client needs, from product distribution in the context of driving commission sales. Fidelity is aligning its pricing structure in preparation of more aggressively supporting advisory services and in the process fills a massive leadership vacuum in advisory services.

The rest of the industry will not know what hit them.

SCW

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Roger Hewins said:

April 19, 2011 — 6:45 PM UTC

Unfortunately, they also charge this when you terminate them, as you are moving the assets out to a better custody platform. It’s not right.

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PPott said:

September 2, 2013 — 8:46 PM UTC

If Mr Winks is correct, and I am not certain that he is, then he appears to be confirming that there is a serious economic cost that must be borne by the smaller investor under the DF fiasco.

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Stephen Winks said:

September 3, 2013 — 3:39 PM UTC

PPott,

The entire industry is in transition in terms of the broker’s value proposition, cost structure , margins and professional standing. .The introduction of second opinion technology which makes it easy for consumer’s to understand how all their holdings look as a portfolio materially changes the competitive landscape through transparency.

This will require more broker accountability for recommendations and ongoing responsibilities entailed in fiduciary standing in the consumer’s best interest not presently possible in a brokerage format that affords lesser consumer protections for “retail investors” than all other investors.. This is hardly a fiasco, if you are a consumer.

The economics to the consumer is the level of advice increases exponentially while its cost come down significantly, while the advisor makes as much as 50% more than the broker, all achieved through a more modern approach to portfolio construction.

Modernity is a win/win/win for everyone. This is the free market at work.

SCW

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PPotts said:

September 3, 2013 — 4:07 PM UTC

Mr Winks

I can log into my retail accounts at Fidelity or Ameritrade right now and receive detailed reports on the portfolio in terms of asset allocation, performance and risk. I am not certain why you espouse that retail is afforded less protection.

The fiasco of the DF, as a whole, is apparent if I lose access to my advisor because third parties increase their costs for access to basically the same items that I get for free while paying smaller commissions.

I do not buy your win/win/win proposition in the least bit.

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Stephen Winks said:

September 3, 2013 — 5:06 PM UTC

PPotts

You may have missed the fact that no US brokerage firm allows their brokers to render advice, as that would trigger accountability for recommendations entailing a broad range on ongoing fiduciary duties in the consumer’s best interest.

As for your ability to perform a statutorily required asset/liability study, it is news to Fidelity and TD Ameritrade that they have the capability to evaluate all a client’s holdings, including those outside their custody, as a portfolio. This sort of evaluation is required before a recommendation to determination its implications as required for fiduciary standing and continuous comprehensive counsel.. This would be a quite an accomplishment that the industry’s largest firms have yet to achieve.

You may be the only person that utilize Fidelity and TD Ameritrade that is aware of this capability to include the firms themselves.

SCW

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Stephen Winks said:

September 3, 2013 — 5:13 PM UTC

PPotts,

To provide clarity on professional standing and the fiduciary standard of care rendered by advisors.

The suitability standard to which the brokerage industry subscribes does not hold the broker accountable for their recommendations nor require ongoing fiduciary counsel in the consumer’s best interests. This lesser suitability standard obviously does not accord the same consumer protections that are afforded by a fiduciary standard in the consumer’s best interest.

SCW

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Diane Ouellette said:

September 24, 2013 — 6:22 PM UTC

As a former micro-RIA who moved from Fidelity after they first doubled their fees, with very little advance notice, I was fortunate to move to Scottrade. Here, the service is 300% better, and I’ve more than doubled my AUM in 2 years. It turned out to be a blessing in disguise since Fidelity paid little attention to emerging and small RIAs, as they are focused on attracting primarily HNW clients. The tools and technology are also more user friendly at Scottrade, and the Relationship Management team concept works extremely well there, for those of us who want to serve the middle market.


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