Does The Schwab Migration Herald A Sea Change In Custody?

Julius Buchanan, Managing Editor, Wealth Solutions Report

F2 Strategy And Entrustody Discuss The Schwab Migration, Digital Account Opening, Pain Points In Repapering, Sticky Major Players, Nimble Niche Providers And More

Custodian issues have risen to the foreground this year as Schwab prepares to migrate advisors currently using TD Ameritrade’s platform to its own platform. At the recent T3 Conference, discussions both onstage and private often centered around custodian issues. We heard from Charles Schwab on custodian issues as they took the stage and spoke with Craig Cintron of Goldman Sachs Advisor Solutions about new advancements and reducing times for migration to new custodians.

Though this space remains dominated by three major players, a number of smaller, niche players have shown increasing competitiveness in the field and are using the industry’s focus on the Schwab migration to highlight their offerings. 

Wealthtech strategy consultant F2 Strategy recently released a five-part series of articles outlining recommendations for advisors currently using TD Ameritrade on how to successfully navigate the transition.

Pain Points And Client Attrition

Will the clients make it to your finish line?

Doug Fritz, Co-Founder & CEO of F2 Strategy, describes the paperwork and pain points involved in moving from one custodian to another, stating that advisors who start a migration process “just created a massive amount of paperwork. You are introducing this change to your client. It is an immensely operationally intensive, headache-inducing process.”

Doug Fritz, Co-Founder & CEO, F2 Strategy

Fritz points to the worries advisors often have about migrations, including losing access with login credentials, whether information successfully ported over, whether all assets transferred in the migration, and if the cost basis from embedded gains and losses is ported over correctly, “which, by the way, isn’t often the case.”

Repapering isn’t easy

Greg Thornhill, Head of Operations at custodian Entrustody, said, “I understand the concerns about repapering and think the advisors and their customers ultimately would see that it is a nuisance because it’s not at the direct request, need or benefit of a customer.”

Greg Thornhill, Head of Operations, Entrustody

“You’ve got some firms out there that are paper based, some of them are paper with a little bit of automation, all the way up to digital. In some cases there’s back and forth with the advisors and trying to chase down information to effectively open that new account and transition the assets,” continued Thornhill. “If you’re a customer, this is not your most important thing.”

Fritz points out that clients may be unhappy if they perceive the dynamics of the migration as driven by lower fees offered by the new custodian. Clients may perceive such a move as driven by greed.

Inflection Point

Is it meeting client needs?

Thornhill notes a silver lining in the migration process – advisors, such as those who must migrate from TD Ameritrade, may use this time as an inflection point to reach out to clients and ask if the new situation represents the right fit for the clients’ needs. 

“It’s important for advisors to see this as an inflection point, to ultimately ensure that their custodians are meeting their needs for their own practice, but more importantly, to ensure the new custodian is meeting the needs of the investor.”

Competitive Strengths Compared – Sticky Major Players And Competitive Niche Providers

Advisors contemplating a move or finding the move mandatory, in the case of TD Ameritrade users, must weigh many strengths and weaknesses balancing the three major players – Fidelity, Schwab and Pershing – and multiple smaller niche players serving the wealth management space.

According to Fritz, “The new custodians are faster, cheaper and more lined-up for the future. Especially for some who want to do more customized portfolios, they have fractional share abilities which lap the major custodians today. They have better functionality, access to data and costs.”

Contributing to the stickiness of the major players, Fritz notes they are more competitive in integration, depth of banking products and lending services tied to custodial business, referral networks and access to a marquee brand.

Multiple Custodians

Multiple connections

Thornhill notes that many advisors choose multiple custodians, so that the decision is not all one custodian or the other. “In terms of determining where they want to move their customers’ assets, ultimately many advisors are multi-custody. We would like them to remember that there are multiple choices.”

Fritz agrees that some advisors may move a portion of accounts to new custodians. For instance, “If you already had some accounts at TD Ameritrade and you wanted to set those up in another custodian, you may test it with those accounts, thinking, ‘I’ll move over to the other custodian for those accounts, but not move everything over, because of the operational nightmare of shifting custody.’”

How Digital Account Opening Changes The Landscape

Thornhill, whose firm provides a fully digital custodial account opening process, states that, “We want to get the friction points out of the equation so that the advisor and client truly have an extremely smooth experience of opening an account with us as custodian. Design from the client and advisor experience first and then create the solutions to ultimately ensure that you drive the inefficiencies out of the process.”

“What enables us to do that to some extent is that we’re designing the process from scratch, as opposed to having to walk in and adapt other processes or technologies, sometimes fragmented, to ultimately remove that friction in the client experience,” Thornhill continued. 

“It will absolutely change things,” said Fritz. “Probably not as quickly as we imagine, but it will change things. It cuts down on time and investors say, ‘I got an account open in five hours!’ That’s a nice experience.”

Fritz adds that digital account opening can boost revenue for advisors. “We can start accruing fees on that account several days early, right? So the advisor is charging 100 basis points on the portfolio for several days more,” because the account opened faster. “That’s 2% more than you would have otherwise made in that year. That’s real money.”

On the subject of why the larger players don’t have automated account opening, Fritz attributes the cause to regulatory hurdles. “Despite the fact that advisors think that it’s their client, the custodian thinks about them as their client, too. So when they go to the KYC, AML, money laundering and suitability type questions, they can’t just take the advisor’s word for it. They have to process that themselves.”

‘Not In Good Order’

Not in good order

Thornhill described another parameter by which custodians are judged – NIGOs, which means “not in good order” documents. “The buzzword you’ll hear is ‘not in good order,’ and firms spend much time talking about how to drive down the percentage of NIGOs. It’s an important proof point.”

As part of its “start from scratch” methodology, Thornhill says that his firm begins with the scenario in which NIGOs do not exist. “Imagine you could build that experience where the advisor and customer know exactly what they need to successfully open or transition the account. If you can get real-time information back to them as they interact with our technology to know if they’re being successful or not, they can submit the account opening and have it real-time validated back to them as the account is open.”

Breakaways Are A Major Source Of Migration To Niche Players

Fritz says that most often movement to new, niche players happens as advisors break away from wirehouses. “It’s where some new players see most of their advisors coming in.”

“As the wirehouse advisors break away, they understand they can set up with a niche player rather than a dominant player and think, ‘I might as well do it with a newer custodian,’” says Fritz, noting as an example a client who is currently leaving a wirehouse with the same thought process.

Stickiness Of Major Players

Fritz concludes that, “There are elements of being big, known, supported and complex that will still keep the vast majority of our clients working with Schwab, Fidelity and Pershing for many years to come. The average client that we work with is going to stay with them, and that makes sense.”

Julius Buchanan, Managing Editor at Wealth Solutions Report, can be reached at

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